CHAPTER 5
Launching Your Crowdfunded Offering
If your company has offered securities in the past, you will probably be able to launch a Title III crowdfunded offering with little assistance from outsiders. Start-up companies, first-time issuers, and concept companies will have a tougher time. Regulation Crowdfunding contains dozens of rules issuers have to comply with when offering securities under Title III, and it is relatively easy to make mistakes if you don’t have at least some professional help.
Finding the Help You Need
Companies making Title III crowdfunded offerings for the first time will need help from at least three, and possibly four, professionals:
A good accountant
A good lawyer who is experienced in private offerings of securities and familiar with the Title III and Regulation Crowdfunding rules for crowdfunded offerings
A business mentor or adviser who can coach the company founders throughout the offering process
(Perhaps) a social media marketing expert who is familiar with crowdfunded marketing campaigns under Kickstarter, Indiegogo, RocketHub, and other project crowdfunding platforms
The accountant will be necessary to put together the financial statements, cash-flow projections, and other financial information in the offering documents. The lawyer will be responsible primarily for drafting the disclosure documents required by Regulation Crowdfunding but also for coaching the company founders on what they cannot do or say during the offering process.
As Title III crowdfunding becomes a reality, there will be an explosion in the number of people offering advice to entrepreneurs on structuring and managing their crowdfunded offerings (including, perhaps, the person whose book you are reading). Like all business mentors, many of these will know what they’re talking about and many won’t. The ideal mentor for a start-up company contemplating a Title III offering is someone who:
“Gets” social media and the triggers that make successful social media marketing campaigns work
Understands the industry your company is in and the factors that make for success in that industry
Has successfully managed Title III crowdfunded offerings for at least one or two other companies
Has the honesty, integrity, and reputation for fairly dealing with clients who you and your cofounders trust
Of course, at the time this book was being written, virtually no one met all those criteria because no Title III crowdfunded offerings had taken place yet.
Do you need to work with a social media marketing expert when launching a Title III crowdfunded offering? I’m frankly of two minds on this. On the one hand, success in marketing a Title III offering will depend on your ability to leverage your social networks effectively. If you do not live on social media every day, you probably do not know what works and what doesn’t on each of the most popular social media platforms, and any help in this area will likely improve your batting average with prospective investors, especially those younger people (and they seem to be legion) who trust their Facebook friends’ recommendations more than anyone else’s.
On the other hand, many social media marketing consultants may not be familiar with Title III and the many detailed rules and regulations for crowdfunded offerings of securities. Reaching out to people you don’t know may work on Kickstarter and help you raise money for an invention or a charitable fund-raising campaign, but it almost certainly will shut down your Title III offering if the SEC finds out you’re doing it.
If you have to choose between a brilliant marketing expert who doesn’t understand Title III and a halfway decent lawyer who does, choose the latter, at least until you know what you are doing.
Preparing Your Disclosure Documents
Before you begin approaching funding portals to launch your offering, you will need to put together a term sheet—a nonbinding summary, often in bullet form, of the principal terms and conditions of the offering you propose to make. Appendices 6, 7, and 8 are sample term sheets for offerings of different types of securities (debt securities, common/preferred stock in a corporation, and LLC membership interests, respectively).
Most funding portals will not accept your offering on the basis of a term sheet, however. They will want to see the actual documents you will be using to solicit investors through the portal. These documents fall into two categories:
1.The disclosures you are required to make to investors under Regulation Crowdfunding, in an offering statement using the SEC’s new Form C (from now on we will call these Form C disclosures)
2.Any other materials—such as PowerPoint slide shows, video presentations, detailed business plans, online product reviews, newspaper/magazine articles and blog postings, and advertisements and marketing materials you plan to use when selling products and services to customers—you think investors should see in order to fall in love with your company, its mission, its products, its services, and its good-looking-enough-for-Hollywood management team, as long as they don’t violate Regulation Crowdfunding (from now on we will call these the supplemental materials)
Becoming Familiar with Form C
Before you begin working on your crowdfunded offering, it’s a good idea to become familiar with the SEC’s Form C. A copy of the current text, as issued by the SEC on October 30, 2015, is included as Appendix 1 at the end of this book.
