Are your students looking for funding to get a great idea, product, or new venture off the ground? If you teach in the U.S., now there’s a new source of financing they can tap into—equity crowdfunding.
It’s taken until May of this year for the regulations regarding equity crowdfunding—officially referred to as Regulation Crowdfunding—to go into effect, opening the door for all types of businesses run by all kinds of entrepreneurs to raise funds over the Internet.
Why the holdup? The U.S. Securities and Exchange Commission (SEC) wanted to protect investors from fraud as well as keep unsophisticated investors from losing significant sums in risky ventures.
There are generally two types of crowdfunding:
- Equity, in which investors receive a percentage of ownership in return for their funds.
- Non-equity, in which funders receive some sort of reward or benefit.
If your students are thinking about equity crowdfunding, they first need to keep in mind some of the SEC regulations limiting the manner and amount of funds they can raise:
- Maximum fund-raising amount: $1 million in any 12-month period.
- Limits on how much an individual investor may invest. Amount depends on investor’s income and net worth, generally $2,000 for the average investor.
- Must raise equity funds through an SEC-registered online portal.
- Must have a specific business plan.
- Must be a U.S. company.
- Must disclose specific, detailed information about the company, including information about officers, directors and owners of 20 percent or more of the company.
- Must disclose detailed financial statements. If raising over $100,000, statements must be reviewed by a CPA. If raising over $500,000, statements must be audited.
- Must file annual reports.
For more information on the SEC rules, check its website here.
A few equity crowdfunding portals:
4 keys to crowdfunding success
As with other forms of funding, your students will have to be prepared—and do their homework. Simply because the amounts of cash exchanging hands are smaller doesn’t mean your students won’t face some of the same scrutiny they would from established investors.
1. Have the right type of business or product. For crowdfunding success, a large number of people (on the platform of choice) must easily understand the idea. Consumer, food, consumer electronics, and fashion products are particularly well suited to this. Complex concepts and many business-to-business ventures may have a harder time gathering widespread support.
2. Create a compelling video. A great video helps engage potential funders, as most funders will want to hear your students’ story, see them, and view prototypes of their product (if any).
3. Raise sufficient funds. On some crowdsourcing platforms, start-ups don’t receive any money until they have raised the entire goal amount. This means your students will have to set an achievable fund-raising target. However, on some platforms, you can raise no more than the financial target you originally set. So you want to make sure your students raise enough to execute on their vision. This can be very hard to get right—even for seasoned entrepreneurs.
4. Choose the right crowdfunding platform. Make sure the platform your students choose meets their particular needs—type of product or service, type of rewards or equity start-ups can give, amount of money they can raise and whether they need to raise the full amount before receiving any of it.
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