crowdfunding

The next evolution of Kickstarter involves real equity

Kickstarter, Indiegogo and sites like them have been a tremendous boon to innovators, artists and small businesses. In fact one could say they have fundamentally changed the landscape for how innovation is funded forever.

The main challenge with the current crowdfunding sites is that they do not allow for investment of more substantial amounts of funding in exchange for equity. For example of the more than 54,000 projects funded by Kickstarter since inception, the vast majority have received less than $10,000 of capital.

enter equity-based crowdfunding

In April 2012 President Obama signed the JOBS Act – perhaps the most significant change to securities law since 1933. The JOBS Act allows private companies to publicly advertise their funding campaigns to the general public – aka the crowd. This is simply one of a number of changes designed to increase the flow of capital coming into emerging companies.

Start-up companies will now have the ability to raise up to $1 million dollars from individual investors, many of which they will have no other relationship with other than social media contacts. The current equity crowdfunding regulations are being refined and are expected to be finalized soon.

a complex process

While the concept of crowdfunding seems straightforward, anytime a start-up company is raising capital from investors it becomes a very complex endeavor. The JOBS Act requires that companies put their offering though a qualified intermediary.  And disclosures such as incorporation documents, names of officers and directors, financial statements, use of proceeds, share price, ownership percentages, deal structure and many others need to be disclosed.

cap table considerations

It is expected that equity crowdfunding will take place after the traditional friends and family round and before a series A round with accredited angel investors or venture capital firms. The implications of how a company structures its crowdfunding round relative to the total current and expected cap table (a summary of all current investors) can be dramatic. The failure to properly structure a round of capital from many (50, 100, more) different individual investors can have long-term negative consequences.

how we can help

True equity based crowdfunding is still on the horizon, but it’s very close. When the final regulations are passed The 10X Group will launch a suite of advisory services specially aimed at companies seeking funding from the crowd. We are excited by the possibilities of broadening your reach to potential funders – and cognizant to ensure you have the expertise you need to do it right.