Ready for Crowdfunding? Get out Your Checkbook! (originally published 4.29.2014)

How does spending $28,700 for the “opportunity” to raise money sound?

Think crowdfunding will be some great panacea for startups?

Think again!

According to the NY Times (among many others who have actually “read” the law), due to the new filing requirements, it will cost the startup money in new reporting and hoops, just to comply with the opportunity to crowd fund.

Let’s start with a quick differentiation.

First; I think the term “crowd funding” has already been screwed up. With companies such as Kickstarter, IndieGoGo and the myriad of others already in the public lexicon, these sites are really crowd “gifting”. This means when you go to a site like that you are either donating money (because you like the cause or the idea), or you’re potentially pre-buying the product being offered.

In either case, you are NOT buying equity in the company.

The new JOBS Act allows companies to raise money directly from investors. This type of equity crowd funding was designed to make it easier for companies in the capital market.

However, as typical with Government, there is a little term called “unintended consequences”.

The JOBS act is full of them.

When you look at a crowd gifting platform, you simple fill out an application, create a cool video, and use social media to encourage all your friends to donate.

With the equity crowd funding, you’re going to be required to submit financial documents, tax records, audited statements, etc.

Here’s a quote from the article:

Though these requirements are, in fact, much less onerous than those faced by public companies, they will no doubt make crowdfunding a more expensive way to raise capital than some people may have imagined. Regardless of how much a company raises, the S.E.C. estimates that complying with its regulations would cost about $6,500 for the offering and $4,000 for each annual report.

For a company that has to provide audited financials the cost could be over $28,500 per year.

So, when you look at the new JOBS act as a way to raise money; it may be good for an ongoing company. Or even one with customers, revenues, etc.

However, for your Start up; that idea you have that you’re boot strapping along; that dream of a business, it won’t be as simple as an online application and cool video.

No, there will be a real value judgment for the Start up to determine if the cost is worth the effort.

I’m holding out hope that the new equity funding will spawn a new group of investors and fund a new crop of entrepreneurs.

However, I’m afraid that the crop may be stunted before it even gets growing.