Crowdfunding Planning's Update on the JOBS Act and Raising Equity from Crowdfunding

posted May 31, 2013, 9:29 AM by Andrew Manzo   [ updated Jun 6, 2013, 9:04 AM ]
As you may recall from last year, the Jumpstart Our Business Startups Act (called the JOBS Act) was passed and signed by President Obama in April, 2012.

The JOBS Act makes equity based crowdfunding much easier

The JOBS Act makes it possible to raise funds from investors and donors through certain crowdfunding sites in exchange for equity in your company.

This was supposed to start on January 1st 2013. (more on this below).

The key to the JOBS Act is this: it opens up more possibilities in equity funding without the tedious requirements to register your funding as a public offering with the Securities & Exchange Commission (SEC).

If you have tried to raise funds in the past by going the public offering route, you'll know that it's expensive. Being able to bypass all that is huge, especially if you are raising smaller amounts of funding that don't justify such expenses.

The passing of the JOBS Act also means you won't have to seek out accredited investors specifically (people with incomes of $200,000 or more, or a net worth of $1,000,000 or more-not including their residence). Rather, you will be able to get funding from people of all income ranges, which makes the pool of potential investors MUCH bigger.

Imagine how many regular people are out there, who might want to reallocate some of the funds they already have invested in savings, stocks, mutual funds, or other investments that aren't paying so well at present. In the future, funding other businesses might be a much more common way to diversify your capital-that anyone can do and not just accredited investors. Even you!

So, what's the latest?

As mentioned above, equity based crowdfunding was supposed to go live on January 1st 2013. This was predicated on the SEC writing the crowdfunding regulations by December 31 2012 like they were supposed to.

But this never happened. The two key issues regarding why this didn't happen were: 1) a lack of consensus within the SEC decision-makers about the regulations, and 2) the recent resignation of the former chair of the SEC.

Both of these issues are expected to be resolved with the recent appointment of Mary Jo White to head the SEC. White is one serious woman - her career includes serving as the New York prosecutor who brought down John Gotti and put many terrorists in jail.

So, it is expected that within the next 60 to 90 days that Mary Jo White will take the helm and help the SEC write the regulations that make equity based crowdfunding legal in the United States.

How can you prepare for this now?

If you want to raise equity capital later this year and beyond, here's a quick list of things you can do now to be ready when the time comes:

Broaden your network 

One advantage crowdfunding sites offer you is having access to more investors and donors than there already are in your personal network. These sites generate their own traffic, and a percentage of your funding will come from people searching those sites or stumbling across it.

As it turns out, enough projects have been successfully funded (using the donation-based Crowdfunding model, not the equity-based crowdfunding model) for experts to be able to look back and say that your project is much more likely to be successful if the first quarter to third of the funding comes from your existing network first. Reason being, they are the ones most likely to believe in and trust you already, and strangers want to see some social proof and credibility in advance before they jump on board.

Deepen your relationships

Do this for the same reason I mentioned above-to get the ball rolling on your funding from your existing contacts. So in the coming months, you should be out seeking new relationships and strengthening the ones you have-specifically with those who are more likely candidates for funding you, or those who are in a position to spread the word for you.

You don't even have to mention funding during this time. Just spend the time necessary to confirm that they have the means and would be interested in your project, while at the same time showing your willingness to serve them and build trust and experience together.

If you're already in business, keep growing it

As with any kind of funding, you will be in a much stronger position to ask for funds if you can demonstrate success in the past. You will have more data available to work into your plan and forecast. And, people want prefer to invest in something that looks like a sure thing-with the least uncertainty. So keep doing what you're doing and you'll be able to show prospective investors your first-half 2013 financial statements and smile.

Work on your business plan

Also, as always, have a solid plan for how much funding you need, how you will spend it, and what effects it will have on your operations and revenues. People want to lend to someone who has thought things through and looks less likely to run into unforeseen problems-especially strangers online! Remember that.

It will also take some time to craft your presentation and pitch. If you plan on using a slideshow or video of some kind (or even just writing it out on your project's page), it will take some time to put that together in advance. But, it's something you can be doing now.

So there it is...equity-based crowdfunding is one more way to get the funds you need to launch or grow your business. Stay tuned to the developments (you'll hear them from me) and prepare for funding like you normally would. This  might just be the key to your company's growth!