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11/15/2013 McKinsey & Co - Why crowdfunding appeals to the Middle East
12/30/2013 KQED Radio - Richard Swart - A How-To Guide to Crowdfunding 12/20/2013 Gulf Times - Silatech Hosts Seminar...

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SEC Votes Unanimously for Crowdfunding Rules

Screen Shot 2013-10-23 at 12.44.13 PMOctober 23, 2013 - Washington, DC.  Today, the SEC took the important next step in legalizing debt and equity based crowdfunding in the USA.  In an hour-long hearing all 5 commissioners, including two conservative ones, voted in favor of updating the securities laws to the way we live our lives today via the Web and social media.  “This is a huge step forward in our fight to increase access to capital for startups and small businesses,” says Jason Best, principal of Crowdfund Capital Advisors and co-creator of the Crowdfunding framework that was signed into law by President Obama.  “The work isn’t done.  We need to review the rules and provide substantive feedback on them so they can be finalized.  We look forward to continue working closely with the industry, the Securities and Exchange Commision and FINRA to finish the process.”  

Crowdfunding is an Internet phenomenon that uses the social network and crowdfunding websites to facilitate the funding of startups and small businesses.  It takes traditional “friends and family financing” and expands it to make it faster and more efficient to attempt to raise money for a business.   With the passage of the JOBS Act in 2012, the United States paved the way to use money raised via the internet and social networks as an investment rather than a donation or pre-order for a product.  The industry has grown dramatically in volume in just a short period.  A University of California Berkeley Study claims the market size will reach almost $4B when debt and equity crowdfunding begins.

Entrepreneurs will be able to seek up to $1M/year on regulated crowdfunding websites either known as funding portals or broker/dealers.  Investors are limited as to how much they can invest based on the following income or net worth thresholds. 

Income or Net Worth

Maximum You can Invest across all crowdfund opportunities/year

Example

< $100,000

5% of your income or net worth.  Whichever is greater

 

  1. If you make $50,000/year you can invest up to $2,000/ year.
  2. If you have a net worth of $75,000 you can invest up to $3,750/year.

 

 

> $100,000

10% of your income or net worth up to $100,000

 

    1. If you make $150,000/year you can invest up to $15,000/ year.
    2. If you have a net worth of $775,000 you can invest up to $77,500/year.

 

Investors need to understand that investing in startups and small businesses is a high-risk investment. While entrepreneurs must submit to a fraud and background checks the reality of business failure and fraud still exists. “We believe a risk greater than fraud is failure, despite the best efforts of the entrepreneur,” say Best.  

“Entrepreneurs should take the time to educate themselves,” says Sherwood Neiss, principal at Crowdfund Capital Advisors and also co-creator of the crowdfunding framework signed into law by President Obama.  “Raising money is not easy, nor should it be.  We want entrepreneurs to be successful but we also want them to understand the seriousness and responsibility of taking investor money and reporting to them.  This is why we created Success with Crowdfunding to help entrepreneurs and investors better understand this new type of investment and how best to use it.”  

Neiss and Best aren’t done.  They just released a report in conjunction with the World Bank entitled Crowdfunding’s Potential for the Developing World.  In the report they provide a roadmap for governments interested in implementing crowdfunding ecosystems to analyze whether they have the variables necessary for the environment to flourish.  They estimate that the global opportunity for crowdfunding will exceed $90B within 20 years.  They just returned from being part of a U.S. State Department Delegation to Kuala Lumpur, Malaysia where they presented at the Global Entrepreneurship Summit and from the first Academic Symposium on Crowdfunding, held at UC Berkeley where leading academics presented research papers on key findings related to crowdfunding.

 

Why is September 24th a Huge Day for Entrepreneurs? Title II of the JOBS Act and Crowdfunding for Accredited Investors Begins

More Investment Money Means Potentially More JOBS!

On September 24th, there will be a sea change in how entrepreneurs can seek money from early stage investors - one of the largest changes to securities laws in 80 years.  On September 24th, Title II of the JOBS Act (a seven-part Act signed into law by President Obama on April 5, 2012) goes into effect.  Here are the key questions to be asking.

             

Screen Shot 2013-09-20 at 7.52.19 AM

 

Question: What is the change is that is going into effect?

