Crowdfunding is a popular way for startups to raise money. You may have already heard of platforms such as GoFundMe, Indiegogo, or Kickstarter, which connect investors and startups by an easy-to-use interface. While it’s simple to sign up for these websites, startups first need to undergo several steps with a lawyer before they can legally raise money through crowdfunding. In this article, we will go over common crowdfunding documents and filings.
Regulation CF
The Securities Act of 1933 was enacted in the wake of the Wall Street crash of 1929. One of the causes of the Great Depression was widespread fraud in the capital markets. Companies frequently misrepresented their securities in fundraising from investors, promising large profits even as they were saddled with debt or on the brink of bankruptcy. To protect the general public from “company insiders,” the U.S. government enacted a series of regulations and laws that require companies to disclose certain information in making securities offerings.
Regulation Crowdfunding, also known as Regulation CF, comprises one such set of regulations and laws that startups must comply with in accessing crowdfunding platforms. In order to be able to raise money through crowdfunding, startups must file a Form C with the Securities and Exchange Commission. But what exactly is Form C?
Form C
Form C is an extensive disclosure document that typically ranges between twenty and thirty pages. It provides investors with information on the nature of the startup’s business, key personnel involved in managing the startup, and the risks of making an investment in the startup. Founders interested in accessing crowdfunding platforms must prepare and provide the following to their lawyers:
- Business plans
- Industry trends and how their startups fit into them
- Backgrounds of senior management
- Hypothetical scenarios in which their startups could fail
While lawyers may include additional information that they brainstorm on their own in drafting Form Cs, founders should have a solid idea of their business positioning before even considering Regulation CF. Crowdfunding is not for startups that are still conceptually blank or open. It is for startups that already have a clear strategy on how to grow.
Budget
What is the budget for a Regulation CF filing? Depending on the complexity of the securities offering, small law firms typically charge between $5,000 and $10,000, while large law firms can charge between $10,000 and $20,000. Consider how crowdfunding will fit into your broader fundraising and budgeting goals.
If you’re an early-stage, bootstrapped startup, crowdfunding may generate a better return on your legal costs if you already have investors lined up. In this scenario, crowdfunding platforms could provide an easy way for founders to share links to their fundraising page and for investors to access documents and write checks online. While you may have read on the news about startups that became one-hit wonders on crowdfunding websites, these stories are far and few between. Startups don’t generate publicity from simply being listed online. In fact, it’s not uncommon for them to be unable to reach their fundraising targets even with extensive digital marketing.
The sweet spot is for startups that already have a cash pile available for different types of fundraising efforts. Crowdfunding is just one of the ways they could raise money. They have the financial resources to pursue different securities offerings simultaneously, and the legal costs involved in filing under Regulation CF are relatively insignificant. They have may have a team dedicated only to digital marketing for crowdfunding. In other words, they can reap the benefits of crowdfunding without relying on the hope of being a one-hit wonder, just like the companies that had been on the news.
In a Nutshell
Before you start raising money through crowdfunding, consider if it makes sense from a strategic standpoint. Crowdfunding is one of the easiest ways for investors to be able to access private companies, as well as for companies to be able to raise from just about anyone, whether the investors are accredited or not.
With that said, depending on the stage and size of the startup, the legal costs can be quite substantial, and the returns on these costs can fail to measure up. It is important to develop a fundraising strategy early on so that you can assess whether crowdfunding (or any other type of securities filing) is the best fit for your business. Ultimately, as a securities attorney, I have only good things to say about crowdfunding, so long as it aligns with your business goals.
