Summary
In this episode of the Ecommerce Finance Podcast Stephen Brown from LedgerGurus and Joseph May from May Law discuss the challenges eCommerce businesses face in securing funding, particularly through traditional means. They explore the concept of equity crowdfunding as an alternative funding vehicle, detailing its compliance requirements, governance implications, and the differences between raising debt and equity.
The discussion emphasizes the importance of professional guidance in navigating the complexities of crowdfunding and highlights the costs associated with the process. Additionally, they address the barriers to adoption of equity crowdfunding among ecommerce brands and the need for greater awareness of this funding option.
Takeaways
- Equity crowdfunding allows businesses to raise funds from non-accredited investors.
- Compliance with SEC regulations is crucial for equity crowdfunding.
- Governance requirements include annual updates to investors.
- Debt crowdfunding can be a viable alternative to equity.
- Professional guidance can simplify the crowdfunding process.
- Costs for equity crowdfunding can range from $1,500 to $30,000.
- Awareness of equity crowdfunding is low among ecommerce brands.
- Investors typically need a liquidity event to realize returns.
- The crowdfunding process can be complex but offers unique opportunities.
- Many successful brands have utilized equity crowdfunding to raise capital.
What We Cover:
00:00 Introduction to eCommerce and Law
01:52 The Evolution of eCommerce Marketing
03:41 Challenges in eCommerce Funding
04:18 Understanding Equity Crowdfunding
08:37 Compliance and Regulations in Crowdfunding
10:46 The Role of Audited Financials
13:16 Public Disclosure and Investor Rights
14:29 Regulation CF Explained
15:08 Voting Rights and Control in Equity Crowdfunding
17:21 Governance Requirements in Crowdfunding
17:57 Annual Investor Updates and Compliance
19:08 Valuation in Equity Crowdfunding
20:11 Common Shares and Entity Types
20:48 Debt Financing through Equity Crowdfunding
23:34 Simplifying Fundraising with SAFE and Convertible Debt
26:24 The Importance of Professional Guidance
28:20 Cost Considerations in Fundraising
31:12 Examples of Successful Equity Crowdfunding
32:23 Barriers to Adoption in E-commerce
34:23 Liquidity Events for Investors
Connect with Joseph May
- joseph@maylawgrp.com
Work with LedgerGurus
If you need help with your ecommerce accounting, reach out to us at LedgerGurus. We are an ecommerce-specialized accounting firm, and we can handle all your numbers so you can focus on growing your business.
Transcript
Stephen Brown (00:00)
Welcome to the eCommerce Finance Podcast. I’m your host, Stephen Brown with LedgerGurus In this episode, I have Joe May from May Law to discuss an alternative vehicle for funding an eCommerce business. Joe, thanks for joining us today.
Joseph May (00:11)
Awesome, thanks for having me.
Stephen Brown (00:12)
Why don’t you give us a little background on yourself? How you got into e-commerce, what you’re doing right now. A lawyer in e-commerce, I don’t see that very often. So tell me a little bit about your journey.
Joseph May (00:21)
Yes.
Yes. I was, I was about, I guess, 12 years ago, I graduated from law school, started practicing law and found it just to be absolutely insufferable. So after about two years, I got an opportunity to jump into an e-comm company and participate in ops and do in-house counsel kind of operations work and went into an early stage startup called Freshly Picked.
I was there right before they went on Shark Tank, got to see the like, just insane growth. And so this is about, I guess, 10, probably 11 years ago. But so 11 years ago when, you know, Shark Tank just had a massive growth impact. And so we went, we’d be 5X in revenue in my first year there and got to experience all the pain of
Ecom scaling, manufacturing, all the issues that came up with that. Ended up going on doing my own Ecom startup from there, selling backpacks, did that for number of years. Then I got into a marketing agency in more of like a biz dev, helping people raise money type of role. And then from there, I and did a tech startup that didn’t work out.
And then it kind of got to the end, started looking around and started a law firm focused primarily on capital transactions because the kind of the last five or six years before I did this was all involved in raising money, helping other people raise money. really taking that and pivoting that into a law firm has been what I’ve doing the last year or so.
Stephen Brown (01:52)
So 11 years ago in e-commerce, that was like a whole different era.
Joseph May (01:56)
It was was insane.
Yeah, would post on the founder would get the Kardashians to post These little leather moccasins on their babies and we do $70,000 in business the next day It was you know pre I don’t even know if you can do marketing on Instagram that time I mean to tell you kind of where I was at. I didn’t even have an Instagram account when I started working there that I
Stephen Brown (02:11)
Cheers.
Joseph May (02:23)
I hadn’t ever gone on social media really. So I got into social media as part of my job. I started learning about that. But yeah, it was an insane time.
Stephen Brown (02:31)
⁓
How many years were you there?