 Effective as of September 24, 2013, Issuers of shares (under New Rule 506c) may use general solicitations and general advertising to effect a private placement. Prior to this any public means of communication like magazines and television were excluded from avenues for raising money for companies unless they were public. You really needed to know someone who was raising money in order to invest. There must have been a pre-existing relationship. Now that pre-existing relationship doesn’t have to be there. So businesses can reach more potential investors, faster, via the Internet and social media.

Now private companies can use those mediums as well as the Internet and the social network to reach millions of potential investors.  This reverses an eight-decade-old law. 

Question: Can anyone invest?  Is this crowdfunding for unaccredited investors that we’ve been hearing about?

No, not anyone can invest. While anyone can see the solicitation for funds, the completed sales, must only be to “accredited investors” and the Issuer (the company, broker/dealer or 3rd party Web platform) has the burden to verify that the investor is “accredited.” An accredited investor is someone who makes over $200,000 for the last 2 years or has a liquid net worth of $1M.  Crowdfunding for unaccredited investors is still waiting on the SEC to come out with the proposed rules. Unaccredited investors that might see these solicitations cannot invest in these offerings. Companies accepting funds must be careful to verify accreditation.

Question: What is the maximum amount that can be raised?

Unbeknownst to many people there is no cap on the amount that can be raised.  While this has always been there, the ability to use the Internet to reach more investors has the potential to lead to a lot more investment money. This influx into the economy could be a boon for businesses and jobs. This can be beneficial for startups, small businesses and even Venture funds.

Question: What are the risks?

There are many. 

    1. First, as with any investment there are no guarantees that you will see a return, that you will get your money back or a timeline attached to if and when you see a return.
    2. Second, there is no review of the offering by the Securities and Exchange Commission. Solicitations can be online or offline and made to any potential investor. While forms need to be submitted to the SEC, there is no requirement for review of the offering by any State Securities Commission. Since State Securities police the markets there is an opportunity for fraud.
    3. Third, this is really buyer beware.  Investors need to be cautious before they invest.  Investors should only invest in people they know and trust and opportunities they believe in. They should take time to educate themselves about investing in the private markets and understand that in many cases the securities they buy will not be liquid, meaning they are not converted into cash easily.  As a matter of fact in many cases you might have to hold on to them until the business sells, merges or goes public.

             Question: What are the benefits?

The majority of wealth in corporations happens at their early stage.  While there is a tremendous amount of failure after 5 years, companies that succeed not only create a vast number of jobs but a return on investment that exceeds many other investment opportunities.  That being said, investments into high-risk companies like startups and small businesses should never equate to more than 10% of an individual investor’s portfolio.

DRILLING DOWN

  1. What does this change mean?

    1. Issuers can reach moreWhy is this important?
      1. According to the IRS there are around 6M accredited investors in the USA.
      2. According to the Angel Capital Association:
        1. Only 10% of them invested in private companies
        2. However, those investors pumped $23B into those companies
        3. With the lift on the ban the potential to reach every 1% more of accredited investors represent another $2.3B into the economy and jobs
  1. Is this Crowdfunding?
    1. Crowdfunding is using the social network to solicit funds for an idea via an online platform likeIf a website like this is used under the new law and the solicitation is targeted to accredited investors, you could consider this the first wave of equity or debt-based crowdfunding.
    2. However the change in the law does not require the use of websites to facilitate theWe think this might be problematic because crowdfunding websites bring transparency to the process by forcing all the documents related to the offering online.  This means there is a digital footprint of everything that happens.  Digital footprints have been shown to increase transparency since people are afraid of repercussions.  Not having a footprint of what people are offering or saying can lead to problems.
    3. When Title III of the JOBS Act goes into effect, businesses will be able to solicit both accredited and unaccreditedHowever there is a $1M cap on how much issuers can raise as well as caps on how much investors can risk.  In what just went into effect, there are no caps on issuers or investors.  This means investors can lose a great deal if they aren’t careful.
    4. By not forcing this to happen on SEC registered websites, it might be difficult to police theTitle III of the JOBS Act requires that these transactions take place on websites that are registered with the SEC.

EDITORIAL

Net-Net This could be a huge influx of capital upwards of $2.3B for every 1% more of accredited investors that begin to invest in private companies.

