TL;DR – While it may present some extra legal, compliance effort and fiscal responsibility, equity crowdfunding is a great way to monetize your network and give back to the people who support you early on.
We are closing in on the implementation of Title-iii of the Jobs Act. Here are some things to think about if you are thinking of raising money this way.
For the company
Pros
- Easier access to capital outside the valley/ “Startup Ecosystems”
- Audience engagement like none other
- Forces you to think about marketing at a stage when you were not doing that
- May put you on a strategy which is not currently hot (growth vs Profitability/ Does the business make sense at this stage?)
Cons:
- Its easy to raise angel money/ Friends and family round as a debt obligation.
- Slightly more advanced regulatory compliance effort
- Requires more capital for said effort
- Puts off traditional investors for your next stage of growth
- Legal responsibilities when your campaign fails, (Smaller retail investors can sue( even after proper indemnification rules are applied & will be seen favorably by the judiciary)
- Added burden of educating retail investors about your business
- Fear of giving away your trade secret/Secret sauce/novel idea etc
- Inability to raise money in traditional ways signals weak product/ something is wrong so no VC or Angel invested
If you are an investor thinking about putting money in , here is a link to an SEC press release on how much and how often you can invest. Here are some common scenarios on what happens.
When the company succeeds (and there is wide array of definitions for success)
- Great, How do I get my cash?When should i get my cash? Should have stayed in it longer!
- How will that affect my taxes?
- Which < insert expensive impulse buy > should i get?
When the company fails –
- That was bad, wonder how the public stocks are doing?
- Those guys said this is a great opportunity, so lets sue them.
- I only put 5% of my earnings anyway, onto the next opportunity.
Here is my advice, follow the SEC guidelines and dip your toe. Go in for less than 5% your yearly earning and support the idea that you really like. If you have had some experience with Kickstarter or Indiegogo take lessons from that experience and amplify them with the effect of Money.
There are some issues with equity crowdfunding which will likely be solved very soon, so sit back and enjoy the ride and always act as if you were betting your own money ( cause that is what you are doing anyway).