Joseph May (02:34)
So I was there about 18 months before I started my own e-comm company that I then ran for about three years, three and a half years. then transitioned into a, a partner in a marketing agency. And then I got to see a ton of like high growth brands like Pillow Cube. I was part of Pillow Cube, Stairslide. We got to help out. ⁓
can’t remember all the names of the companies right now, but the name of the agency is called Creatively. And so they’ve worked with a ton of those big YouTube commercials. Manly Bands is one of the ones that we’d worked with. Kizik, a lot of these kind of big brands that have kind of come out of it and gotten a lot bigger from the big push on marketing. But even that’s changed dramatically over the last 12 to 24 months on how you need to do marketing, you know, with the kind of re-emergence of tick, or I get that.
mean, TikTok is newer, but the re-emergence of being able to just create content and have that go somewhere. So it’s been, I’ve seen a bunch of different stages of e-comm and marketing and growth. Just in the last 10 years, it feels like a hundred almost.
Stephen Brown (03:41)
Yeah. The era you started was kind of nascent. was a lot of, ⁓ you know, it the rise of social media as a selling platform. And we had the huge boom with COVID and now it’s been the post COVID. I don’t know, like doldrums, right? And one of those challenges is raising money, right? Which is why we’re talking here today. One of the challenges we see with e-commerce businesses is banks don’t like to lend because they don’t have
Joseph May (03:45)
Yeah.
Yeah.
yeah.
Yeah.
Stephen Brown (04:09)
a lot of tangible assets. They don’t like to deal with intangible businesses and they don’t like inventory, get a lot of predatory lending from the merchant cash advance lenders. But there’s another vehicle. So let’s talk a little bit about this alternate vehicle that you focus on, what it is and let’s dive in.
Joseph May (04:18)
Yeah.
Yeah, yeah, yeah,
absolutely. So it’s called Equity Crowdfunding. It was created under the JOBS Act, I believe it was in 2008.
Stephen Brown (04:33)
And when was the job,
Zach, just as a refresher?
Joseph May (04:36)
Oh, want to show this to 2008 as I believe.
Stephen Brown (04:40)
Okay.
So it’s been around for a while.
Joseph May (04:42)
Yes, and or was it 2012? So it was enacted in 2012. 2008 for whatever reason, it’s been stuck in my head. But in 2008, they created the jobs act, which is basically to help small businesses become more efficient and make it easier for them to raise money to operate. And one of the things they created was at the time you could go out and raise money from non-accredited investors.
Stephen Brown (04:48)
2012.
Joseph May (05:08)
And I think the max then was like 1.2 million or 1.8 million that you could raise. And it’s now at five, but there’s some different things that need to actually happen to be able to raise five, but you can essentially raise at the $1.2 million of unaudited tax or unaudited financials and from unaccredited investors. Now,
Most of the people listening to this have probably tried to raise money or at least have some kind of rudimentary idea of what an accredited versus unaccredited investor is. So an accredited investor is basically someone who has over a million dollars in assets excluding their house or they’re making over $300,000 a year. Now there’s a married single, but it’s like people with a
Stephen Brown (05:38)
Let’s just dive in just in case. What is an accredited investor?
Joseph May (05:54)
people with enough money to write a sizable check into your company is basically what an accredited investor is. An unaccredited investor or kind of main street investors, they call it, is somebody who is making less than, yeah, I think the cutoff this year is like 300,000. So they’re making less than like 300,000 and they have less assets than a million dollars. And so these are individuals that can write pretty good sized checks.
you know, there’s a wide variety of them, because you have people kind of on the low end who could maybe only write like a hundred dollar check, and you have people who might be able to write a $10,000 check. So there’s a wide variety, and there’s even regulations on how much you can take from people depending on how much they’re making. But that should all be done by one of these platforms you could use to help you figure out how much you can collect. So an unaccredited investor, mainstream investor, is somebody that, you
might have a lot of cash, but maybe they don’t have a million dollars in assets, or they’re not making quite enough money a year to be considered an incredible investor.
Stephen Brown (06:57)
Gotcha. Okay. the, ⁓ getting back to equity crowdfunding, this came about as a vehicle for businesses to raise small businesses to raise money outside of accredited investors. Let’s keep diving in. Tell us more.
Joseph May (07:02)
Yeah.
Mm-hmm.
Yeah, yeah. essentially it allows you to, well, there’s, allows you to raise money from them and there’s a bunch of different ways you can do it. You don’t just have to give up equity. You can do it as a debt vehicle that you could actually use it to replace your, your MCA. I know a lot of as an econ owner, I dealt with MCAs. I’m still dealing with them. actually being sued by one personally for Ford. got me like six months before the statute limitations ran.
Stephen Brown (07:33)
Hmm.
Joseph May (07:38)
they actually filed their lawsuits. So I’m still dealing with that. But it’s something that basically you can lower the cost of your capital. And it’s pretty innovative in what you can do because you have these people that are already buying your products. You have their email, your other address, you you might even have their phone number and you can put together an email campaign where you go out and you get people to commit. Hey, I’ll give you a couple hundred bucks. You know, you get a thousand people to do that. All of sudden you have
you know, between you can easily get to half a million dollars and adjust some of the users that are buying your products. And so it’s just, it’s a simplified way to raise money, opens up a lot of opportunities in, your ability to hire, your ability to take on inventory, you know, and to just lower the cost of capital that you’re currently paying.