  1. All issuers and participants in the offer and sale of securities who may elect to utilize the new freedoms afforded by Rule 506(c) should proceed carefully and to generally solicit and market the offering of unregistered securities in a manner that doesn't draw unwanted attention.
  2. Issuers should consider hiring a law firm like Ellenoff, Grossman and Schole to review their documents and assist with filing their forms with the SEC.
  3. Issuers should consider listing their offerings through an “accredited investor crowdfunding platform” like SeedInvest that can help them follow the steps to be compliant.
  4. If you are an entrepreneur and you have never raised money before, you need to EDUCATE yourself before you getThere are resources:
    1. Success With Crowdfunding– Provides online step-by-step training and education including:
      1. Introduction to Crowdfunding
      2. Title II for Issuers
      3. Title II for Investors
    2. Crowdfund Investing for Dummies – Lays the groundwork for raising money using the Internet and is a resource for issuers looking to raise money from both accredited and unaccredited investors.

The Law

This isn’t easy.  Companies trying to raise money will have to work for it.  Here’s a breakdown of what issuers need to confirm.  (Some of this is repetitious to above).

  1. All solicitations must be accurate
  2. Companies need to make sure each potential investor receives a full private placement memorandum (these require lawyers and can cost at minimum $25,000) so this will likely mean that people using this means of raising money will be raising more than $500,000
  3. Companies, as mentioned above, must verify each investor is indeed “accredited”
  4. Form D will be expanded and require addition information including:
    1. Issuer information
    2. Issuer website
    3. Type of securities
    4. Details about purchasers (individuals or entities)
    5. Use of proceeds
    6. Description of general solicitation
    7. Description of verification methods
    8. File Form D within 15 days before general solicitation begins
    9. File an amendment to Form D within 30 days after completion of the offering
    10. Include a legend in offering materials for generally solicited deals
    11. For a period of two years, submit offering materials to the SEC for review and analysis (these materials will not be available to the public via the SEC website)
  5. For the first time in history the ban on general solicitation is lifted.
    1. No need to engage a middleman, no need for a broker
    2. However, they can only take funds from accredited investors.
  6. Prior to this change accredited investors self-certified their status
  7. Now the burden of certification falls on the shoulders of the issuers
    1. Con – Investors might not want to release their privateIssuers might not have the manpower to read through all the documents to confirm accreditation.  If issuers do not follow reasonable verification procedures, they may be in violation of the 1933 Act resulting in significant penalties, including rescission rights on behalf of investors.
    2. Pro -  Accountants or lawyers can act as the proxy forThere is talks about US Treasury creating a plug-in to the IRS tax tables for investors to print off a government issued accreditation certificate which would solve this problem

Crowdfunding: Income or Gift

Although Internet based crowdfunding has been around for at least five years, a large degree of ambiguity still exists around how to file taxes for money raised. With no definitive ruling from the IRS as to how crowfunded money is to be taxed, the burden of making sure that everything is in order rests completely on the head of the person (or entity) raising the funds. This is a scary responsibility to take on for most people raising money via crowdfunding. However, listed below are some recommendations by experts in tax law, whom we interviewed, that should help to simplify the task. (Disclaimer- These are general guidelines and should in no way replace the advice of a professional accountant):

Are rewards being issued?

The majority of campaigns are being hosted on reward-based platforms. Depending on the structure of the campaign and the level of donation, the rewards offered may be intangible, such as a thank you e-mail or an honorable mention on the company’s website, or it may be tangible, such as a small token of gratitude or a pre-sale of a product. Tangible gifts may include products or services.

If the perks are not tangible then it’s not taxable, as no sale has occurred. In this case, donations are considered gifts, which according to the IRS, is the responsibility of the giver. This donation is not taxable up to $14,000 per person for a single donor or $28,000 per person for married couples.

If the reward is diminutive compared to the amount given, such as a gesture of gratitude, then no transaction has taken place. For example if a funder were to donate $50 and they were to receive a mug or a calendar as a thank you, this would not count as a transaction but rather a gift.

If the rewards issued are tangible and comparable to what the market price would be for that good, then it is a business transaction, and any profit derived from the sale is considered taxable income. If production expenditures match or exceed business earnings, then you may not owe anything. In other words, if the difference between the amount received and the cost of providing the perk/merchandise comes to zero or less, no tax payment is required.

