Back in 2010, I was running the Community Supported Enterprise (CSE) Program at the nonprofit Sustainable Economies Law Center (SELC).
I had co-founded SELC with another attorney, Janelle Orsi, to help changemakers navigate the rules that could get in their way as they try to create a healthy, just, and sustainable economy.
That summer the CSE program had some great law student interns. We decided to focus on changing the securities laws – the laws that govern how enterprises can raise capital from investors.
The interns drafted and I signed a petition for rulemaking to the Securities and Exchange Commission. Our request was simple: exempt from any regulatory requirements an offering of an investment opportunity in which no investor could invest more than $100. We figured that if the most that anyone could possibly lose was $100, requiring the enterprise to jump through a bunch of regulatory hoops was unnecessary.
The American Sustainable Business Council was an early supporter of the idea and they helped to promote it. Amazingly enough, the idea started to spread and the White House endorsed the idea of an exemption from securities law requirements for investment crowdfunding.
On April 5, 2012, President Obama signed the JOBS Act. It had changed quite a bit from our original proposal, but it did create several new exemptions for different types of investment crowdfunding.
Below is a summary of the new tools in the tool box created under the JOBS Act. Note that even before the JOBS Act passed, investment crowdfunding was legal and had been legal for decades (see this post for more details on the pre- versus post-JOBS Act options). However, the JOBS Act added some new legal compliance options for enterprises that want to be able to advertise their investment opportunities to everyone.
Title II of the JOBS Act – Rule 506(c)
This exemption allows a company to publicly advertise an investment opportunity and there is no cap on the amount that can be invested by each investor or the total amount raised. However, under this Rule, all the investors must be accredited, which generally means individuals with at least $1 million in net worth (excluding their primary residence) or $200,000 in annual income.
Title IV of the JOBS Act – Regulation A+
This exemption allows a company to raise up to $50 million and ANYONE can invest – not just accredited investors. The offering can be publicly advertised in all 50 states. The downside is that the company must have audited financials and must complete a filing process with the Securities and Exchange Commission that can take approximately four months and costs $75-$125,000 in legal fees. Once a company has raised money under Regulation A+, it can file to become a public company and its securities can be freely traded on an exchange.
Title III of the JOBS Act – Crowdfunding Exemption
This is the part of the JOBS Act that took the longest to go into effect – it took over four years for the Securities and Exchange Commission to complete the detailed rules governing how this exemption could be used and for the crowdfunding platforms authorized under the law to go through the registration process.
Starting on May 16, 2016, this part of the JOBS Act finally became available. Here are the basic requirements:
- You can raise up to $1 million per year
- There is a per investor cap on the amount that can be invested: 5% of the lesser of the investor’s annual income or net worth (or 10% if the investor’s net worth and annual income are greater than $100,000)
- Offerings must be conducted through a registered intermediary – you are not allowed to talk about the offering outside of the registered online crowdfunding portal
- You can accept investors from all 50 states
- If you’re raising more than $100,000, you have to get reviewed financials from a CPA
- Your financials are public and must be available on your web site
These three new tools obviously all have their pros and cons as all capital raising strategies do. It’s important to understand all of the options before choosing your strategy.
For a comparison chart of various crowdfunding options, click here.
Here is an exercise we recommend in order to make sure you get your fundraising done within a reasonable amount of time.
1. Imagine you have reached your fundraising goal. You are looking at the list of all your investors and how much each one invested. What is the lowest amount that someone invested and what is the highest amount? Try to create a clear picture in your mind of your investor list and the amounts invested.
2. In your imagination, scan the list and estimate what the average investment size per investor is. For example, you may picture that you’ll have some people come in at $5,000, some at $10,000, a few at $25,000, maybe one or two at $50,000, and one at $100,000. In that case, you may estimate the average per investor to be $20,000. You can use this tool to decide how much you’ll ask for from each potential investor: http://www.jennykassan.com/blog/7-steps-for-making-the-big-ask/
3. Now, take the total amount you want to raise and divide it by the average per investor. That will tell you the approximate number of investors you’ll have when you reach your goal. So, if you want to raise $400,000, you’ll end up with around 20 investors.
4. Multiply that number by 10. That is the approximate number of potential investors you’ll need to talk to about your offering. (This assumes that an average of one out of ten people you talk to will say yes—you may do much better than that, but it’s best to be conservative). In our example, this would be 200.
5. Divide that number by the number of weeks you would like to devote to reaching your funding goal. This is the number of people you will contact per week about investing. So, if you’d like to reach your goal within six months, divide 200 by 26 weeks—you need to contact 7-8 people per week.
6. Assume that for each contact you’ll need to spend 30-60 minutes on average. Multiply the number of people you’ll talk to per week by the average number of minutes you think each contact will take. That is the total number of hours you should schedule into your calendar for contacting potential investors. Add at least half that many hours to give yourself time to follow up with people who haven’t yet given you a definitive answer. In the example above, I would assume eight hours per week plus another four for follow up—so a total of 12 hours per week should be spent contacting potential investors.
7. Now block out that time in your calendar for the number of weeks you gave yourself to reach your goal.
If you use this method, you’ll keep your momentum going and get that fundraising done before you know it!
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