We have created a quick and dirty equity crowdfunding cost model based on some assumptions about the industry. The results are a little shocking, with expected negative cashflow resulting even from successful crowdfunding offerings in several scenarios.
This is a work in progress and we are calling on investors, entrepreneurs and the crowd to help us refine this model. Please post any additional data points on how much you expect the various items to cost and any challenges to the assumptions and we’ll continuously update the model.
Here are some of the shocking (unintended) potential results of the SEC rules on equity crowdfunding.
- A successful $99,999 crowdfunding raise with no audited financials will result in negative cashflow 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 generating stage offerings around $1M) and countless hours before even starting their offering. In our experience, these upfront fees can be a huge deterrent.
- Many startups will have to choose between keeping the doors open and violating securities law or paying hefty annual disclosure costs ($30,000+). Startups without the money to pay the fees will have to dissolve prematurely in order to avoid violating the law. This will result in premature failure of many startups and potentially a great reduction in the job creation originally intended from equity crowdfunding.
We will be sharing the results of this project directly with the SEC staff so please comment regularly.
Click Here to view or download the Equity Crowdfunding Industry Cost Model Spreadsheet.
This post was written by James Han on January 23, 2016
Crowdsourcing a Title III Equity Crowdfunding Cost Model