Here is a quick and dirty crowdfunding cost model based on various assumptions. The results are a little shocking, with expected negative cash flow resulting even from successful crowdfunding offerings.
This is a work in progress and we are calling on the crowd to help us refine this model. Please post any additional data points on how much you expect items to cost or challenges to the assumptions in the comments and we’ll continuously update the model.
Here are some of the shocking (unintended) potential results of the SEC rules.
- A successful $99,999 crowdfunding raise with no audited financials will result in negative CASH FLOW to the company of about $38,000.
- A successful $1M raise will actually only net $750,000 in capital. This is an astronomical cost of capital
- Companies will have to spend between $5,000 (idea stage, small offering) and $38,500 (Revenue, $1M offering) and countless hours before even starting their offering. In our experience these upfront fees will be a huge deterent.
- Many startups will have to choose between keeping the doors open and violating securities law or paying the hefty annual disclosure costs ($30k+). Startups without the money to pay the fees will have to dissolve prematurely in order to avoid violating the law. This will result premature failure of many startups and potentially great reduction in job creation
We will be showing the results of this directly with the SEC staff so please comment regularly.