The SEC requires issuers to use an XML-based fillable form to input Form C and discourages the submission of paper filings. Information not required to be provided in text boxes in the XML-based fillable form would be filed as attachments to Form C.
Form C is used for all of an issuer’s filings with the SEC related to the offering made in reliance on Regulation Crowdfunding. The issuer checks one of the following boxes on the cover of Form C to indicate the purpose of the Form C filing:
“Form C: Offering Statement” for issuers filing the initial disclosures required for an offering
“Form C-A: Amendment” for issuers seeking to amend a previously filed Form C for an offering
“Form C-U: Progress Update” for issuers filing a progress update
“Form C-AR: Annual Report” for issuers filing the annual report
“Form C-TR: Termination of Reporting” for issuers terminating their reporting obligations
The SEC’s data-handling system—Electronic Data Gathering, Analysis, and Retrieval (EDGAR)—would automatically provide each filing with an appropriate tag depending on which box the issuer checked so investors could distinguish among the different filings. An issuer who did not already have EDGAR filing codes and to which the SEC had not previously assigned a user identification number, called a Central Index Key (CIK) code, would need to obtain the codes by filing electronically a Form ID at www.filermanagement.edgarfiling.sec.gov.
An issuer is permitted to submit exhibits to Form C in Portable Document Format (PDF) as official filings.
Because the prospect of filling out an SEC form can be quite daunting, especially for a first-time issuer, the SEC gives issuers the option of submitting some of the required information in a question-and-answer format. Issuers opting to use this format would prepare their disclosures by answering the questions provided and filing that disclosure as an exhibit to the Form C filed electronically in XML format. The text of the question-and-answer version of Form C, as issued by the SEC on October 30, 2015, is included as Appendix 2 at the end of this book.
The Form C Disclosures
The SEC requires issuers to provide certain information to investors through the funding portals and to the SEC directly via an electronic filing of SEC Form C on EDGAR. While some of the Form C disclosures will be included in the itemized fields of Form C, other information will be included as attachments to Form C.
The Form C disclosures for each issuer are:
The name, legal status (whether corporation or LLC), state of organization, date of organization, physical address, and Uniform Resource Locator (URL), or website address
The names of the directors and officers, the positions and offices held by those people, how long they have served in those positions, and the business experience of those people over the past three years
The name of each person who is (as of the most recent practicable date but not earlier than 120 days prior to the date the offering statement is filed) a beneficial owner of 20 percent or more of the issuer’s outstanding voting equity securities
A description of the business of the issuer and anticipated plan of business (merely a short description of the business and its plan going forward, not a detailed business plan, although this may and probably should be included in the supplemental materials)
The current number of employees of the issuer
A discussion of the material risk factors that make an investment in the issuer speculative (see Appendix 9 for a sample risk-factors disclosure for an issuer creating a mobile smartphone app)
The target offering amount and the deadline, or closing date, to reach the target amount
A statement with respect to whether the issuer will accept investment in excess of the target amount and the maximum amount it will accept (if the issuer accepts investments above the stated target, it must state the method it will use to allocate oversubscriptions), and a description of how the issuer will use any excess funds
A description of the purpose and intended use of the offering proceeds or, if an issuer is uncertain how the proceeds will be used, a statement of the probable uses and the factors impacting the selection of each use (these descriptions must be fairly detailed and include what proceeds will be used to compensate the funding portal, salaries to the company founders and others, repurchase shares issued to previous investors, and so forth—a mere statement that proceeds will be used for “working capital” or “general corporate purposes” will not suffice)
A statement of how long the issuer expects the proceeds to last
A description of the process to complete the transaction or to cancel an investment commitment as prescribed by Regulation Crowdfunding
The price of the securities or the method for determining the price (if the issuer has not set a price at the start of the campaign—not recommended—it must provide a final price prior to any sale of securities)
A description of the owner and capital structure of the issuer
The terms of the securities being offered as well as each other class of security of the issuer
Any rights held by the company founders or other principal shareholders
How the securities being offered are valued and how the securities may be valued in the future
