Why Minimizing Fraud in the Equity Crowdfunding Frenzy is Important
By Cynthia Nevels | Senior Editor and Founder of ThinkCrowdFund.com
As a small business owner and a female entrepreneur operating in the male dominated technology field, I know all too well the challenges we face when it comes to raising capital for your small business.
There are many options available for funding a small business or new idea. The problem isn’t quantity nor is it access. The myth of accessing capital is being debunked by crowdfunding.
Crowdfunding is removing barriers to capital in a major way. Currently, with 13 states now allowing intrastate equity crowdfunding utilizing approved online platforms, access to capital, in certain communities, will no longer be an excuse for stifles growth and innovation.
The transfer of cash from one party to another in exchange for equity in a legal business is enticing to those educated on how the process works and the risk factors. However, I cannot help to think it only takes one huge scandal to uproot the movement. One “bad apple” to ruin the consumer sentiment in an instant to which even Olivia Pope and Associates couldn’t spin.
Can you see it now? “Story at 10, how one local business man steals $1 million dollars from unsuspecting investors for fake company using xyz.com Crowdfunding website.” David Manshoory, Co-Founder and CEO of @AssetAvenue says it’s difficult as an investor to ensure you are in a safe place when it comes to crowdfunding.
Creating a “safe” environment for the crowd and the issuer are important. I believe most leaders in this field are placing too much responsibility on the “crowd” to regulate itself and ensure safety in the exchange. If that were true we wouldn’t need police men and women to keep our streets safe. Humans will be humans and relying on the crowd to validate an issuer or campaign is irresponsible.
I believe there’s equal responsibility on both sides of the transaction. The issuer must be willing to be transparent in all crowd funded deals whether it is reward, debt or equity. If you are not willing to share data, provide proof of ownership and
open the books to potential investors then you shouldn’t be allowed to put your offer on the street. Equally, if you are an investor looking for the next Apple or Amazon.com, you should be willing to take the time to conduct adequate due diligence, demand certified validation and to fully review all disclosures and records prior to forking over your hard earned cash. Investors should be willing to validate their capacity for risk by certifying themselves as an accredited investor but for the regular guy or girl who doesn’t have $1 million sitting in a cash account, the best guard against fraud and risk is education.
Creating a safe crowd to ensure there is a level playing field occupied by upstanding stakeholders with good intentions is a minimal requirement to ensure the viability of a stable economy. We’ve created four simple steps below to help issuers and investors play nice.
4 Steps for Creating a Safe Crowd for Issuers Before Launching an Equity Crowdfunding Campaign
1. Think about Your Processes
Evaluate your current internal processes and systems to ensure you have the infrastructure to support the sale of equity in your company. In the state of Texas, you can privately sell shares in your company offline. According to a source at the State Securities Board, only 35 businesses in Texas have utilized this law to sell shares in their private companies, legally. Don’t try this alone, get the help you need to comply with the regulations. Also, consider the federal or state reporting requirements before, during and after the sale and budget for the costs to your business to comply. Think about the process for creating a campaign, what marketing strategy you will employ and be sure to research what the rules are before announcing your plans.
2. Develop Your Plan and Marketing Strategy
Create or update your business or growth plan. It will be important for you to know where you have been, where you are and where you are going operationally and financially. Hire professionals to help you if you don’t have the intern staff to pull it off. Eric Senn, Chief Executive Officer, Bumbershoot Ventures raised $118,000 on Kickstarter this year and prior to launching his company’s Kickstarter campaign they privately raised $75,000 to manufacture the first line of products and to invest in their online crowdfunding marketing efforts.
3. Validate Your Company
Trust and transparency are important to any capital exchange and eco-system. Being aware of your legal requirements and open with your management data can help you build trust among the crowd whether you are raising capital for real estate development projects, school tuition or an oil and gas venture being open and communicating with investors is important. At a recent UCLA Real Estate Crowdfunding Conference in Los Angeles, Jilliene Helman, Co-Founder and CEO of @RealtyMogul shared this observation, “#transparency and communication are important when it comes to equity crowdfunding.” If you’re planning on launching a debt, equity or reward-based crowdfunding campaign hire a firm or subscribe to a service that can certify your legal entity, verify your owners background and validate your financials. This will help eliminate questions and distrust from the crowd.
4. Engage and Connect
Remember, not all crowdfunding platforms are created equal. Once you have found the right equity crowdfunding platform, for your business and campaign, it is time to connect with and engage potential investors utilizing the platform. Keep in mind some real estate platforms require you to complete a diligent review of your raise and your campaign may not be accepted on all portals. Once approved, be prepared to plug your data and certified profile into their platform and prepare to raise the capital you need. Once you are funded and all fees paid, it is time to execute the plan and communicate your performance, financials and outcomes on a regular or annual basis to your investors and regulators.
Don’t forget to budget for this activity. No one set creating a safe crowd would be inexpensive.