As businesses prepare for fundraising 2015, more and more will wade into the pool of equity crowdfunding. For small and emerging businesses, equity crowdfunding offers the attractive prospect of raising risk capital and growing a loyal customer base. But it is also a difficult process to navigate. Below we discuss three critical elements of this process for businesses to address.

Behind the Page

Construction of a successful equity crowdfunding campaign takes hard work, dedication and time. As the old maxim goes: preparation, preparation, preparation! We recommend that companies prepare for an equity crowdfunding campaign at least 3 months prior to the online launch of the company’s crowdfunding page. This time generally includes:

• Identifying your crowd (from a user/customer base analysis),
• Preparing your channels strategy for reaching that audience (traditional media, social media, events, etc.),
• Producing your critical elements (pitch video, audio, slides), and
• Securing your legal footing (remember, equity crowdfunding is much more legally complicated than a traditional rewards/donation based campaign).
• The foregoing work takes place “behind the page”. The ultimate supporters of the campaign may never actually see all the work that goes behind the page, but they may never see the campaign at all without it.

On the Page

The list of operative equity crowdfunding sites is likely to continue expanding in 2015. (See Equity Crowdfunding Sites). Currently, only accredited investor (SEC Rule 506(c)) and intrastate only platforms are operational. However, this list is itself expanding, and the list of successes is growing. Companies should choose a platform they are comfortable with according to its user profile and the ease of use.

Once a platform is selected, companies should use all of the time they need to build an elegant, functional and informative page. The video should be kept to 3 minutes (maximum) and include a clear collaborative call to action. Ease of use is key. The more complicated the pitch is “on the page”, the more likely the company is to lose potential supporters.

Beyond the Page

Companies may fail to reach their goal in an equity crowdfunding campaign for any number of reasons. Often these reasons relate a failure by the company to think “beyond the page”. Companies tend to follow belief that crowdfunding is an online-only phenomenon. This is a fallacy. The page only creates an organization space and channel; not a substantive connection.

To supplement the material on their crowdfunding page, companies should also plan as much outreach as possible (and as legally permissible) outside of their crowdfunding page to reach their target audience. This outreach should include some combination of the following elements:

• Digital Marketing;
• E-mail Marketing;
• Launch Party;
• Public and Private Events; and
• Investor Meet-ups.

By engaging in as many contact points as possible “beyond the page”, companies increase the likelihood that they will reach their target audience and, in turn, the funding goals for their campaign.

It should be noted, however, that many of the foregoing strategies have securities laws implications that are unique to the equity crowdfunding space. It is therefore important to abide by all such laws and consult an experienced professional prior to the launch of any campaign.

If you are interested in more detail related to your situation it is best to speak with an attorney.

It’s a good time for small and emerging businesses to think about what the landscape for capital raising will look for the rest of 2015. The traditional channels will likely be unchanged: bank loans (if you can get them), angel investors (if you are a tech company based in San Francisco), or venture capital (if you invented a perpetual motion machine). For the remainder of the 99% of small and medium sized enterprises that don’t check one of the boxes above, what other options might emerge in 2015?

Equity (or, more broadly, securities) based crowdfunding will likely emerge in 2015 as a go-to choice for small and emerging businesses to raise capital. Unlike traditional “rewards” or “donation” based crowdfunding, equity crowdfunding is structured for businesses to sell interests (securities) in the enterprise itself to the crowd at large through a mini-public offering. At the end of a successful offering, the business has raised the capital it needs to start-up or expand, and the public now owns an interest in the fortunes (or failures) of that business going forward. Although equity crowdfunding already exists in the United States, it has been underused, and undervalued (for an example of an intrastate crowdfunding exemption, see Georgia’s here: Invest Georgia Exemption). We expect 2015 to be a breakout year as awareness and marketplace acceptance expands more rapidly.

The Trends

Why do we see this happening in 2015? Well, for many businesses (start-up or growth stage), equity crowdfunding may be their only source of access to capital. This includes a massive amount of SMEs in the United States who are either too young, or too industry or geographically challenged to attract capital from other sources, but who nevertheless have a great idea and a loyal customer or affinity base.