The risks to investors relating to minority ownership and the risks associated with corporate actions like the additional issuance of shares, issuer repurchases, and the sale of the issuer or issuer assets to related parties
A description of any restrictions on transfer of the securities (for example, any buy-sell provision that might appear in the issuer’s shareholders’ agreement or LLC operating agreement)
The name, SEC file number, and Central Registration Depository (CRD) number of the funding portal that will conduct the offering
The amount of compensation paid to the funding portal for conducting the offering and the amount of any referral or other fees associated with the offering (which can be disclosed either as a dollar amount or percentage of the offering amount or as a good faith estimate if the exact amount is not available at the time of the filing)
Any other direct or indirect interest in the issuer held by the funding portal, or any arrangement for the funding portal to acquire such an interest
A description of the material terms of any indebtedness of the issuer (if the issuer has debt, it will need to disclose all material terms, including the principal amount, interest rate, maturity date, and any other terms an investor would deem material)
A description of any exempt offering under Regulation D, Regulation A, or Section 4(a)(2) of the 1933 Securities Act conducted within the past three years (the description should include the date of the offering, the offering exemption relied on, the type of securities offered, the amount of securities sold, and the use of proceeds)
A description of any completed or proposed transaction by the issuer or any affiliated company for value exceeding 5 percent of the amount being raised in the Title III offering since the beginning of the issuer’s last fiscal year, including the current offering, when a control person, promoter, or “member of the family” (defined as a child, stepchild, grandchild, parent, stepparent, grandparent, spouse or spousal equivalent, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships of any such control person or promoter) had a direct or indirect material interest
A description of the financial condition of the issuer (which must include, to the extent material, a discussion of liquidity, capital resources, and historical results of operations)
The tax returns, reviewed financial statements, or audited financial statements of the issuer, depending on the level of the offering and other offerings within the previous twelve months
A description of any events that would have triggered disqualification under the “bad actor” disqualification rules in the SEC’s Rule 506(d) had they occurred after the effective date of Regulation Crowdfunding
A statement that the issuer will file annual reports on EDGAR within 120 days after the end of each fiscal year
The location on the issuer’s website where investors will be able to find the issuer’s annual report and the date by which such report will be available on the issuer’s website
Whether the issuer or any of its predecessors previously has failed to comply with the ongoing reporting requirements of Regulation Crowdfunding
Any material information necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading
Updates on the progress of meeting the target offering amount
For the full text of the Form C disclosures, the reader should consult the actual text of Form C, which appears as Appendix 1, or the question-and-answer version of Form C, which appears as Appendix 2.
By far the most important Form C disclosure—which should appear in as many places as possible not only in the Form C disclosure but also in your supplemental materials, in your Regulation Crowdfunding offering announcement (described in Chapter 6), and in every communication you make to investors during the offering period, and in capital letters—is the simple statement, “INVESTMENT IN THESE SECURITIES IS HIGHLY RISKY, AND THERE IS A CHANCE YOU MAY LOSE YOUR ENTIRE INVESTMENT.” As will be seen in Chapter 8, including that statement in as many investor communications as possible goes a long way to avoid trouble with disgruntled investors down the road.
The SEC does not specify the format in which the Supplementary Materials must be presented, leaving some flexibility for issuers to present some information in written offering documents, some in videos, and other information by graphic means.
While the SEC does not review, comment on, or in any way approve the Form C disclosures, it would be foolish to assume that the SEC will not read information that is on EDGAR. When preparing your Form C disclosures and supplemental materials, you should assume that if and when they suspect problems, the SEC staff and the state regulatory authorities (who under Title III have the primary responsibility for preventing fraud in Title III offerings) will thoroughly review the Form C disclosures for potentially misleading statements and also review the supplemental materials on the funding portal’s platform.
The Form C disclosures may include screen shots and other visual aids, such as tables and charts, but cannot be submitted in the form of a PowerPoint presentation.
