In Part 1, I researched four main components of Crowd-Sourced Equity Funding—The Company, The Intermediary, The Investor and The Offer. Today I run through the process of equity crowdfunding, from inception to closure.
Equity Crowdfunding Step 1
A company decides it would like to raise some crowdsourced funds. It has made sure it meets the requirements, so chooses an intermediary to host its offer. As of February 2017, only 7 companies have licenses to act as CSEF intermediaries. This will increase in the future.
The hosting intermediary investigates the company to make sure they can take part in equity crowdfunding. This includes checks to confirm the identity of a company. The intermediary won’t sign a hosting agreement with the company without confirming eligibility.
The hosting agreement sets out the intermediary’s obligations, what services they will offer, and fees. Regulatory Guide 261 notes that there are no restrictions on fees, however fees paid should be noted in the CSF offer document presented to investors.
The company writes its CSF offer document. The intermediary makes sure that minimum information is included, and that the document is ‘clear, concise and effective’. It must be readable and accessible to the average investor.
Before publishing a document, the company must have written consent from: all directors; proposed directors; someone who’s made a statement in the document; or someone who made a statement on which a statement in the document has been based. The company must keep consents for 7 years.
The intermediary is still checking! It will verify the identity of directors, senior managers & officers. It also attempts to determine if they are of ‘good fame or character’. As a retail investor, I don’t want to be investing in a company if the directors have a dodgy past.
Now the intermediary publishes the offer on their website, which officially opens it. The offer can be open for a maximum 3 months. It may be open for a shorter time, depending on the agreement made between the company and the intermediary. Offers define a minimum amount for the offer to be successful, as well as a maximum amount the company wants to raise.
The online platform must include a communication facility to allow investors to ask questions. Investors may be able to communicate with the company, the intermediary, and other investors via this platform.
At this point, several situations may occur:
- The offer reaches the maximum funding amount, so it is “fully subscribed”. The intermediary closes the offer.
- The offer has been open for 3 months, or a shorter timeframe as per the agreement. The intermediary closes the offer.
- The company withdraws the offer.
- The intermediary or company finds something wrong with the offer—the offer is defective. In this case, the intermediary may close the offer. Otherwise, it may suspend the offer while the company writes a supplementary CSF document or replaces the original.
If the offer raised at least the minimum amount, it is complete. An offer isn’t complete until all 5-day cooling off periods have expired. If an investor withdraws their money during the cooling-off period, it doesn’t count towards the minimum amount raised. Also, if a supplementary or replacement equity crowdfunding document was published, investors have 1 month to withdraw their money. In this case the offer can’t be complete until the last investor’s withdrawal date has passed.
If the offer did not meet the minimum amount, it is unsuccessful.
For a complete offer, the company issues shares to the investors. The intermediary pays the company money raised (less fees) after it issues the shares.
For an unsuccessful offer, the intermediary refunds all money to investors.
For a closed or withdrawn offer, the intermediary refunds all money to investors.