With Title III equity crowdfunding finally taking effect this month it’s worthwhile to take a peek into what a startup may face in costs to execute a successful raise. One important thing to keep in mind is that this analysis is based on my exposure to only a limited number of portals. The numbers and opinions expressed below should be digested through an upfront admission that my analysis may change as time goes on.
As many analysts surmised, the funding portal will handle the bulk of the legal compliance. A Title III funding portal must be registered with the SEC, and the portal must become a member of the national securities association. Thus, the SEC has effectively made the portal the gate-keeper to the public. This means a lot of the compliance work will be handled by the portal, instead of your company’s attorney and CPA.
Areas where an outside attorney can still be helpful include: corporate cleanup in preparation for the raise, organizing the necessary documents and information to complete the Form C disclosure schedule, educating the client on the communication standards that can be used offline when discussing the deal with a potential investor, and the initial application process to use your chosen portal. Therefore, there is still plenty of opportunity to take advantage of an outside counsel’s knowledge and experience, but many of the compliance matters that would be handled by your attorney will instead be handled by the funding portal.
Speaking of a funding portal, it’s helpful to consider the budget you’ll need to engage with one. Generally, the upfront cost should be around $15,000 to $20,000 and it is broken down with $4-7k for the portals legal compliance team, $4-7k for preparing reviewed financials with the portal’s CPA, and $4-7k to setup escrow and the transfer agent to close the deal. However, it’s important to note that those are just the upfront out of pocket costs. In addition to those fees the funding portal will take anywhere from 3-7% of the cash raised, and 3-7% in equity that mirrors what you’re selling through the Title III raise.
We’re still months, and maybe years, away from understanding how this will all shake out, but as you consider different strategies for raising money, please don’t hesitate to reach out to discuss costs, and other implications by contacting us at info@bendlawoffice.com or (415) 633-6841.
If you’re thinking about raising funds in 2016, I encourage you to check out these posts on our website
- Top Ways to Fund your Business in 2016
- A Private Placement Roadmap
- Crowdfunding: Understanding Title II and Title III of the JOBS Act
- Three Security Exemptions Founders Should Be Aware Of
Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.