In order to file the Form C disclosures on EDGAR, your company will need to have EDGAR filing codes and a CIK code. If an issuer does not already have these codes, it can obtain them from the SEC. Since virtually all funding portals will already have these codes and will be experienced in filing documents on EDGAR, it may be best to have the funding portal file your company’s Form C disclosures on EDGAR. Just don’t be surprised if the portal charges an additional fee for that service.
Your Supplemental Materials
Only the Form C disclosures are required to be filed with the SEC. Regulation Crowdfunding does not, however, limit your offering documents to the Form C disclosures. Issuers in crowdfunded offerings are not only allowed but encouraged to post a wealth of information about themselves and the offering on the funding portal that is listing the offering, by way of supplemental materials that go beyond the Form C disclosures. This is a departure from prior law, in which investors were allowed to see only the statutory prospectus for an offering.
Your supplemental materials may include, among other things:
PowerPoint presentations about your company and its products and services
Audio and video presentations by the company founders
Screen shots of the company’s website
Sample marketing materials your company will use to promote its products and services once funding has been successfully raised
A detailed written plan of the sort venture capitalists, angel investors, and other traditional players in the venture capital market are accustomed to seeing (I would venture to say that posting such a plan on the funding portal is essential if you are looking to raise money from accredited investors)
Regulation Crowdfunding does not limit the form or content of your supplemental materials in any way. You are, however, liable for any misstatements or omissions in the supplemental materials.
The one rigid, inflexible rule in Regulation Crowdfunding is that the supplemental materials must be posted only on the funding portal while your Title III crowdfunded offering is in progress. You cannot post them on your website or social media pages during the offering period, and you cannot send them directly to investors as part of a direct pitch. As will be seen in Chapter 6, you are permitted to send members of your social media network only an announcement of the offering that points them to the funding portal.
While the SEC and state securities regulators are unlikely to plow through your supplemental materials looking for problems, the funding portal may well do so in order to protect itself against legal liability for any false or misleading claims you may make there. Also, keep in mind that if the SEC, in reviewing your Form C disclosures, suspects there may be compliance problems with your offering, it is not prevented from looking at your supplemental materials, and it will almost certainly do so.
Your Financial Statements
Issuers of securities under Regulation Crowdfunding are required to provide financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) covering the two most recently completed fiscal years (or since inception if the company is less than two years old). The financial statements cannot be more than eighteen months old. If more than 120 days have passed since the end of the issuer’s most recently ended fiscal year, the issuer will have to produce financial statements for that most recent year but until that point can use financial statements from the preceding year.
The extent to which an issuer’s financial statements will need to be reviewed by an independent accountant or accounting firm will depend on (1) the amount of money you are seeking to raise and (2) the amount of securities your company has already sold under Regulation Crowdfunding during the preceding twelve months. Here are the rules:
If your current crowdfunded offering plus previous Regulation Crowdfunding offerings were for $100,000 or less, the financial statements must be certified by your company’s “principal executive officer” or founder and accompanied by the company’s tax returns (if any). Basically, the founder(s) will need to include a sworn statement that everything in the financial statements is “true, correct, and complete in all material respects” (Regulation Crowdfunding is not clear, but I doubt the SEC will allow company founders to qualify that statement by saying the financial statements are true and correct “to the best of their knowledge and belief”).
If your current crowdfunded offering plus previous Regulation Crowdfunding offerings were for more than $100,000 but less than $500,000 in total, the financial statements must be reviewed by an independent CPA.
If your current crowdfunded offering plus previous Regulation Crowdfunding offerings were for $500,000 or more, your financial statements must be audited by a CPA unless this is your first crowdfunded offering and you are raising less than $1 million, in which case only reviewed financial statements are required.
Reviewed Financial Statements. Reviewed financial statements provide the investor with comfort that based on the accountant’s review, the accountant is not aware of any material modifications that should be made to the financial statements in order for the statements to be in conformity with GAAP. A review engagement involves the CPA performing procedures (primarily analytical procedures and inquiries) that will provide a reasonable basis for obtaining limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with GAAP.
In a review, the CPA designs and performs analytical procedures, inquiries, and other procedures, as appropriate, based on the accountant’s understanding of the industry, knowledge of the client, and awareness of the risk that he or she may unknowingly fail to modify the accountant’s review report on financial statements that are materially misstated. A review does not contemplate obtaining an understanding of the entity’s internal control, assessing fraud risk, testing accounting records, or other procedures ordinarily performed in an audit.