Furthermore, the regulatory trend is toward expansion and permissiveness of crowdfunding. In 2012, it was only permitted in two States (Georgia and Kansas). In early 2015, the list of States which have enacted (or have considered) intrastate crowdfunding exemptions will be upwards of 15 (including, now, Texas), and is growing geometrically (see NASAA’s excellent resource center here: Intrastate Crowdfunding Resources. That means that businesses in these States can use equity crowdfunding now, they do not have to wait on federal rules under the JOBS Act from the SEC that are now years late. Eventually, when the SEC does release final rules under the JOBS Act, national equity crowdfunding will be legal and available as well. This trend will continue ahead.

The Benefits

The benefits to SMEs wishing to conduct an equity crowdfunding are numerous, and include the following:

• Access to capital that might be otherwise unavailable.
• The Company drives the terms of the capital raise.
• Engagement of customer/affinity base on a going forward basis.
• Low or zero cost to rewards fulfillment following completion of the campaign.

The Drawbacks

SMEs wishing to conduct an equity crowdfunding should, of course, consider the limitations of such a campaign as well, including the following:

• Currently, only legal in certain States, and not on a national/interstate basis (yet).
• Low maximum raise thresholds (generally $1M).
• Requires legal compliance structuring (unlike rewards/donation based crowdfunding).
• Backers will own a security in the company following completion of the campaign.

The Takeaway

Equity crowdfunding—like other methods of capital raising—can be challenging and time consuming. However, for those SME’s with a natural customer or affinity group that they can tap into for support, equity crowdfunding will likely be the cheapest and easiest source of capital that they can access, and will offer the collateral benefits associated with completing a successful crowdfund.

Unlike a simple rewards based crowdfund (like on Kickstarter or Indiegogo), equity crowdfunding involves the offering and sales of securities. Accordingly, any business that is considering conducting an equity crowdfunding campaign should consult a qualified securities attorney to make sure that the necessary compliance boxes are checked in advance. Finally, all the hallmarks of a great crowdfunding campaign should be assembled (video, copy, images, disclosure documents, etc.), and a strategic plan for execution should be formed. After that, it’s up to the crowd!

If you are interested in more detail related to your situation it is best to speak with an attorney.

THE RISE OF “QUASI-PUBLIC OFFERINGS” REFLECTIONS FROM THE NASAA CONFERENCE

As I prepare to deliver remarks at the NASAA Corporation Finance Training Conference in St. Louis this weekend, it has provided a cause for reflection on over three years marking the rise of what I would term as “quasi-public offerings”. Trends in corporation finance laws at both the State and Federal levels have been loosening the regulatory grip on small and emerging business capital formation, and, in the process re-making over 80+ years of venerable securities laws. The rise of “quasi-public offerings” is a big part of this story.

What is a “Quasi-Public Offering”

A long accepted trope in the securities laws industry is that an offering of securities must be either “public” in that it is a transaction registered with the proper regulatory authorities (State and Federal, for a typical interstate offering), or “private” in that it is an unregistered offering that is only open to select persons, who, generally, have a prior existing relationship with the company issuing securities.

But the ever increasing costs of conducting a public-offering, coupled with the meteoric rise in the popularity of crowdfunding as an aspect of a holistic capital formation plan have led to a chorus of voices, at all levels, calling for a more sensible and affordable route to public capital raising. The responses to these calls have been variable by State, and also at the Federal level. What is emerging, however, are regulatory seems in the legal fabric that are allowing businesses (primarily small and medium sized enterprises) to raise capital from the broader public without registering the transaction, provided that certain important regulatory safeguards are abided. Collectively, these emerging exemptions are what I have termed as “quasi-public offerings”. These channels have taken on various forms, including the following discussed below.

