Should you use crowdfunding to buy or sell a business?

This article was written by Paul Winkle and published from  www.navocate.com

If you haven’t heard of the Crowdfund or JOBS Act of 2012…you soon will. The Bill, approved by the House of Representatives last November got a thumbs up from the Senate last week. The amended version was sent to the President Tuesday for his signature and is expected to be signed by the end of the week.

The idea behind the crowdfunding exemption is to allow individuals to collectively pool monies to invest in U.S. businesses via approved and registered crowdfund investing portals. Previously, this type of investment was only available to accredited investors. Business owners trying to raise funds will now be allowed to use advertisements to attract investors under the new crowdfunding guidelines.

Things to know if you are an investor:

• There are restrictions on the amount of money you can invest and on the aggregate amount invested. 
• You will not be able to readily sell your shares for a period of one year unless they are bought by an accredited investor or the issuer. 
• There is not an established trading market and therefore limited liquidity. 

You should choose a registered crowdfund portal (any person engaged in the business of effecting transactions in securities for the account of others) that provides investor disclosures and education as required by the act. Crowdfund investing portals are required to screen candidate companies by performing extensive background checks. 

The hope, of course, is that you get lucky and invest in the next Facebook or Apple. To increase your odds of finding the next Google, look for registered sites that go beyond the required rules. These sites perform more intense screening techniques and take steps to create liquidity for the investors who register on their portal. 

A good example is www.earlyshares.com. EarlyShares profiles companies with the goal of providing their crowdfunding investors with those companies that will offer a good return on investment within three years of the funding date, preferably by means of acquisition (m & a). They don’t fund medical device companies, biotechnology companies, restaurants, consultancies, or real estate related projects and companies.

Things to know if you are a business owner:

The purpose for the Crowdfund Act is to create jobs in America. Every rule and regulation is there to assure that goal is accomplished. Click HERE To read the s. 2190 version of the Bill.

If you are a business owner or entrepreneur in search of funding for your company several factors need consideration, including those listed below:

• File the proper forms with the SEC and provide investors and the relevant broker or funding portal pertinent information about your company and its owners.
• Describe the financial condition of your business, the amount you want to raise, the deadline for raising the funds and the price and terms of the securities being offered.
• Explain how the securities being offered are being valued.
• Define the risks to purchasers of the securities.
• Only provide notices which direct investors to the funding portal or broker (e.g., you may not advertise the terms of the offering.)

The rules can be onerous for the unfamiliar. That’s why it’s important to choose a crowdfund investing portal with the proper procedures already in place to manage the reporting requirements of the Act. 

An example of a company which provides compliant back office solutions for crowdfund investing portals is Funding Roadmap. They provide cloud-based business plan access, due diligence and GAAP compliant financial statements to meet the transparency requirements of the Act. Visit Crowdfundingroadmap for more information. 

Make sure that you also consider the long-term picture. Crowdfund Investing portals that have thoughtfully considered how to educate and align you, the owner, with capable experts will pay off. Pay particular attention to the ones that can introduce you to Merger and Acquisition (m & a) firms that specialize in helping Emerging Companies. You will need their help securing future financing or negotiating and executing the sale of your company. This will help keep your new shareholders satisfied. 

A great website to learn more about crowdfunding and the exemption framework is startupexemption.com.

Navocate provides Business Sales and Acquisitions services for Emerging Companies with revenues from $3M - $30M. Specifically, Navocate focuses on the market segment above business brokers, and below investment banks. For more information please visit www.navocate.com.