The CPA then issues a report stating that the review was performed in accordance with Statements on Standards for Accounting and Review Services; that management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements; that a review includes primarily applying analytical procedures to management’s financial data and making inquiries of management; that a review is substantially less in scope than an audit; and that the CPA is not aware of any material modifications that should be made to the financial statements in order for them to be in conformity with the applicable financial reporting framework.
Audited Financial Statements. Audited financial statements provide the user with the auditor’s opinion that the financial statements are presented fairly, in all material respects, in conformity with GAAP. In an audit, the auditor is required to use GAAS to obtain an understanding of the entity’s internal controls and assess fraud risk. The auditor is also required to corroborate the amounts and disclosures included in the financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third-party confirmations, examination, analytical procedures, and other procedures.
The auditor issues a report that states the audit was conducted in accordance with GAAS and the financial statements are the responsibility of management, and provides an opinion that the financial statements present fairly, in all material respects, the financial position of the company and the results of operations in conformity with GAAP, or the auditor issues a qualified opinion if the financial statements are not in conformity with GAAP. The auditor may also issue a disclaimer of opinion or an adverse opinion if appropriate.
As initially proposed, Regulation Crowdfunding required all issuers raising $500,000 or more to provide audited financial statements to prospective investors. This requirement was hotly debated during the comment period leading up to the adoption of Regulation Crowdfunding in October 2015, with most commentators insisting that the high cost of an audited financial statement would effectively prohibit early-stage companies from launching crowdfunded offerings under Title III. The SEC backed down on this requirement in the final version of Regulation Crowdfunding, but only for first-time issuers raising between $500,000 and $1 million. After that, audited financial statements are required.
The SEC defended its position on audited financial statements on the grounds that financial statements prepared in accordance with GAAP generally are “self-scaling to the size and complexity of the issuer.” Or, to put it in plain English, start-ups and concept companies that need $500,000 or more in upfront money to launch their business plans are much more likely to fail and thus pose a bigger threat to investors than start-ups and concept companies that need only $50,000 to get up and running. If a start-up or concept company needs $500,000 or more to launch its business plan, then its CPA better be willing to back that up in writing, even if it means putting his or her license at risk. Needless to say, few CPAs will be willing to take that risk for anyone but their largest clients unless they cover their rear ends ten times over to avoid liability if the company fails.
The requirement of reviewed and audited financial statements may well mean that, as a practical matter, only companies with significant track records and a product or service that is well on its way to being marketed will qualify to raise more than $100,000 using Title III crowdfunded offerings.
Finding the Right Funding Portal for Your Offering
Prior to January 26, 2016, the earliest date on which funding portals were allowed to register with the SEC, there were no Title III crowdfunding portals operating anywhere in the United States because the final version of Regulation Crowdfunding authorizing the existence of funding portals wasn’t released until October 30, 2015.
By the time you read this, there still may not be any Title III crowdfunding portals in existence. Before a company can operate as a funding portal under Title III, it must:
Register as a funding portal with the SEC
Register with FINRA
(Possibly) have its principals take examinations in order to qualify under SEC and FINRA requirements
Hire and train the many people that will be necessary to comply with Regulation Crowdfunding’s many requirements for funding portals
As we will see in Chapter 11, funding portals will require tons of cash to get off the ground and will be extremely labor-intensive to operate. It’s a fair bet that funding portals will need to charge high fees for their services in order to cover their high start-up and operating costs. While it is anticipated that most of these fees will be charged in the form of commissions (that is, a percentage of the amount successfully raised in each crowdfunded offering), the SEC does not prohibit funding portals from charging flat upfront fees for their services. This, in fact, is how most funding portals will probably charge for handling offerings of $100,000 or less. Also, it is almost certain that funding portals will charged fixed breakage fees for crowdfunded offerings that fail to raise the minimum amount of capital on or before the scheduled closing date.
