Equity crowdfunding is upon us and for many it will allow their business to become a reality.
Like any step one takes when establishing a business, the pros and cons of equity crowdfunding need to be closely analyzed to make sure this is the right step for that individual’s specific business.
One key area that is not being talked about enough is compliance and the costs associated with it. If you want to crowdfund equity in your child’s lemonade stand you will discover it may not be worth the effort once you look at an infographic prepared by regulatory compliance consultants Crowdentials.
Typical areas of expense include portal commission, and costs per issuer for six items – obtaining of EDGAR access codes, Form C preparation and filing, audits, preparation and filing of progress updates, annual reports, and termination of reporting.
If your goal is to raise $50,000, prepare to cough up a third of that to pay for the above. Move up to $300,000 and the percentage drops to roughly 18.5%. A $750,000 campaign will cost you 15%. For smaller campaigns, annual report and Form C preparations are significant costs. Once you hit six figures, the culprit is portal fees.
Crowdentials CEO and Co-Founder Rich Rodman took some time to discuss equity crowdfunding, API development and security issues.
Given the high percentage of costs associated with compliance for smaller campaigns, is it cost ineffective for smaller operations to become involved in the process?
Normally I would say no, but that is why Crowdentials exists. Staying compliant for a small company is almost impossible. You have one of two ways to go about it. Either hire an expensive general counsel to review all of your procedures or try and navigate the legislation yourself.
Small companies cannot afford to hire a general counsel when they are starting up. Likewise, if a small company tries to tackle the problem of compliance on their own, they are asking for a lot of regulatory mistakes. If companies take either of these paths at such an early stage they are either going to lose their money or commit a crime they did not even know existed.
Do most entrepreneurs have any idea how many individual compliance issues must be addressed?
Most entrepreneurs do not have the time to read through hundreds of pages of legislation to find out what compliance issues they must address.
Reading legislation is a lot different than reading a book or blog post, it takes a few reads with a few different mindsets to get the full view of the level of compliance they must attain. Entrepreneurs do not have time to read through all of this legislation. What they are doing is getting the cliff notes version from white papers and online articles.
Given the 1st-year costs of more than a million dollars for intermediaries to register as brokers, do you see many new players creating brokerages or will we see a greater percentage being existing brokers who add this to their portfolio?
I think we will see a greater number of brokerages adding a portal onto their existing infrastructure. It is very expensive to file with FINRA and become a broker to facilitate these types of transactions.
The better bet financially is to expand on an existing model and build a portal. This way brokers can leverage their existing experience to better facilitate crowdfunding transactions.
How long did it take to test and refine the API? What was the most challenging stage?
We are continually refining our API. There is not a day that goes by that we are not tweaking parts and changing functionality. We have a constant iteration cycle that we go through to question our assumptions, put them to the test and change features. This was we can have the most functional and up to date product in the market. The most challenging stage thus far was in the very beginning.
We built the API completely wrong and had to start from scratch. Luckily, our development team is second to none and can implement changes very quickly.
Although this was a tough time, it was great to see the process take place as CEO. It means that we have assembled a team that can admit defeat in a product, look for customer feedback and crank out a new product in record time. It truly reinforces why we are at the top of this industry.
Is it preferable for an investor to have their financial person verify their status because a professional is likely to have better safeguards on their computer?
It is preferable to have a financial person verify an investor’s accredited status because they already have access to the investors personal financial information.
One piece of backlash in the industry is that investors have to give their tax records or credit reports to issuers in order to prove their accredited status. Our process makes it so that you as an investor do not have to give anyone your personal financial information.
We simply link into the pre-existing relationship an investor has with their CPA, Broker Dealer, or Investment Advisor and allow those individuals to verify the accredited status of an investor.
What are some of the biggest challenges in staying ahead of cyber criminals and how do you do that?
One of the biggest challenges of staying ahead of cyber criminals is keeping up to date on security protocols for this industry as a whole. We are very deliberate in our approach to security. We are consistently questioning our approaches in order to provide the highest level of security possible. Our development team and outside hackers have tried to break into our system and find gaps.
The best way we stay ahead of cyber criminals is by consistently staying up to date on security proposals and in certain cases – creating our own.
Rich Rodman is the co-founder and CEO of Crowdentials, a provider of regulatory compliance tools for equity crowdfunding and private placement platforms. He has a passion for crowdfunding and founded the company to help entrepreneurs and businesses navigate a complex regulatory environment.