If you are a registered non-profit organization or are partnered with a non-profit organization, and have applied to the IRS for tax exemption status, then you will owe no tax on income earned.

Does the reward have a well-defined market price?

If the reward has a well-defined market price and is being pre-sold or sold at a comparable price, your state government may expect your customers to pay a sales tax. Check your state laws regarding sales, particularly concerning Internet sales. (http://www.nolo.com/legal-encyclopedia/50-state-guide-internet-sales-tax-laws.html)

Are you an artist?

Pre-selling or offering up as a perk paintings, movies, publications, or other forms of physical media where the amount donated to receive a particular perk is comparable to the market price of the good may be subject to a sales tax. 

If you are offering a reward where your costs of production are less than the amount earned through crowdfunding, then the profit is considered income and is subject to an income tax.

However if production costs exceed the amount received then no income is earned and income taxes are not applicable.

If producing an audio record, for example, and all the money received go to studio fees, no taxes have to be paid. Any income, meaning any monetary gain derived after considering the costs of production, is subject to a tax.

Are these funds being raised for a charity or registered non-profit organization?

The IRS lists the types of organizations that fall under charity and non-profits that qualify for tax exemption as well as criteria required to achieve exemption. Note that even if an organization is recognized as a non-profit it is the organization’s responsibility to apply for recognition. (http://www.irs.gov/Charities-&-Non-Profits/Types-of-Tax-Exempt-Organizations)

Donors can only receive tax deductions if they donate to a registered 501(c)(3) non-profit organization or a qualified charity organization. If a perk was received, the donor can only deduct the amount that exceeds the market value of the perk. (http://www.irs.gov/uac/Eight-Tips-for-Deducting-Charitable-Contributions) Donations to a cause, unless associated with a non-profit organization or qualified charity organization is not tax-deductible.

Did you raise more than $200,000 from more than 200 transactions?

Crowdfunding platforms do not handle any of the monetary transactions; those services are outsourced to third parties such as Amazon Payments or PayPal. The IRS therefore requires that you fill out form 1099-K, which ensures that online sales are reported and allows the IRS to track transactions for tax purposes. You should receive Form 1099-K upon earning $200,000 from 200  transactions. (http://www.irs.gov/uac/Form-1099-K,-Merchant-Card-and-Third-Party-Network-Payments) If you don’t receive a form, contact the company that processes these transactions to make sure a form hasn’t been filled out for you.

Do you have international donors?

Backers should not have to worry about customs fees because backers are making donations and not necessarily purchasing goods from retailers.

One difficulty may arise your campaign includes perks that fall under multiple taxation criteria, whereupon best judgment based on the information above must be made. Regulations associated with crowdfunding are still under development, but it is the campaigner’s responsibility to evaluate the appropriate criteria for taxation. 

Special thanks to Ron Worsham, Associate Professor of Accounting at Brigham Young University, and Randy Stucki, Audit Intern at Ernst & Young

A Letter From The Crowdfund Capital Advisors Team

This one is for the Entrepreneurs!

What would it feel like to have enough money to really get your small business up and running, with all the capital you need to advertise, to rent the space you need, and hire the ideal people to help you grow?
 
Most likely, you’ve heard about “crowdfunding”, where you can raise money from real people, not big, greedy venture capitalists or nosy angels or even kind yet meddlesome friends and family.  In our new book “Crowdfund Investing for Dummies” Jason, Zak and I explain the exact process you can use to raise the money you need - faster, safer and more likely to succeed.

Entrepreneurs like you who need to raise $250,000, $500,000 or even up to $1M per year have found our simplified method exactly what they need to achieve their dreams.  Click here to buy the book on Amazon now.  

To get a sample of what you’ll learn in our book, we’re giving our newsletter subscribers a free taste.  Click 'How to Create a Great Crowdfund Investing Campaign' to view our timely video.  It will open your mind to how to prepare to raise money from your crowd.

South by Southwest (SXSW) 2014 - The Impact of Crowdfunding a Year from Now

SXSW 2013 is over and the cultural shifts taking place on the horizon are becoming apparent.  One of the biggest shifts will be the impact crowdfunding will have over the next year.  In our panel, the Global Impact of Crowdfund Investing, Jason Best and I described how Crowdfunomics© will sweep the globe. Crowdfunomics is the economic impact of crowdfunding.  It is the business case for the social web we’ve been waiting for.  It is different from donation-based crowdfunding because up until now there was no financial return tied to those donated dollars.  Rather than giving to support a cause, you are now investing in people with ideas that have profit potential.

