I work with and for entrepreneurs. When they consider raising capital, I suggest several different options. Most recently, for certain clients, I recommend equity crowdfunding under Regulation Crowdfunding. In response, they ask: How much does it cost to raise money through equity crowdfunding? Followed by What is the likelihood of success? To which I respond with: Depends on the size of their affinity group and the effectiveness of their marketing campaign. Entrepreneurs are not just interested in fees, they want a full budget for the transaction and not just a vague notion of “all-in costs.” After answering this question several times, I thought it would be useful for entrepreneurs and advisors to have access to what I call an “all-in” cost estimate for an equity crowdfunding transaction under Regulation Crowdfunding. As you will see from the table below, assuming a $1,000,000 equity crowdfunding offering, the “all-in” cost ranges from $60,000 on the lower end of the scale (assuming a good amount of DIY work) to $150,000 on the higher end. The good news is that many of the fees can be deferred until the closing of the offering as many service providers are willing to accept some fees up front and defer the balance until the closing. In most cases, a company will be able to launch an equity crowdfunding campaign for as little as $15,000 to $25,000 with the balance of the fees deferred until capital is raised at the closing.
$3,000 to $7,500
Most companies that raise capital in an equity crowdfunding offering are startup companies and their financial statements are relatively simple – mostly just expenses.
Since Regulation Crowdfunding only became effective May 2016, it is likely the first time for companies to raise capital in an equity crowdfunding offering. Therefore, an audit is not required even if the company raises $1 million.
This cost is eliminated altogether if the company is raising $100,000 or less.
The cost noted is for a review of financial statements for a typical startup. Of course, if the company is more complex or not a startup, this cost will increase.
$3,000 to $20,000
The legal cost really depends on how much work the client is willing to do (the DIY Model) vs. how much work is delegated to the attorney.
The typical equity crowdfunding legal services include (a) preparation of Form C Offering Statement, (b) assistance with the preparation of advertising and marketing materials for the offering and legal compliance review of the same, (c) review of materials posted on the funding portal, (d) quarterback the offering – coordinate with auditors, portal, marketing agency and other service providers, (e) prepare subscription documents for the offering, (f) draft any necessary ancillary agreements and documents, including board and shareholder consents, and (g) post-closing assistance and assistance with certificate delivery and record retention.
The Form C Offering Statement, which is very similar in size to a standard private placement memorandum, is responsible for most of the legal costs. At Bevilacqua PLLC we license proprietary software from iDisclose that allows clients to take on much of the responsibility for drafting the Form C and puts us in more of a reviewing function. Clients that use this software find it beneficial since they can do much of the work and significantly reduce their legal spend.
In many instances, Bevilacqua PLLC is willing to defer a large portion of the fee until the closing of the offering in exchange for a small equity award from the company.
|Commission to Portal||
3% to 6% of amount raised.
|Good news is that this is paid at the closing of the offering. There typically are no significant upfront fees or retainers. This commission is the cost of using the portal to create a landing page for your offering and use of the portal’s technology to facilitate sending funds into escrow and signing documents. All offerings must take place through a FINRA member broker-dealer with a funding portal or a funding portal member of FINRA.|
$15,000 to $50,000
|Marketing is critical to the success of the offering. Again, in some cases, the marketing firms will work with you and let you defer a portion of the fee until the closing. This is not the place to skimp. This cost covers things like (a) social media campaign (AdWords, Facebook, Linked In, Twitter and other advertisements), (b) email marketing campaigns, (c) digital media, (d) influencer outreach including coverage by editors and bloggers, (e) press releases, (f) public relations (local, national trade and consumer and investor), and (g) potentially, if the budget is large enough, television and radio placement.|
|Blue Sky Filings Fees and Related Legal Costs||
$1,000 to $7,500
|Title III of the JOBS ACT (Section 305) amended Securities Act Section 18(b)(4) to preempt the ability of the states to regulate certain aspects of equity crowdfunding. What this means is that there is no State review or registration requirement. However, the States can (and many do) require notice filings. So, the size of this cost will depend on how many states you actually sell securities in. Notice filings will typically not be required in states where no securities are sold. Bevilacqua PLLC handles blue sky filings for a flat fee of $500 per state plus the amount of the state filing fee, if any.|
$500 to $1,000 per year
|If you successfully complete an equity crowdfunding offering, you may end up with hundreds of shareholders. You will either need to engage a transfer agent or obtain cap table management services. Many portals offer cap table management for a flat annual fee.|
|Ongoing Reporting Requirements||
$2,000 to $5,000 per year
|A company that sells securities in an equity crowdfunding offering is required to provide an annual report on Form C-AR no later than 120 days after the end of its fiscal year. The report must be filed through the SEC’s EDGAR system and posted on the company’s website. The annual report requires similar information to what is required in the Form C Offering Statement although neither an audit nor a review of the financial statements is required.|
1% to 2% of Offering Amount
|To be safe, I recommend that you budget for miscellaneous costs that might arise. A good budget would be one to two percent of the offering amount.|
Equity crowdfunding is an excellent new tool for entrepreneurs seeking capital. It allows entrepreneurs to reach out to their real friends and family and ask for smaller amounts of money, as opposed to a Regulation D private placement where you have to rely only on friends and family who are accredited investors and ask them for larger amounts of money. Through equity crowdfunding, entrepreneurs are able to generate interest in the offering through online general solicitation and advertising, while also tapping friends and family, networks, affinity groups and others to support their cause.
For more information on equity crowdfunding and/or raising money for your startup or small business, please contact me at 202-203 8665 or firstname.lastname@example.org. I look forward to speaking with you!