What You Must Do Before Launching an Equity Crowdfunding Campaign

Before you can list on a portal and raise money from the masses, you need to get your business in order

Written by Robert Gold

Snowbirds may flock to Florida for the Sunshine State’s balmy weather, but Canadian technology entrepreneur Oscar Jofre found something even better on a trip to Orlando: an idea for a new business.

Jofre had his eureka moment while listening to Douglas Ellennoff, Jason Best and Sherwood Neiss, who played major roles in developing the portion of the 2012 JOBS Act which enabled equity crowdfunding in the U.S. He turned that inspiration into Toronto-based KoreConX, which helps clients navigate the myriad requirements regulators and equity crowdfunding portals impose before companies can raise capital from the public.

Equity crowdfunding represents a significant broadening of the investor base for cash-seeking companies according to Jofre. “In the past, you would go to a broker-dealer, [who] would take your deal to the 10 or 15 or 100 people they knew,” he explains. Listing your offering on a registered platform expands that number dramatically.

Regulations that took effect in six provinces in January have brought plenty of attention and interest to equity crowdfunding. But Jofre says the new rules are not the first of their kind in Canada. “We are one of the countries with the oldest crowdfunding rules in the world,” he says. Though they didn’t necessarily use the term, the accredited investor and offering memorandum exemptions allow companies to raise money from individuals.

Whichever exemption you plan to use, platforms require a significant amount of documentation and due diligence before you can list. “Portals turn down 80% of companies, [and it’s] not because you’re bad—in fact, they would love to take you on and list you,” says Jofre. It’s failures of readiness that could deny you a listing.

Jofre calls the preparation process “pre-crowdfunding.” Get your corporate and minute books in order, and make sure your lawyer has done all the necessary paperwork. “Portals are going to be watching this very carefully, in light of the very first equity crowdfunding fraud in the United States,” notes Jofre. So itemize every detail of how you plan to spend the money, and be prepared to provide regular updates about your progress once you’re finished raising it. KoreConX facilitates due diligence and reporting, and helps entrepreneurs apply to 1,200 portals across the world rather than just the 12 operating in Canada at the moment.

There’s also marketing planning to be done. The new provincial regulatory regime restricts what companies trying to raise money can say significantly. Marketing is limited to saying, “We’re on ABC portal—look at our documentation there.” But if you’re using the offering memorandum exemptions, there’s more room to market, and to do that you need a plan. “What kind of advertising are you going to do?” Jofre asks. “What are you going to do with your social media, your video, and your PR?”

The marketing limitations are one reason Jofre prefers the offering memorandum exemption to the new rules. The January regulations also make it difficult for individuals to invest across provincial borders. “That’s why I’m a fan of Canadian-wide regulations, because that’s the only way we’re going to be able to have true crowdfunding,” says Jofre. KoreConX also operates in the U.S., U.K., Australia, China, Singapore and Thailand—all of which have cross-country legal frameworks.

While regulations will doubtlessly evolve over time, companies are already making good use of equity crowdfunding. Jofre says six deals have closed in the last 60 days in Canada, with the average investor pitching in $1,500 under the offering memorandum exemption. In the country’s first blockbuster deal, Vancouver’s RentMoola raised $7.5 million over three months.

Jofre anticipates there will be 30 portals operating in Canada in the next 12 months, with real estate leading the charge, and that deal sizes will grow. “As far as total size in Canada, I think we should easily be able to reach $150 million with the number of portals we’re launching,” he says.

But for that to happen, plenty of compelling companies will need to meet the requirements of a portal listing. “We tell people to take 90€“120 days to prepare before crowdfunding,” says Jofre. Now would be a good time to start getting ready.

For more insights from Jofre, including why Canadian companies need to go global as fast as they can, listen to this week’s BusinessCast by clicking the button above or download by clicking on the iTunes logo below:

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Originally appeared on PROFITguide.com