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Overlooked Issues in Evaluating Crowdfunding Options

By Kresimir Peharda, Partner.

In a previous post I outlined the crowdfunding universe and some of the factors to consider in selecting a option. See https://vestedlaw.com/retail-crowdfunding-and-the-expanding-crowdfunding-universe/

In this post I want to highlight two interrelated issues that are frequently overlooked: cost of capital and post-closing disclosure obligations.

Cost of capital

Depending the amount of the raise, paying attorneys, CPAs, funding platforms, broker-dealers, etc. can make the method very expensive from a cost of capital standpoint.  All other things being equal a method that has a lower cost of capital is preferable to one with a higher cost of capital.

The following chart is an example of how a company can evaluate the cost of capital efficiency of a particular crowdfunding option from a pre-raise standpoint.

Amount of raise
          Subtract Legal fees
          Subtract CPA fees
          Subtract funding portal fees
          Subtract broker dealer fees and commission
          Subtract escrow fees
          Subtract mailing/overnight fees
          Subtract printing fees
Net proceeds to company

 

Obviously this chart is the just the beginning.  Companies should consider the timing of the expense outlay and add in equity costs such as warrants issued to placement agents and the like.

Post-closing disclosure obligations

Various crowdfunding methods entail very different post-closure disclosure obligations.  On one extreme, under Regulation A+ companies raising over $20M will have to file annual, semi-annual, current and exit reports with the SEC.  Filing those reports will require companies to engage and pay for legal and accounting services.  On the other end of the spectrum companies electing tier II crowdfunding will have virtually no ongoing obligations other than keeping their private placement memorandum updated if the raise continues for a longer period.

Types of reporting required

The reporting obligations will vary from nothing to reports filed with the SEC.  The middle ground is retail crowdfunding under Title III.  Retail crowdfunding will require an issuer to file an annual report with financial statements with the SEC and post the report on its website.

Financial statement requirements

These will vary significantly depending on the type of offering.  The nature and detail in the financial statements will impact the cost of the accounting services required to generate them.

The following checklist can be used to assess these obligations:

  1. Are any filings with the SEC required?
  2. Is it a simple annual report, or detailed annual, semi-annual, current or exit reports?
  3. What type of financial statements are required (reviewed, compiled or audited)?
  4. How often must the financial statements be updated?
  5. How long do the obligations continue?
  6. What outside professionals are required to prepare and file the reports?