Your company will not be able to make a Title III crowdfunded offering of its securities except through a funding portal. How do you find the right portal for your specific offering? Generally, you want to work with the funding portal that is likeliest to get a successful result for your crowdfunded offering. Here are the questions to ask:
Does the Portal Handle My Type of Company?
Most funding portals will be focused on technology-related companies, for three reasons:
1.That’s what the funding portal’s founders know and understand (keep in mind always that funding portal executives are entrepreneurs just like yourself. Most will be coming from venture capital backgrounds and accordingly will be more familiar with tech companies than other issuers).
2.Tech companies generally have higher valuations and therefore higher offering amounts (leading to greater commissions for the funding portal) than other issuers.
3.Most serious investors (angels and venture capitalists) will be focused on tech companies and other scalable businesses to the exclusion of everyone else.
However, one of the great selling points of Title III crowdfunding is that it opens up the securities markets to retail, service, distribution, franchise, and other companies that have not historically had an easy time attracting investors. It is not inconceivable that specialized funding portals may emerge to focus on these nontraditional issuers.
Is the Portal Handling Other Issuers in the Same Industry (Is It Vertical)?
Generally, you want to work with a funding portal that understands your industry and is handling offerings for other companies in your industry, for two reasons:
1.They are in a better position to vet your offering and point out areas where your offering documents may need improvement.
2.They are more likely to attract investors who are interested in your specific industry.
The downside, of course, is that you may find your offering being listed shoulder to shoulder with an offering by one of your competitors. That is great for investors, of course, as it permits side-by-side comparison of different offerings by similar companies, but is highly stressful for the participating issuers, who may find themselves in a beauty contest to attract the best investors. In such a situation, competing issuers will be under pressure to outdo the others in their offering terms and conditions (because your offerings are publicly available for view online, they can see yours and you can see theirs), with a greater risk of fraud or misstatement if one or the other competitors promotes its offering too aggressively.
It can be a difficult decision to make: is your company better off being the only one in its industry listed with a particular portal (and therefore more likely to stand out) or being one of many similar companies handled by a portal known for its expertise in that industry (and therefore more likely to attract the best and most knowledgeable investors in that industry)?
Does the Funding Portal Have Lots of Investors On Board?
Not only issuers but investors are required to list with funding portals. The difference is that while investors may register with more than one portal, issuers are limited to one portal for their crowdfunded offering.
While funding portals will be prohibited from providing you with personally identifiable information about their investors—for fear you will try to contact them directly and circumvent the portal’s role as intermediary—they probably will offer aggregate information about the number of investors that have registered with them, the percentage of accredited investors, and other statistical information that may help you make a more informed portal selection decision.
Is the Portal Marketing Itself Aggressively?
Remember that funding portals are start-up companies just like yours, competing with other portals for business, and that just like your company, they have to market themselves to attract issuers and investors to the portal. Maybe—just maybe—some funding portals themselves use Title III crowdfunding to raise capital for their business operations (which raises the question of who would be acting as their funding portal?)
Regulation Crowdfunding specifically allows portals to advertise themselves and to seek brand recognition from broker-dealers, investment banks, and other players who may recommend investors to the portal. Your company should be looking for funding portals that are marketing themselves aggressively and securing the capital they need to grow their operations. As in all industries, aggressive competition among funding portals will lead eventually to a handful of companies dominating the industry. Your company should be listed with a winner in that competition, not an also ran.
Will the Portal Coach My Company Through the Process?
Regulation Crowdfunding allows funding portals to advise an issuer about the structure or content of the offering, to a limited extent. For example, a portal can:
Provide predrafted templates or form documents to the issuer
Provide advice on the types of securities the issuer can offer and the terms of those securities
Provide advice on compliance with crowdfunding regulations (including advice on correcting mistakes in the Form C disclosures)
Obviously, the line between telling an issuer what it did wrong in its offering documents and coaching an issuer on the right way to do its offering documents can be a very thin one, and funding portals will have to train their employees dealing with issuers carefully to make sure no one crosses a line that might invalidate an offering or (worse) put the funding portal’s SEC or FINRA registration in jeopardy.
