The Securities and Exchange Commission (SEC) released on October 23, 2013 their proposed rules for regulating Crowdfunding. Their proposal, which included an explanation of their proposed rules, feedback they received on proposed rules and a standard cost/benefits analysis made of 585 pages.
While recapping the entire proposal would be timely, here are some key points that the majority may be interested in. All websites that sell crowdfunding securities is required to be registered with the SEC and the Financial Intermediary Regulatory Authority (FINRA). These websites are also commonly referred to as broker dealers or funding portals.
It is required that each investor is provided with a complete business plan, valuation and all financials. Each investor also has the right to enlist the help of a CPA to go over the financials provided. Obviously, these things cost money, which brings us to what most people are generally interested in: the cost/benefits analysis.
When creating a cost/benefits analysis, the SEC examined three factors. The success fee, the compliance cost and the CPA services. While CPA services can be controlled to an extent, the fees can not. According to the SEC, the fees associated with a $100,000 campaign will range from 12.9% – 39%. For campaigns between $100,000 and $500,000, the fees will drop to around 7.96%. The more money raised, the lower the percentage.
With those numbers in mind, the smartest move is to raise money as close to the next level as possible. For example, instead of trying to raise $50,000, a campaign should try to raise $90,000 because the fees will be progressively lower. While many entrepreneurs set their goal at the least amount needed to get their business off the ground, they need to take into account how much it will cost them to raise the money.
While crowdfunding provides a creative way to raise funds, there are downsides that entrepreneurs need to be aware of. Often times, entrepreneurs are focused solely on the benefits, which leads to sticker shock down the road.