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By now, hopefully you know that the goal of Metro Startup Launcher is to make it much easier for startup companies in the Louisville metro area to raise capital through equity crowdfunding. We also want to help lots of people in the Louisville area actually make money by investing small mounts in lots of startups: a strategy that statistically has proven to provide an average of 27% return on investment for angel investors in the United States.
Now that we have the monthly meetings rolling for both entrepreneurs and investors, I guess it should come as no surprise to anyone that startup entrepreneurs are starting to ask: OK, so how do I actually do equity crowdfunding for my company.
A lot of people around here still think that you start a business in your garage, you get in pitch contests, go to a bunch of networking meetings, and meet some rich guys who invest in your company. Next thing you know, you’ve got venture capital money, a super cool startup company office, and all your wildest dreams come true!
The problem is, around here, we have plenty of pitch contests, but not enough rich people to invest in startups. However, we do have 1.3 million people in the Louisville metro area, and equity crowdfunding is now legal.
We’ve all heard about crowdfunding, but how does it work? Let’s talk about some of the specifics.
On October 30, 2015, the Securities and Exchange Commission voted to adopt “Regulation Crowdfunding” (Regulation CF). The rules went into effect May 16, 2016. Regulation CF allows a company to sell up to $1 million in company stock in any 12-month period.
Here are a couple of the amazing features about the Regulation CF exemption:
- It allows anyone to invest in a company. The investors do not have to be “Accredited Investors” (a.k.a millionaires).
- You can raise capital from an unlimited number of investors, and the number of investors do not count toward the current maximum number of investors allowed by a private company (2000 total, 500 non-accredited).
However, investments are limited in the following ways:
- If either the annual income or the net worth of the investor is less than $100,000, the investor is limited to invest the greater of $2,000 or 5% of the lesser of his or her annual income or net worth.
- If the annual income and net worth of the investor are both greater than $100,000, the investor is limited to 10% of the lesser of his or her annual income or net worth, to a maximum of $100,000.
- The transaction must be made through a broker, or through a “funding portal.” This is actually a good thing because the portals have made it pretty easy to run your fundraise.
- The business must be incorporated in the U.S.
- The business may not be an “investment” company (set up for the purpose of investing in another company).
The SEC requires that issuers provide certain information to investors through the intermediaries’ platforms and to the SEC directly via a filing of Form C on EDGAR, the SEC’s data handling system.
If a current offering plus previous raises amounts to $100,000 or less, the financial statements must be certified by the principal executive officer and accompanied by information from the company’s tax returns (but not the tax returns themselves).
If current offer plus previous raises amounts to $100,000-500,000, the financial statements must be reviewed by a CPA.
If the current offer plus previous raises amounts to $500,000 or more, the financial statements must be audited by a CPA. However, if the issuer has not previously sold securities under Regulation CF, the financial statements will only be required to be reviewed by a CPA.
Issuers that have sold securities under Regulation CF must file information with the SEC and post it on their websites on an annual basis. The annual filing must be made within 120 days of the issuer’s fiscal year-end. The information included in the annual report is similar to that required in the initial filing, except that, in response to numerous objections to the burden of ongoing reporting as originally proposed, no accountants’ audit or review of the financial statements will be necessary.
An issuer may “not advertise the terms of the of the offering, except for notices which direct investors to the funding portal or broker.” Under the new rules, an issuer and any person acting on behalf of the issuer may publish a limited notice (sometimes called a “tombstone”) that advertises the terms of an offering so long as the notice includes the address of the intermediary’s platform on which information about the issuer and offering may be found.
So what are the steps to for Louisville area startup companies to raise capital?
- Sign up on WeFunder.
- Create an awesome profile on WeFunder.
- Select the type of raise. (WeFunder typically recommends a Regulation CF utilizing WeFunder SAFE investment documents.)
- Walk through the steps on WeFunder to file your Form C for your Regulation CF capital raise.
- After approval by the SEC, Metro Startup Launcher will help you market your capital raise (at no cost to you).
- WeFunder collects the funds, escrows and money, and transfers the money to your bank account (minus their 4% fee) after your funding targets are met.
The whole process is pretty easy with one exception: you have to do some great marketing to get people to actually invest. This is where Metro Startup Launcher comes in.
The Louisville metro area has about 1.3 million people. We have to work together as an entire metro area to get people to actually invest in startups.
How are we doing it? We’re doing our best to build a huge audience for the Metro Startup Launcher website using content marketing and the standard social media tools.
What do we charge? Zero! Metro Startup Launcher is a non-profit. All of our advertising funds come from local donations.
So we need lots of help in getting the word out. Join our mailing list. Join us on any social media you can. Share our announcements, videos, podcasts, and blogs on social media. Invite us to speak at events. Tell your friends to raise capital on Metro Startup Launcher or invest in a startup.
Together, we can accelerate the number of startups in the Louisville metro area, attract great talent to start companies here, and increase the wealth of our entire region.