Crowd Funding A New way to Raise Capital

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1 Crowd Funding A New way to Raise Capital Crowdfund investing, also known as crowdfunding was created by the JOBS Act, which is an acronym for Jumpstart Our Business Startups. The Act was signed into law by President Obama on April 5, It is a new form of financing that is intended to enable a small business or startup (the issuer) to seek funding from the network of people it has on LinkedIn, Facebook, and elsewhere. The issuer encourages the network members to examine the issuer s investment offering using an online funding portal. If a person is interested in funding the initiative, he must transfer his money to the issuer through the online funding portal. Hopefully, the initial investors will share the opportunity with the members of their own network and encourage them to also provide funding. And so on through an ever-expanding network, or crowd, of people. In this way the issuer s investment opportunity is said to go viral. Online Funding Portals There are two basic types of crowdfunding portals. Donation-based portals, such as Kickstarter and Indiegogo, are sites where funders donate money in return for products, perks, or rewards. Investment-based portals, such as Crowdfunder and Somolend, specialize in issuers who are seeking equity or debt capital. We will focus on the latter type of portal. Backgound to Crowdfunding Crowdfunding is intended to fill a void in the financing landscape for small businesses and startups. Let s first explain the concept of securities and the why and how of securities regulation. The Act lifts the restriction on the number of unaccredited investors that may be solicited, meaning that the issuer may solicit investors of any net worth or income level. Provided, however, the issuer may not conduct a general, public solicitation by, say, advertising the offering in a newspaper or on the radio. Rather, the issuer may only solicit people who are members of

2 the principals online social networks (e.g., members of the issuer s LinkedIn and Facebook networks). Thereafter, the issuer may solicit people who are members of its members social networks. And so on as the solicitation expands through the network. The issuer can raise no more than $1 million in crowdfunding per year. An unaccredited investor may invest, annually, no more than the following amounts in one or more crowdfund campaigns: o If the investor s annual income or net worth is less than $40,000, he may invest a maximum of $2,000 per year. o If the investor s annual income or net worth is $40,000 - $99,999.99, he may invest 5 percent of his annual income or net worth, with a cap of $5,000. o If the investor s annual income or net worth is $100,000 or more, he may invest 10 percent of his annual income or net worth, with a cap of $100,000. Target Businesses for Crowdfunding Crowdfunding is a viable means of financing for startups and small businesses while simultaneously discouraging larger companies from using this venue to compete for capital. The $1 million per year limitation, in particular, is intended to make it hardly worth the time for a large company to use crowdfunding to raise new capital. Small technology companies, such as information technology and green technology companies. Brick-and-mortar retail shops, such as small hotels, bed & breakfast facilities, restaurants, clothing stores, dry cleaners, and so forth. Service firms, such as professional service firms (e.g., lawyers, doctors, accountants, architects, etc.) and other types of service firms, like home and office cleaning services, tour services, elder-care services, and so on.

3 Investment Structures The issuer of the Crowdfunding campaign must set a financial goal (How much money do you want to raise) and the structure of your business might dictate the financial goal. There are various types of structures that issuers can offer investors. As explained below, the viability of a particular type of investment structure is influenced, in large part, by the type of business that is involved. Stock: In some cases, the issuer issues stock in the company. This makes the most sense for a company that has the potential to offer its investors significant upside potential through significant growth, by going public, or both. Two cases in point are a technology company with high growth potential and a rapidly-expanding retail chain. A key point to be made here is that in order to retain control of the business, the issuer should never give up more than 49 percent of the equity interest in the company. Revenue Sharing: Companies with less upside potential and less chance of ever going public (e.g., a single clothing store) are more likely to attract investors by offering to share revenues with them. A revenuebased financing structure provides that the investors will share in a specified percentage of the businesses revenue during a specified period of time. For example, the investors might receive 10 percent of the businesses revenue for a five-year period. Debt: A third means of raising capital is to structure the investment as debt, which is to be paid back, with interest, over a given period of time. This form of financing makes sense for an existing business with a reliable cash flow. It makes no sense for a startup that has no revenue or is expected to have negative cash flow during the startup period. Web Site Prior to launching the investment campaign, the issuer should create a website for the offering. The only way to access the website should be a link on the online funding portal. The website should not contain a request for funding; the only place to do that is on the funding online portal itself. The website should contain the details of the summary information contained in the video pitch, including answers to frequently asked questions (FAQs).

4 Websites enable the issuer to present information using a variety of media, including text, graphics, photographs, blog articles, and additional videos. Video Pitch Prior to launching the campaign, the issuer should create a video that pitches the business idea. Video pitches are now considered essential because they engage people in ways that simple text cannot. The video will be uploaded to YouTube (or some other online video site) and a link to the video will be placed on the online funding portal. It is critical that the video be designated as private on the video site so that the only people who are able to see it are those who click on the link provided on the online funding portal site. If the video is not marked private, it will be viewable by the general public, which is a violation of SEC regulations. However, even if these precautions are taken, the issuer should take care not to ask for money on the video, just in case a potential investor somehow stumbles upon it. In order to comply with SEC regulations, the only place the issuer can request money is on the online funding portal. Launching the Investment Campaign Once all of the prerequisites are in place the social network, crowdfunding online portal, website, video and campaign manager the issuer is ready to launch its investment campaign, which is to say that the campaign goes live on the funding online portal website. At the start, it is important for the issuer to understand that a newly-launched investment campaign is like a small snowball rolling down a snow-covered hillside. As it rolls, the snowball will pick up more snow, causing it to have more surface area, which causes it to pick up even more snow, which causes it to have even more surface area, which causes it to pick up even more snow, and so on. Measuring your success 1. Whatever amount you set as your goal, if you raise 5% in the first week your crowdfunding campaign will probably be successful. 2. The crowdfunding campaign begins to be perceived as stale and loses momentum if it runs for more than 90 days.

5 3. Saying Thank You: The issuer should always thank the investors when the campaign is a success (and even when it is not a success). Among the ways of doing so are to post a thank-you note on the online funding platform, post a short thank-you video to the platform, or go the old-fashioned way and mail hand-written thank-you notes to each of the investors. 4. Communicating With Investors: The first reason is because it is legally required the JOBS Act requires the issuer to communicate with the investors via an annual report. The Second reason is to keep this investor interested in future opportunities. A crowdfunding campaign is not easy. The steps you take require hard work and dedication. Recently, a small startup technology elearning Company, HMBookstore.com, began to take the same steps to use crowdfunding as a way to raise capital. This method proved to be a perfect solution for this startup technology company, as it exposed potential investors to the benefits of elearning, a concept they may have had little knowledge previously. Steve Jobs once said..we see genius, because the ones who are crazy enough to think they can change the world, are the ones that do. Go raise some money, start your business and say to the world, I am one of the Crazy ones. COO Tristar Hotel Group & HMBookstore Rick Tomljenovic received his degree in Hotel and Restaurant Management from Forest Park College in Saint Louis, Missouri. Rick has spent over twenty-five years in the hotel industry working in various management positions including: General Manager, Guest Services-Room Division, Accounting, and Food &

6 Beverage. With his superior managerial experience in the industry, Rick brings vast knowledge in the fields of Cash Management, Sales & Marketing, and the take-over / turn-around of properties. Currently, Rick Tomljenovic served on the Carlson Hotel Owners Advisory Committee.