Crowdfund Investing For Dummies
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Whether you choose a funding portal or a broker-dealer to support your crowdfund investment campaign, that entity must be registered with FINRA. What else are you looking for from an online portal? Following are the services recommended as you decide which organization to work with to raise money via crowdfunding.

Contain key social media tools

Crowdfund investing sits at the intersection of social networking and community capital. You use your Facebook, LinkedIn, Twitter, Google+, and other social media accounts to engage with your networks and request money for your business venture. Therefore, any online funding portal must feature tools that connect you to your social networks.

When comparing platforms, look for one that has the most robust (and easy to use) social media connectivity tools — ways to direct your networks to your pitch.

Integrating your social networks (Facebook, Google+, LinkedIn, Twitter, and so on) to your pitch page on the funding platform tells your friends that you have a pitch, and they can easily get to it via your shared social networks. From your online funding portal, you must log in to Facebook and grant access between the portal and your Facebook network.

Then, once your connections arrive at the funding portal page, you can tell your crowd about your brilliant idea and the details of the offer.

Pretty cool, eh? The same process works for Twitter, allowing you to tweet that you’re raising money and provide a link to your pitch. You can also notify your LinkedIn and Google+ networks that you have a pitch and where to go to get the details. Make sure that you work with an attorney and follow the letter of the law regarding what information you can include in your social media campaign.

Keep in mind that the SEC doesn’t allow you to spam people you don’t know, nor does it allow you to send pitches that contain much more than very basic information about your venture. It definitely doesn’t want you using words like “Limited time — act now!” or “Amazing, definite success” or “Inability to lose, and guaranteed to win.”

The information must be focused on directing the user to the funding platform so she can review the complete equity or debt offering all in one place.

Integrate background checks

Think crowdfund investing is right for you? Think that it will be an easy way to access some untapped cash from your friends, family members, and existing customers? Unfortunately, fraudsters may think it’s an easy way to access untapped cash as well.

For this reason, anyone who wants to partake in crowdfund investing must submit to a background check, and the online funding portal (or the broker-dealer) you choose must perform a securities enforcement regulatory history check.

Per the JOBS Act, anyone who is a principal or who owns more than 20 percent of the equity in a business seeking crowdfund investments must submit to a background check. The check aims to prevent someone from fronting as another individual and running a fraudulent crowdfund investing campaign.

Be prepared to turn over your name, address, Social Security number, date of birth, e-mail address(es), cellphone number(s), and more. Before you can ask anyone for a dollar, the SEC wants to know that you exist; that you haven’t been convicted of a crime (particularly fraud) in the past; and how you can be hunted down (by the SEC itself, by the Internal Revenue Service [IRS], by the police) if you try to pull the wool over their eyes.

Although, at first, it may feel a bit strange to provide all this data, doing so is in your best interests and in the best interests of your company and your investors. This is the same type of information that is required from angel, venture capital, and private equity investors when they invest money in entrepreneurs.

Quiz users on their investment knowledge

Investor education is imperative when it comes to crowdfund investing. Investors need to understand what it means to park their hard-earned dollars in a small business or a startup. The risks of this type of investment are significant; about 50 percent of business startups fail.

The JOBS Act prescribes that crowdfund investment platforms (both funding portals and brokers-dealers) must do the following:

  • Confirm that investors understand that they can lose their entire investment and can afford that loss.

  • Warn investors of the speculative nature generally applicable to investments in startups, emerging businesses, and small issuers, including risks in the secondary market related to illiquidity (difficulty selling equity or debt shares to another buyer).

  • Warn investors that, as minority share owners in a business, they have small voices, and investors with the majority of shares (and votes) can make decisions because they have control. This means, for example, that the company can vote to sell more equity, and, hence, each investor will own a smaller piece of a bigger pie.

    For example, if an investor owns 1 share out of 100 (1 percent) and the company votes to sell another 100 shares, she would then own only 0.5 percent of the company’s equity. This process is called dilution.

  • Warn investors that they are subject to restrictions on the sale of the security. The legislation requires that equity investors hold on to their crowdfund invested shares for at least one year.

As a business owner or entrepreneur, you want happy investors. An educated investor is more likely to make a good decision than one who doesn’t know the facts (including all the risks that you know about at the time that the investment decision is being made) related to crowdfund investment. Therefore, you want to look for an online platform with robust investor education components.

About This Article

This article is from the book:

About the book authors:

Sherwood Neiss, Jason W. Best, and Zak Cassady-Dorion are the founders of Startup Exemption (developers of the crowdfund investing framework used in the 2012 JOBS Act). They deeply understand the process, rules, disclosures, and risks of capital formation from both the entrepreneur's and the investor's points of view.

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