Just as obviously, your company will probably have to pay a bit extra for any hand-holding services a funding portal believes it is safe to provide.
What a funding portal cannot do, under any circumstances, is play favorites or discriminate between your company and other issuers. This would include giving you advice that would give you a leg up over any issuers competing for the same investors.
Should I Use a Matchmaker?
Because under Regulation Crowdfunding issuers are required to work with only one portal when launching a Title III crowdfunded offering, the selection of that portal will become mission critical to the offering’s success. To avoid mistakes in portal selection, it may be worth getting professional help in making that decision. It is almost certain that some individuals and companies will set themselves up as matchmakers who will help link issuers and funding portals online.
Regulation Crowdfunding allows you to use a matchmaker to find the right portal, as long as you disclose the amount of its compensation in the Form C disclosures. Unless the matchmaker is a registered broker-dealer, it cannot accept a percentage of your successful offering as compensation: it must charge a flat fee, hourly rate, or other compensation that is not tied to the amount or success of your offering.
Setting the Offering Schedule and the Minimum/Maximum Amounts
The last question you need to ask before launching a Title III crowdfunded offering is: when do we really need the money?
Setting the Offering Closing Date
You must first set a closing date for your crowdfunded offering. Crowdfunded offerings are not open ended; they must close at a specific date and time set forth in the Form C disclosures. Regulation Crowdfunding requires that crowdfunded offerings last a minimum of 21 days. Even if it takes only two or three days to raise your minimum offering amount, you cannot grab the cash until 21 days have passed. This is a cooling-off period required by the SEC to give investors more time to study your company and possibly withdraw their investments if they get cold feet or a better opportunity comes along, and give you time to fine-tune and update your offering documents to reflect the latest changes,.
You can set as long a period as you like for your crowdfunded offerings, although periods of 90 to 180 days will be commonplace, and periods of more than a year probably will be discouraged. You may be able to extend the closing date of your offering if you find yourself close to achieving your minimum offering amount, but you will have to give the portal at least five business days before the scheduled closing date to process and post the extended closing date, and the portal will be required to give existing investors five days in which to reconfirm their investments. If an investor fails to reconfirm an investment within the five-day period, the investment is canceled and the investor gets the money back.
An extended closing date may give your investors additional time to get cold feet and pull the plug on their investments, as they will be able (as they always were) to withdraw their investments up to forty-eight hours before the extended closing date.
Also, the funding portal is almost certain to charge your company an additional fee for keeping the offering documents posted for an extended period of time.
All in all, if your offering has generated lots of investments within the scheduled offering period, it may be advisable to take the money and run.
Setting a Minimum Offering Amount
Regulation Crowdfunding allows you to set a single target amount for your crowdfunded offering, but most issuers will opt for the so-called min/max offering, with a minimum offering amount they will accept and (sometimes) a maximum offering amount. Even without a maximum offering amount, it is recommended that you set a minimum offering amount to hedge your bets in case your target amount proves unrealistic.
So, for example, you can stipulate in your Form C disclosures that you are seeking to raise $500,000, but with a minimum offering amount of $200,000. If at least $200,000 is raised by the scheduled closing date, the offering is successful and will close even though you didn’t raise the full $500,000.
Keep in mind, though, that crowdfunded offerings are all or nothing: if the minimum offering amount you set has not been raised by the scheduled closing date, the offering has failed and your funding portal will be required to return any investments that have been made to the investors.
Setting a Maximum Offering Amount
You also have the option under Regulation Crowdfunding to set a maximum offering amount for your crowdfunded offering, such that the offering automatically closes if the maximum is reached prior to the scheduled closing date. If your crowdfunded offering is wildly successful, and you raise the full amount of capital you need in twenty-one days or less, why would you want to shut off the spigots? The only requirement in Regulation Crowdfunding is that you state in your Form C disclosures what you will do with any excess proceeds of your offering.
Also, by setting a maximum offering amount, if your offering is oversubscribed, you will be forced to decide which investors you will accept and which you will reject (or accept only a percentage of each investor’s subscription to keep everyone happy), and describe in your Form C disclosures how you will handle the oversubscription.