Q&A with CohnReznick: startups and crowdfunding
The SEC’s final rules for Title III equity crowdfunding go into effect on May 16th. This legislation is part of the Jumpstart Our Business Startups (JOBS) Act passed four years ago in an effort to encourage funding of U.S. small businesses by easing securities regulations.
In advance of the session – held at the Emerging Technology Center (ETC) – Castelli and Schwartz have answered some key questions about the legislation below.
What do start-ups and entrepreneurs need to know about the changes to the crowdfunding legislation coming down the pipeline?
The Title III legislation will broaden the audience of people that can engage in equity crowdfunding. In the current environment, only accredited investors can invest and get equity. Starting May 16th, investors who participate in equity crowdfunding can be accredited or non-accredited.
What should start-ups consider before utilizing crowdfunding portals?
Equity crowdfunding will be done through either a registered broker-dealer or a registered funding portal that complies with certain requirements. Start-ups should be aware that funding portals are intermediaries connecting them with investors; they can’t offer investment advice or recommendations, or solicit purchases, sales, or offers to buy securities offered or displayed on their portal.
Entrepreneurs also need to keep in mind that by utilizing the portals, they are opening the opportunity to invest in their company to the general public. Potentially, this means selling an ownership interest in your company to unknown investors. For this reason, it’s essential that the terms of the investment are clearly defined and outlined. For example, will your new investors get the right to vote, will you require a minimum investment what information do you plan to share your new investors on an on-going basis?
What are the requirements for companies to participate in a crowdfunding campaign as defined by Title III of the JOBS Act?
To ensure that all the proper checks and balances are in place, there are quite a few requirements for companies to participate in a crowdfunding campaign. Among other things, companies will need to fulfill certain requirements as well as make filings with the SEC and provide information to investors and intermediaries.
If companies decide to raise equity capital from the crowd, does that exclude them from utilizing VCs or private equity?
No, absolutely not. Frankly, companies should build a comprehensive plan with multiple funding channels. While both avenues get start-ups to their end goal, each are valuable for different reasons. Angel investors can bring experience and industry expertise to the table while crowdfunding creates both a buzz and ambassadors for you product, service or technology and helps validate the potential market demand for your idea or business
Will this new legislation help or hurt start-ups?
Anything that gives entrepreneurs another avenue to raise capital to grow and build their companies is a plus in our book. The key here is to plan ahead, taking into account the amount of money you plan to raise, the on-going reporting requirements and how you plan to manage communications to your new investors post-offering.
What does this mean for Maryland start-ups?
The Baltimore region is becoming a hub for entrepreneurs and start-ups pushing the limits of technology and innovation. Raising capital is always a challenge no matter your location or industry, but adding this additional funding channel is going to positively benefit our region.
How can start-ups and entrepreneurs learn more?
Your best move right now would be to reserve your spot at the Camp Inc. event on Tuesday at the ETC in Baltimore. We’ll be presenting to entrepreneurs who are ready to grow their businesses and have all their questions about crowdfunding and the JOBS Act answered. We look forward to seeing you there!
Please visit ETC Baltimore to RSVP.