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Apr 7, 201411:03 AMOpen Mic

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Are you ready for equity crowdfunding in Wisconsin?

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Wisconsin has jumped to the front of the pack in equity crowdfunding. On Nov. 7, state lawmakers passed legislation allowing for intrastate crowdfunding in Wisconsin. The law is expected to go into effect on June 1. Is your company ready for its crowdfunding campaign?

The first step to take in the crowdfunding effort is to determine if you are eligible for intrastate crowdfunding. That eligibility is not detailed in the Wisconsin law, but rather in Rule 147 of the federal securities laws. Rule 147 describes the conditions a company must meet to be exempt from federal securities laws, and thereby eligible for intrastate offerings.

First, the company must be organized under the laws of the state in which it is making the offering (that means no Delaware or Nevada incorporations for Wisconsin-based companies). Second, it must be doing business in the state, which is defined as: 1) generating 80% of its gross revenue in the state, 2) having 80% of its assets located in the state, and 3) deploying 80% of the proceeds of the offering within the state. (For a further explanation of Rule 147, see http://stevesprindis.wordpress.com/2014/02/20/state-level-crowdfunding-relies-on-the-80-rules.)

Moving beyond Rule 147, Wisconsin also requires that the company’s principal office and a majority of its full-time employees be located in the state.

If you are eligible for intrastate crowdfunding, the next step is to engage your advisory team. Your advisors should include (in order of engaging) an investment banking firm that is registered as a broker-dealer, a securities attorney, a Wisconsin-based funding portal operator, and members of your internal team. The investment banking firm should have experience raising money for early-stage companies and should be comfortable with the details involved in crowdfunding. It will help with the preparation of the offering materials, the structuring of the investment, and discussions with interested investors. It can also recommend the appropriate attorney and portal.

Your attorney should be conversant in crowdfunding and able to answer questions on your first call. If he or she isn’t, then you chose the wrong attorney. Your attorney will prepare all of the appropriate filings and make sure your disclosure documents adequately describe all pertinent information and risks.

Next, choose the portal operator. Make sure it is a Wisconsin-based company and can do intrastate offerings. Also, ask how the company will drive traffic to your offering and its own site.

Finally, pick the members of your internal team who will work on the offering. That team should, at a minimum, represent marketing and finance functions.

As part of the offering, the company must file a disclosure statement with Wisconsin Department of Financial Institutions (WDFI) describing the company, its business plan, intended use of the proceeds, and a number of other items. When reading this requirement, it seems very manageable, but be careful. By undertaking a crowdfunding offering, you are basically doing a mini public offering. The information requirements in a public offering are extensive for many reasons, the primary two being: 1) full disclosure to investors and 2) avoidance of lawsuits. If you talk to any experienced securities attorney who is knowledgeable about crowdfunding, he or she will advise you to be very detailed in your disclosures, to be accurate and conservative, and to fully disclose all known and possible risks.

There will be many crowdfunding investors who don’t fully understand what they are getting into when they invest, and they can cause trouble if everything doesn’t go as they expect. Exercise caution by giving full and detailed disclosures.

After preparing the disclosure documents, you should be ready to determine the details of the offering, which include the amount of money you need to raise, the valuation of the company, and the type of security being offered. When determining the amount of money to raise, you should consider how much money is needed to cover operating losses (if any), working capital, and capital expenditures through the point at which you become cash-flow positive or expect to raise your next round of financing.

When determining the amount you want to raise, give yourself a cushion by increasing the amount you think you need by 20%. Wisconsin law will allow a company to raise up to $2 million if it has audited financial statements, or up to $1 million if it does not. Valuation is complicated and should be discussed with your investment banking advisor. Structure is also a complicated topic to be discussed with your investment banker and attorney, but you will most likely sell class B common stock with limited voting rights and other provisions that will be looked upon favorably by professional venture capital investors.


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