TELLING IT ALL - CROWDFUNDING – FORM C

QUICK CALENDAR

NOTICE: As an Adjunct Professor at the University of Denver, I will be leading a class of students on a trip to Belize from March 24th to March 30th for the course FIN 4700—International Financial Transactions. As a result, I will be unable to respond to phone calls, emails, and comments immediately.

In addition to this Instant Funding newsletter, I host the Successful Funding show, appear as a guest on various podcasts and television shows, speak at various events, and present my educational programs. A quick listing of upcoming opportunities to share information, learn, or meet in person or via videoconferencing is presented here. More info below.

TODAY - Don Cohen –Wednesday, March 20, 9 am MDT – LinkedIn Live

Successful Funding – Reg CF Crowdfunding – Thursday, March 21, 8 am MDT – LinkedIn Live [SPECIAL THURSDAY SHOW]

NO SUCCESSFUL FUNDING SHOW ON MARCH 26.

Successful Funding – Business Acquisitions – Tuesday, April 2, MDT – LinkedIn Live

SuperCrowd 2024 – Impact Crowdfunding – Wednesday/Thursday – April 17/18 - Online

?Successful Fundin g – Community Building – Tuesday, April 23, 8 am MDT – LinkedIn Live

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TELLING IT ALL - CROWDFUNDING – FORM C

A business preparing to conduct a federal crowdfunding campaign under Regulation CF must submit Form C. Completing this document requires basic information regarding the business and is a starting point for getting organized.

?A copy of Form C may be obtained from the U.S. Securities and Exchange Commission.

https://www.sec.gov/files/formc.pdf

?Like most government forms, it uses terms that may be uncommon or unfamiliar to the business.

?The business is the ‘issuer’ – the legal entity making an offering which if accepted will result in the ‘issue’ of a security.

?The form asks for:

·?????? type of legal entity (corporation, limited liability company, partnership, or other form)

·?????? where the legal entity of the small business was formed (typically the state where the business operates, but some businesses are formed in Delaware for tax benefits and then operate as a ‘foreign’ entity where they operate)

·?????? date of formation

·?????? address of primary business offices

·?????? website

?The business should set up a campaign document folder where it contains the following information:

·?????? copy of the original articles of incorporate, organization, or partnership

·?????? copy of bylaws, operating agreement, or partnership agreement

·?????? all amendments to these documents

·?????? other documents filed with the government regarding trade names

·?????? minutes of all meetings of the governing body of the business specifically including those minutes that involved any grant of ownership rights, including authorization of the sale of securities in the crowdfunding campaign

?The form asks for information about the intermediary. This is the crowdfunding portal or platform where information about the business and its crowdfunding offering will be publicly displayed. The needed information will be provided by the crowdfunding platform.

?The form asks for compensation to be paid to the intermediary. Every crowdfunding platform has different fee structures that commonly include a setup or administrative fee and a success fee which is a percentage of dollars raised on the platform. There may be several additional fees for background checks, payment processing, issuance of payments for returning investments and other fees. The needed information will be provided by the crowdfunding platform.

?The form asks if the intermediary has any ownership interest, control or other relationship with the business other than providing a service. There are restrictions upon who, how and why an intermediary may be paid a portion of its fees in an ownership stake in the business.

?The form asks for the type of security offered. Commonly, the security will take the form of a loan, a sale of ownership rights, or a contractual participation in the revenues of the business. The security may take the form of notes, stock, membership units, or another form. The business must disclose any differences in ownership that may exist with regard to limitations, preference, voting status, or other rights of investors.

?I commonly design crowdfunding investment packages that include more than securities in the form of products, discounts on product purchases, charitable contributions, privileges, or anything else that I think may be an incentive for the investor candidate. These are considered ‘rewards’ and are largely ignored within Form C.

?A description of the ‘offer’ is needed. This may be a very simple statement of a price per unit, number of units, and description of what the unit represents in terms of ownership, share of revenue, or interest rate. However, more complex offers may have different deals for different investors and sliding scales on how many units are purchased based on the dollar amount of the investment or other variables to match the offer to investors with deeper pockets or different interests.

?The form will ask for information on how much money the business plans to raise. There are three numbers used:

·?????? Minimum goal – this is the least amount of funding raised before the crowdfunding platform is authorized to distribute the money to the business. Determination of this dollar amount is dependent upon several factors.

·?????? Target goal – this is the stated goal of the capital campaign when the business and the crowdfunding platform can declare victory. As with the minimum goal, the determination of this dollar amount depends on several factors.

·?????? Maximum goal – the business may accept more investments than the Target goal through an ‘oversubscription.’ This means the sale of securities keeps going until a maximum goal is reached and/or the capital campaign hits a statutory limit.

?The form will ask for the schedule of the crowdfunding campaign and its planned ending date. The business may run the campaign for up to 12 months.

?The form will ask for financial information for the last two years or less if the business is not that old. The business should have a complete set of financial records that is up to date through the end of the last calendar quarter. These profit and loss statements and balance sheet statements should be included in the campaign document folder.

?The business will provide information on whether the financial information was compiled, reviewed, or audited – representing different levels of verification that the information is correct. The level of financial information review is directly related to regulations limiting how much money the business may raise.? A review by an accounting firm is the minimum level of review required. It is recommended that the business use accountants who are familiar with Regulation CF crowdfunding disclosure and review requirements. The accountant must provide a statement on their letterhead that the financials have been reviewed. Add this to the document folder.

