In one of the most radical changes to securities laws since the 1930’s, the JOBS Act will, for the first time, allow emerging growth companies to raise capital from non-accredited investors (e.g. members of the general public) in return for small equity stakes. Through the use of registered online ‘funding portfolios,’ companies can engage in equity model crowdfunding; the sale of securities, such as stocks, bonds and convertible notes.
The new rules around equity model crowdfunding will give emerging growth companies access to an unlimited and fragmented investment market. With more investors to communicate with, these companies will need an effective document management system that offers enhanced transparency and simultaneous access to critical documents. The organization and professional presentation of key documents will be vital to driving the fundraising process, improving buyer confidence and meeting investor expectations.
A virtual data room offers an ideal solution for secure document sharing. A data room provides a secure online document repository to manage capital calls, investor reporting, quarterly statements, tax documents, audited financials and other operational information. Potential investors can be invited into the data room to review the information they need to make a strategic investment in your business. And advanced reporting tools provide valuable insights into data room and document activity, to help gauge investor interest.
The SEC has until 31 December 2012 to implement any new rules in regard to equity model crowdfunding before the JOBS Act comes in full effect next year. In the meantime, startups can prepare for the fundraising process by following a few key steps:
1) Get organised. Store your business documents in one central location. This includes your business plan, incorporation documents, financial forecasts, Executive Team bios and a description of the intended use of the funds. A virtual data room can assist in organizing and managing these documents securely in the cloud, for immediate access anywhere.
2) Develop a plan. Determine how much capital you really need to raise and create a detailed plan for the use of the capital investment.
3) Perform a cost-benefit analysis. If you’re looking to raise more than $150,000 in capital, you will need to have your financial statements reviewed by a certified public accountant. Decide if the financial burden of paying for these reviews will outweigh the benefit of the added capital.
4) Perfect your pitch. Make a video about your project and upload it into your data room. Research suggests that projects with videos have a 50% success rate, as opposed to projects without videos, which have a 30% success rate. A well-crafted video that pitches not just your company and business plan, but also yourself and your team, has a greater chance of being shared and generating positive word-of-mouth about your project.
5) Utilize your networks. Speak to your networks and start compiling your contacts list. With a virtual data room you can directly import contacts from Outlook and Excel.
6) Spark interest early. Invite contacts into your data room to review your investor presentation and preliminary due diligence documents. Advanced reporting tools track user activity to help gauge investor interest and ensure you are following up with right people.
7) Consider your follow-on investment strategy before crowdfunding. Sophisticated angel investors and venture capital funds are unlikely to invest in subsequent rounds after a crowdfunding round brings in a large number of “retail” shareholders. Crowdfunding could therefore be a dead end for a startup looking to grow through multiple rounds of venture financing. Think about what investment strategy makes the most sense for your business.
The JOBS Act is set to bring a major overhaul to the fundraising process for emerging growth companies. By being prepared for these regulatory changes and having an effective document management strategy in place, emerging growth companies can generate investor interest early and be ready to hit the ground running in 2013.