This is a guest article from attorney Zachary J. Robins. Mr. Robins is an associate at the Law Firm of Winthrop and Weinstine.
6 Most Frequently Asked Questions on Crowdfunding
1. What is crowdfunding?
The pooling of small amounts of capital from many contributors. The concept of crowdfunding dates back millennia when one considers how churches, synagogues, and other civic establishments were built. However, the concept of investment crowdfunding is newer and marries the internet with the ability to advertise and sell securities to all types of investors. This is the true power of crowdfunding due to the scale and opportunity presented to non-accredited investors, who have been for the most part unable to back early stage companies.
2. When (under what circumstances) would an entrepreneur want to use crowdfunding?
In order to generally fund growth and execute a business plan. More specifically to roll out a new product, build or renovate a physical location, or fund the development of R&D, for example. In due time, the term crowdfunding will disappear, as this will simply be the “norm” for raising funds.
3. What are the major benefits of crowdfunding?
It takes the slow, unexciting process of private capital raising and supercharges it by sharing opportunities with the masses. With the advent of internet video, offerings are now being supplemented with much-needed story-telling from entrepreneurial founders.
4. What are the main types of crowdfunding in Minnesota?
Minnesota permits various elements of crowdfunding through registered offerings and SCOR offerings, both of which permit 1) general solicitation, or the public advertising of an investment, and 2) the ability for non-accredited investors to participate. Soon MNvest will be one more option for Minnesota-based issuers. Federally, Rule 506(c) has permitted crowdfunding for accredited investors since October 2013, and more recently Regulation A+ has allowed for crowdfunding for all types of investors since June 2015. By mid-2016, Regulation Crowdfunding will be live, which is a nationwide infrastructure for crowdfunded offerings at or less than $1,000,000 and taking place on registered funding portals for all investor types.
5. What are serious pitfalls/problems if crowdfunding is done wrong?
Crowdfunding is public, so it is difficult to hide a failed offering. Even if successful, some issuers may be overextended in trying to manage a large cap table of investors for which they are accountable. Depending on the offering type, additional cumbersome steps may apply such as audit requirements and ongoing annual reports. I would be remiss if I didn’t mention the costs of running an offering of any type, which are by no means nominal.
6. What are major steps in the process of crowdfunding?
You will be best served by affiliating with an experienced securities attorney, portal operator, accountant, and marketing firm able to assist with crowdfunding offerings. From the investor’s perspective, conduct due diligence, and don’t hesitate to make contact with the issuer to address any questions. Lastly, always share offering documents with your trusted advisors before committing to an investment.