?The form will ask about any prior failure of the business in completion of reporting under any prior crowdfunding campaign. Businesses are required to file annual reports once a campaign is completed. If you crowdfunded in the past and did not file the annual reports, there is work to do.

?The form asks for the name, occupation, employment with the business, and principal engagement/employer for each person who is a member of the board of directors, managers, partners, and officers of the business. This request includes past employment to enable the government to do a ‘bad actor’ check of the individuals to determine if they have violated any past law and/or are under any current suspension or prohibition from raising capital for anyone. Some platforms require the business to engage a service to provide the report and give them a copy. Not all background checks are of the same depth, so the business should check with the crowdfunding platform on requirements.

?The form asks for information on the big owners of the business – anyone or entity owning 20% of all ownership rights in the business.

?The business should have a cap table (also known as a spreadsheet with the names of each owner of the business) ?that provides name, address, number of ownership units (however defined), date of purchase, price paid (in cash, services or founder’s grant) and the current net ownership position. The cap table should also include any transfer, sale, or other exchange of any ownership rights previously granted. Disclosure must also be made of any pending ownership grants that may change ownership percentages.

?The form asks for any risks that the business faces. This is a statement of anything known to the business or reasonably threatening to the business that may significantly impact future operations. Discussion of the many types of risk factors has been presented in prior editions of this Instant Funding newsletter.

?The form requires an explanation of how money raised through the crowdfunding campaign may be spent. This is the ‘Use of Proceeds’. Money may be spent to pay the costs of the campaign, including any expenses, fees, commissions, or another cost of raising money. It may include payment of past debts and expenses, including payments to the leadership of the business. However, this is a red flag area – the intended use of new money to fix past problems is concerning to the government and to investor candidates. It may create the appearance that the interests of the business leadership are being placed ahead of investors. In addition, any money paid for completing the crowdfunding campaign or for past debts is one less dollar to move the business forward. These payments discount the net money available to increase the value of the business. The payments are not prohibited, but it may cause greater review by the government with a request for additional information and it may cause an investor candidate to walk away.

?Prior to planning a capital campaign, the business should have completed a ‘capital needs assessment’ where it determined where it is short of needed resources to attain its goals. This information should be stated in a detailed written document like a shopping list that names each item, provides a description (model, experience, new or experienced, etc.) and the anticipated purchase price. This information should guide the business in setting its capital goals. The business should place this information in the campaign document folder.

?The form asks for information regarding the impact of the crowdfunding offering on existing owners and future owners. A grant of new ownership commonly reduces the percentage of ownership by existing owners. This is called ‘dilution’ - every new owner divides the profit pie into smaller pieces. Dilution is acceptable, provided that the new pie is bigger and the resulting smaller ownership represents a greater value.

?The form asks for the history of the business and its current financial condition. The business must disclose if the raising of money is a step forward or curing past problems. The business must explain if the amount of capital raised within the campaign will be enough to go forward without ever raising capital again or if this is one of a series of anticipated capital campaigns.

?This is a lot of information that needs to be collected, updated, organized, and available in a campaign document folder to answer questions from the small business team, its advisors, consultants, contractors, the crowdfunding platform, and investor candidates. This takes time and should not be done at the last minute when needing to raise funding in a hurry.

?Form C looks similar to disclosure forms used by many states in intrastate crowdfunding. Form D, used with 506c and 506b offerings, requires less information but is also quite comprehensive.

?None of the regulatory forms makes for a great sales document. The small business will need to supplement the regulatory disclosures with a slide deck and offering memorandum that can speak to the motivations of the investor candidates in a manner that they can easily understand.

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?SUCCESSFUL FUNDING

Special Show - Tomorrow, Thursday, March 21, 8 a.m. MDT, my guest will be Tom Bassford , CEO of EquityVest – a Regulation CF equity crowdfunding platform. This new platform enables access to capital by “Faith-Driven Entrepreneurs, Businesses, And Causes They Believe In.”

https://www.dhirubhai.net/events/successfulfunding-equityvest-to7168646207727202304/theater/

There will be no Successful Funding show on March 26 as I will be engaged in teaching a course on International Transactions for the University of Denver in the country of Belize where students will be immersed in how business is conducted in a different country.

?The Successful Funding show on my LinkedIn profile will repeat weekly at 8 am MST on Tuesdays. You may register to attend by going on LinkedIn, searching for Events, clicking on the Events button, searching for Successful Funding, and then clicking on the Attend button. You should receive an email with a link to save to your calendar. You can also click the Share button and obtain the URL link to the show to put it in your calendar.

You may view all of the Successful Funding shows in my Posts on my LinkedIn profile at: https://www.dhirubhai.net/in/karldakin/

?DON COHEN

I was a guest on Don Cohen’s show last Friday, Monday, and today.

All shows where I have been a guest can be viewed on Don Cohen's LinkedIn page under Posts.

https://www.dhirubhai.net/in/doncohen/

??SUPERCROWD 2024

?I will co-host SuperCrowd 2024 , "The Impact Crowdfunding Event of the Year,” held online on April 17th and 18th.

?https://thesupercrowd.com/supercrowd24

I will make a presentation at SuperCrowd 2024 on April 18th at Noon MDT on Customer-Focused Crowdfunding. I will share my thinking and designs of investment crowdfunding offers that include products, discounts, charitable gifts and equity ownership.

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Karl Dakin, the Capital Coach

Dakin Capital LLC

[email protected]