By Sydney Armani, CrowdFund Beat CEO & Publisher
On May 16, the Securities and Exchange Commission’s (SEC) crowdfunding rules under Title III of the JOBS Act go into effect, allowing early stage and growth companies, which may be unable or unwilling to raise capital from institutional or private investors, to gain access to another source of capital.
“Title III of the JOBS Act was originally meant to be a game changer for growth companies, adding another way businesses could raise capital in today’s marketplace,” said Alex Castelli, partner and leader of the National Liquidity and Capital Formation Advisory Group at CohnReznick, a top accounting, tax, and advisory firm serving the middle market. “But the SEC has put forth requirements and complexities that might make it extremely challenging for companies to truly consider these opportunities.”
“Whether it is in the public markets, through private equity or venture capital or from individual investors, a solid balance must be maintained between fueling the needs of growth oriented businesses, and investors eager to support the next generation of innovation while maintaining an appropriate level of oversight to protect investors.”
- The key components of the rules that investors must understand and how they can ensure compliance.
- The advantages crowdfunding offers, such a decrease in cost of capital, or a wider and more efficient distribution through selling securities through the internet.
- The challenges that crowdfunding may bring, especially to a private company not accustomed to sharing operational and financial information publicly and as transparently.
- Understanding the regulations and requirements required, such as utilizing funding portals or registered broker dealers and will have certain disclosure requirements to investors.
- Inherent risks that come with crowdfunding as a method to raise capital and the appropriate amount of diligence necessary before committing funds.
5 Tips for Everyday Investors Participating in Equity Crowdfunding
Equity Crowdfunding under Title III of the JOBS Act is coming to fruition next week. Many questions remain and a steep learning curve is inevitable for both investors and entrepreneurs. Under the new guidelines anyone can participate in equity crowdfunding instead of just accredited investors who meet sufficient levels of wealth. Now anyone can become a startup investor.
Amro Albanna, CEO of ieCrowd, a startup with six years of experience and over 17 Million dollars already raised, has tips to help the everyday investor make smart decisions if they decide to jump in and participate in equity crowdfunding. ieCrowd will launch its own Title III raise shortly – they currently have two products coming to market – Kite natural mosquito repellant that blocks mosquito CO2 receptors from detecting human blood and the Nuuma air pollution sensor to create a digital nose in smartphones.
“On May 16th and beyond, a large number of startup companies are going to try to raise money using equity crowdfunding,” said Albanna. “Having been in this business for several years now, I can offer the following attributes the everyday investor should look for as they choose a company to fund.”
1. Already raised capital. Most of these companies are going to be raising money for the first time. If you can find one that has already been in business for a while and raised capital, you can rest assured they have already learned some of the hard lessons of starting a business.
2. Has a Board of Directors. Typically most startups begin as a one or two person show. Single entrepreneurs can have a one track mind and it isn’t always moving in the right direction. Companies with a solid Board of Directors can demonstrate that professionals have done their due diligence and are on board to help with strategic direction.
3. Knows how to deal with investors. There is going to be a steep learning curve with equity crowdfunding, both for entrepreneurs and investors. Any company that already has investors knows how to keep them informed and meet their expectations.
4. Diversifies its offerings. Investors can diversify by investing in several different companies, or by investing in one company that has products and interests in several different markets. Initially the risk for equity crowdfunding is fairly high but the best bet for success is diversification.
5. Has an exit plan. A startup that already has plans for an IPO or a purchase has more potential for a successful exit where everyone makes money.
Sydney Armani is a long time silicon valley entrepreneur, with more than twenty five years experience in Valley’s community acting in both an entrepreneurial and investing capacity. Sydney’s vision for starting and successfully managing innovative companies, like Hello Net A Mobile telephony appliance services on Minitel and Videotex A online a first generation of touch Screen tablets. His international experience in trade and International banking takes him around the world, projects with OPIC Overseas Private Investment Corporation for free trade with business engagement in Europe and UAE’s Dubai.
A creative person at heart, he’s working on building CrowdFunding platform Live Crowdfunding demo pitch contest building bridge for new generation of Startup’s in the Crowdfunding industry.
He has been an active speaker and moderator at conferences and plenary sessions on Real Estate crowd finance, capital markets, secondary liquidity, disruption in banking and a host of other topics. He has lectured at major universities such as Georgetown and Hult International business School, while authoring articles for or being interviewed by INC Magazine, Housing Wire, Forbes, Fortune, The Economist, amongst others.
Sydney is publisher of CrowdFundBeat.com, an online daily crowdfunding news site in US, Canada and UK. He is also the organizer of the annual Silicon Valley Meets Crowdfunders conference in Palo Alto, CA & CrowdFunding USA at National Press Club in DC.