NEW YORK (MainStreet) As we wrote in November, crowdfunding isn't just for doughnuts anymore.
Several states have opened the doors to mass crowdfunding for equity. "Accredited investors" can now buy equity through crowdfunding sites, and the rest of the crowdfunding universe is awaiting final Securities and Exchange Commission (SEC) approval of "Title III" crowdfunding rules, expected this spring, that will open equity crowdfunding up to the masses.
"What people really need to prepare for is getting together their network," Goren said. "That means making sure you have a Facebook presence, building your LinkedIn community, using Twitter if it's relevant. If you're in fashion, use Pinterest. That's not something you can just do you have to prepare."
Don't go into crowdfunding cold, Goren said. Go as part of a crowd. "You need to do things in advance so you can ask the community for money as an experienced member of it," he said.
There are slightly different rules for crowdfunding based on how much you want to raise. If you're raising under $100,000, you may just need a background check and an accounting of your business, not a full audit. But even in that case, "when you crowdfund it's a light version of an Initial Public Offering (IPO), and for the life of your company you're promising to do these things," Goren said.
You have to act like a public company CEO would.
This can have advantages and disadvantages. Sites like Ourcrowd say that if you have a passionate, intelligent crowd behind you, it's almost like getting venture capital. On the other hand, you have to be ready to take in, and act on, advice that may go against your instincts.
It's the same question asked of anyone taking outside investment. Are you ready to let go? If you're not, crowdfunding equity may be the wrong move. But there are alternatives.
"You can crowdfund debt," said Goren, through sites like Lendingmemo and Prosper. You can crowdfund the old-fashioned way on sites like Kickstarter and Indiegogo, pre-selling what you expect to produce. That's how Pedal-Power, a company seeking to build bicycle-desks that generate electricity, recently raised $30,000, after starting with a goal of $10,000.
How much you expect to produce, Goren said, will help you decide what to do.
Some people want to crowdfund franchises, but the first unit of a store is a small business, not a franchise.
"Startups are a small portion of new businesses," Goren said. "What creates more jobs are small shops, restaurants and things that employ people. That was the intent of the JOBS Act. You can't get a loan for these things from banks. You either have savings or go to the community."
Whatever you crowdfund for, understand that what you're doing is very public, said Goren.
"If people don't like you, they won't invest," Goren said. "Getting out there in advance is a great way to test out ideas, gauge interest, and the most successful people in business are doing this anyway. You need to do this. You want people coming in the first day. There's no slow build. It's about how you sell something, how you engage people."
Then, stay on top of what social networks are saying about your business. "The second you have bad Yelp you're done," Goren said. And that's true whether you're crowdfunding or doing things the old-fashioned way.
Another question is where do you crowdfund. Goren expects a shakeout in crowdfunding sites to start as soon as the SEC regulations are final.
"There's tons of people who don't know what they're doing launching," he said. "Those will be gone before they begin. Then there will be many other sites out there. There will be some broad sites falling off, and then the niche industry or location specific sites coming out."
This is starting to happen, with sites like Moola-Hoop, originally created in Dallas to support female entrepreneurs, buying LuckyAnt, originally founded to fund small businesses. Local crowdfunding sites like Sterlingfunder in Atlanta are already doing equity deals.
Just as you hope to get more than money from your equity crowdfunders, Goren said, you need to expect more than a market from your equity crowdfunding marketplace.
"Complying with regulations can cost $65,000," Goren said. "Annual reports can cost $4,000. Audits can cost $28,000."
Marketplaces can help you both meet these costs and find people to do this work. If you need to find a marketplace, you can research the question at sites like CrowdsUnite, which reviews crowdfunding platforms.
What about fraud? Goren thinks crowdfunding may turn out to be safer than what small investors find now.
"When you go to invest in a company now, there aren't many rules or laws," he said. "If I have money, I may make an investment after one meeting. With crowdfunding, officers have to pass background checks. They have to get audited."
Those pitching ideas have to be vetted by all the people investing in the campaign. So sheer numbers will mean a lot more eyeballs looking at each deal. The crowd helps weed out folks.
"There are times Kickstarter campaigns come up people think are amazing, then a single engineer finds something that doesn't make sense, and alerts everyone," Goren said. "There will be fraud, but it's not easy. There are people working now on cutting fraud in crowdfunding. Where this is legal there is a much lower incidence of fraud than other sectors."
Written by Dana Blankenhorn for MainStreet