It might cost you $39K to crowdfund $100K under the SEC’s new rules
On October 23, 2013 the Securities and Exchange Commission (SEC) issued the proposed rules for Regulation Crowdfunding. The 585-pages included an explanation of the rules, the feedback it received, and a cost/benefit analysis.
A cost/benefit analysis is common in many regulations to give the public an estimate of the costs associated with implementing the proposed regulation. It answers the question, “Do the costs outweigh the benefits?” For Regulation Crowdfunding it sheds light on the question, “How much will it cost to raise money via crowdfund investing, and how do I keep it to a minimum?” Here’s a closer look at what that analysis tells us.
The legislation requires that the selling of crowdfund securities take place on registered websites. The websites hosting the transactions are known as funding portals or broker dealers. These entities must register with the Securities and Exchange Commission (SEC) and the Financial Intermediary Regulatory Authority (FINRA). The legislation mandates investors have access to a business plan, use of proceeds, a valuation of the company, and financials. Firm may need to retain a Certified Public Accounting firm to certify the company’s financials or audit the company’s books. Every step costs money, from completing the required documents to retaining professional services to assist in compliance.
The SEC looked at 3 variables:
a) the success fee (in terms of a percent (%) of proceeds) paid to websites for facilitating the transaction,
b) the compliance cost related to the preparation and filing of individual forms both during and after a campaign, and
c) the costs for a Certified Public Accountant (CPA) review or audit(an expense that scales over $100,000). Certain costs like the success fee as a percent of the raise are variable, others scale like the CPA/Audit costs for raises over $100,000 and others like the compliance costs are fixed. The SEC provided both low and high estimates for these costs based on assumptions and surveys it took.