Intrastate Crowdfunding

In 2011, with little fanfare, few spectators, and essentially no press concern, the securities administrator in the State of Kansas quietly enacted a new exemption from the registration requirements for public offerings of securities within its borders. The “Invest Kansas Exemption” (IKE), as originally enacted, permitted capital raises in Kansas of up to $1,000,000 by means of general solicitation (to both accredited and non-accredited investors) without registration and with minimal regulatory compliance features. Whether the administrator knew it at the time or not, Kansas had, in effect passed the United States’ very first securities based “crowdfunding” exemption.

Today, over three years later, fully 14 State jurisdictions have adopted some form of intrastate crowdfunding (by legislative or regulatory means), meaning small public capital raises involving only business and only investors from that specific State. This trend of expansion is continuing apace. Why? Because State regulators are becoming increasingly comfortable that these types of small “quasi-public offerings” can be a safe and effective manner for capital starved businesses to build important community based organizations that can establish and thrive without the necessity for scarce outside capital. I expect this trend to accelerate.1

Accredited Investor Crowdfunding – Rule 506(c)

In late 2013, the Securities and Exchange Commission put in force the first major set of “quasi-public offering” regulations on the Federal level—those relating to the new Rule 506(c) registration exemption (See 17 CFR 230.506(c)). The new Rule 506(c) permits offers to be made on an interstate basis to everyone, provided that the ultimate purchaser base is restricted to “accredited investors” only. This new Rule essentially establishes “accredited investor” crowdfunding, and creates a “quasi-public offering”, albeit with an ultimately restrictive purchaser base.

With a year of data in the books, it is clear that this Rule is working. Use of the Rule is trending upward, and it is emerging as the quasi-public offering of first instance for companies looking for capital beyond what intrastate crowdfunding can provide, and, specifically, in fields (such as technology and e-commerce) in which accredited investors are well versed. The fact that this represents a shift from a focus on who is being offered securities, to who is being sold securities is an extremely important fact, and, in my view, the most significant philosophical addition that Rule 506(c) has made to the body of securities laws.2

Regulation A+

Regulation A+ is an extension of and expansion on an existing securities registration exemption called, you guessed it, “Regulation A”. Reg A permits offerings up to $5M, with scaled (reduced) disclosure requirements in the registration statement. Although Reg A has been around for a long period of time, it is underused and much maligned, primarily because the disclosure requirements are still time consuming and expensive, and, more importantly, it does not preempt State law review. As proposed by the SEC, however, Reg A+ would create a new “quasi-public offering” category for raises up to $50M, which would enjoy scaled disclosure and Federal preemption. It remains to be seen how the SEC will ultimately treat the definition of “qualified purchaser” in these offerings, and whether the Federal preemption issue will be satisfactorily resolved, but, nevertheless, many commentators believe that this Section of the JOBS Act of 2012 holds the most potential for meaningful securities offering reform.3

Follow the Trends; But Remain Cautious

I applaud the forward leaning regulators who are greeting some or all of these techniques with a welcoming—if prudently cautious—point of view. I believe that each of the foregoing has the potential to unlock capital for worthy businesses, and be done in a safe manner which protects the interests of the investing public.

Quasi-public offerings are, as discussed ever too briefly above, a new and evolving area of the securities laws. They hold the promise of broader and more cost effective access to capital for small and emerging enterprises. They are, however, also fraught with uncertainty, and a deceiving level of complexity. Any company consider conducting a capital raise—including using any of the techniques described above—should consult competent securities counsel prior to taking any action.

If you are interested in more detail related to your situation it is best to speak with an attorney.

¹ For a summary of laws/regulations enacted as of July, 2014, see: http://www.crowdcheck.com/sites/default/files/Summary%20of%20Intrastate%20Crowdfunding%20Exemptions_0.pdf

² For helpful and interesting statistic on the use of new Rule 506(c) after approximately 1 year, see: http://www.mofojumpstarter.com/2014/09/29/new-data-on-rule-506-offerings/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+MoFoJumpstarter+%28MoFo+Jumpstarter%29

³ For a good, concise (but now somewhat dated) explanation of Reg A+ as proposed, see

http://blogs.law.harvard.edu/corpgov/2014/01/15/regulation-a-offerings-a-new-era-at-the-sec/