Crowdfunomics is investment-based crowdfunding.  Where communities of interest, geography and origin become more than fans, followers or likes but rather small investors.  Where a group of investors decide to fully fund an entrepreneur who has provided digitally recorded disclosures about the business, revenue model and investment opportunity.  Where investments flow through SEC-registered websites and fund entrepreneurs in their own backyards, in a way that is fraud free (background checks are mandated in the legislation) and transparent. These community businesses will provide economic stimulus and sustainable jobs and the money will cycle from investors to businesses, employees and back to investors in the way of dividends, loan repayments, equity and a return on happiness. Not all companies will be successful but those that have an engaged group of investors stand a better chance.

The 10 day South by Southwest (SXSW) conference contains Interactive (technology/culture), Music, and Film components and takes place every March in Austin, Texas.  It began in 1987, and has continued to grow in size. SXSW Interactive is focused on emerging technology and trends.  It has earned the festival a reputation as a breeding ground for new ideas and creative technologies. Like the Consumers Electronics Show (CES) in Vegas, it is considered one of the premier events with a Who’s who list of speakers. Speaking slots are coveted and held by names that include famous entrepreneurs, Senators, author and TV personalities. Twitter and Foursquare, everyday tools for tech-enabled Americans, were launched at SXSW.  Theory has it, if you can afford to attend and want to be discovered, you’ll be at SXSW parading around with your technology in hand promoting it with a t-shirt on your chest.  Just to be in front of the eyes of 27,000 engaged participants who are the cultural and technological vanguard.

Two years ago at SXSW crowdfunding was a concept.  Last year, it was a new funding tool for artists or tech-related designers that were using it to gathering massive numbers of followers and hundreds of thousands of dollars of pledges or product pre-orders.  Not much attention was focused on the fact that our Bill (we wrote the legislative framework to legalize crowdfunding) was just lumped together with a group of other capital formation bills in the U.S. House and sent to the Senate as part of the very aptly named Jumpstart Our Business Startups (JOBS) Act.  The President signed it into law in April 2012.  This year crowdfunding is a serious topic.  We alone presented on 4 different panels.  There were at least 10 other panels that our peers in the crowdfunding industry either spearheaded or participated in.  And the buzz was that this is going to spur innovation unlike anything we have ever seen.  But not just innovation in apps or technology but in the private capital markets as technologies are built to facilitate communication with thousands of investors seamlessly and reputation management tools á la ebay and amazon are built to review not just ideas, but entrepreneurs, investors and their comments.  We have learned the pros and cons of social media.  And tying that into capital formation will create more transparent markets.   

Investing in private companies (unlike investing in large public companies on stock exchanges) has been around for a long time but these investments have until now - with the passage of the JOBS Act been available, by law, only to the rich.  The new Crowdfunding legislation takes friends and family financing and provides an infrastructure, technology and ecosystem to regulate and expand the process. Crowdfunomics will emerge out of the soon to be live crowdfunding provision of the JOBS Act. Once the SEC finishes the rules making, local communities will be able to pick up where Wall Street, the banks and VC’s left off.  It will put the power into the hands of people who decide what they want to do with their investible capital.  However it will now also include the wisdom and market power of ‘the crowd.’.  Companies won’t get funded until the crowd decides they are worthy of funding.  Post funding, customers will become investors with a mandate to share knowledge and experience to help the entrepreneur (aka their investment) succeed.    

So what will be different between this year’s SXSW and next?  This year people were recruiting fans, followers and likes (via the social networks). Next year they’ll be saying, “like what you see?  Why not invest in our company?”  And with tools like QR codes, they’ll direct people to a funding page on an SEC registered crowdfunding platform very likely hosted by SXSW as well.  When people ask companies how successful SXSW was for them, it won’t be measured anymore by ‘likes’ but by how many dollars they raised. The one thing that’s been missing from SXSW until now has been the ability to connect dollars to the ideas.  With an engaged crowd of 30,000 next year it will be interesting to see how much investment that equates to.