Stephen Brown (08:23)
Let’s drill down a little bit. So you can raise debt, can raise equity. Anytime I think about raising money, I’m like, okay, what are the gotchas? What are the issues? you know, how, how hard is this to do? What do have to do from a, you know, maybe let’s kind of start with like some of the compliance things that you need to do, because this seems like it could be easily abused if not executed properly. So I’m sure there’s some rules about how it’s done.
Joseph May (08:25)
Yeah.
Yeah.
Yeah.
Yeah.
Absolutely. it’s actually, it’s really well done by the, by SEC and FINRA, or the two agencies that manage it. And they’ve kept the process relatively simple. So there’s platforms that have to be approved by the SEC and FINRA. And they’re out there, you know, the big ones like Start Engine, WeFunder, DealMaker. I mean, if you Google equity crowdfunding, know, 2010 or so will pop up that you can use.
Um, and essentially you go to one of those platforms, you present, Hey, I want to raise money. This is who we are as a company. They might ask to look at your financials, um, depending on the platform. And then they’ll have, you know, Hey, here’s a, uh, here’s a cost, you know, you need to put up 10 grand for compliance or so they have like an initial fee. You’ll need to pay to be able to pay for the compliance piece. And it basically that is it. You have to fill out what’s called the form C.
and you have to explain all the risks that were associated with investing in your company, financials, key employees, everyone who owns over 20 % equity will need to be disclosed. And so you kind of, have to make this public disclosure of your company. And basically what that is used for is when someone’s going to decide whether not to invest, they can review your company. What are the financials? What’s your growth? was, you what’s your growth rate over year over year?
and etc. So there’s a real, you you do have to kind of, you know, open your dress for, you know, lack of a better way to say it. You have to show people what’s going on. You show them your profit margin. But that, you know, it’s not as hard as it sounds. And it really depends on what levels you’re going to go for. Because if you’re going to go, if you’re raising between below 1.1 million, you don’t have to show audit and financial.
If you go above 1.2 million, you need to have audited financials. And then there’s some other requirements you’ll need to do. But you could actually raise that first 1.2 million tranche, use some of that money to go get the audited financials, and then run, you know, keep running the campaign. So there’s a lot of flexibility. And that’s really built into it to be able to help small businesses on how to do the fundraisers.
Stephen Brown (10:31)
Mm.
Hmm.
Let me just take a little financial detour since this is the finance podcast. Audited financials, how many years of audited financials?
Joseph May (11:27)
Yes, please.
think it might just need to be one, but please don’t quote me on that. mean, that’s something you’ll at least need one year of it, the last year. And some of these companies are brand new. Some people are utilizing it. This is part of how they’re raising their initial seed capital so they don’t have any audited financials.
Stephen Brown (11:34)
Yeah.
Yeah. And for those who aren’t familiar with audited financials, typically what that means is you pay thousands, sometimes tens of thousands of dollars to a CPA firm. And they’ll go in and they will turn over every stone in your financials and essentially determine that they are legitimate. It’s kind of a really poor man’s way to describe audited financials if you’ve never had to.
Joseph May (11:57)
Yeah.
Stephen Brown (12:11)
do that, or maybe you don’t really understand what they’re doing, but they’re basically validating what you have in your financials that are accurate. That’s essentially what audited financials are doing for you. that you can, like in this case, an investor, so for example, the publicly traded companies are having their financials audited all the time because people are buying stock in those companies. So this is kind of a similar thing. And usually what we see with audited financials
Joseph May (12:19)
Yeah.
Yeah.
Yeah.
Stephen Brown (12:35)
You only do it when you’re going to get invested in a lot of times when you go to sell your business, you need to do that. It is a good, good practice to have your financials audit ready, even if you’re not going to have an audit, meaning you’re, you’re putting things in accrual accounting. You are doing things the right way. They’re clean. because if you don’t, you’re to pay extra money to a firm like LedgerGurus to fix things up.
Joseph May (12:40)
Mm-hmm.
Yeah. Yeah.
Stephen Brown (12:58)
All right,
so let’s go back to this. you submit some information, there’s a threshold for which you have to have audited financials. A lot of this information is somewhat public in nature. Like, is this like an open information or is it like, can you kind of keep your information semi-private as you’re going through this process?
Joseph May (13:00)
Yeah.
Well, yeah, once you do the raise, the information’s put out there for everybody to review that’s potentially going to invest. So there is some public, some level of public disclosure that I know is, is uncomfortable, even having been an e-commerce owner. couldn’t imagine like putting out my financials. But that’s part of the process of opening up to mainstream ⁓ investors. need to do, it’s almost,
You you mentioned, you know, a public company, um, it’s basically starting the process. Not, I mean, technically kind of opening up what people, some people call mini IPO. Once you start doing the reg CF, because you’re bringing on these, um, you know, a lot of instances, I mean, there are, there’s a lot of sophisticated unaccredited investors, but there’s also a lot of unaccredited investors who have no idea what, you know, they don’t understand what a financial statement is. You know, I, I don’t.
Stephen Brown (14:08)
Mm-hmm.
Joseph May (14:09)
And so there’s just a lot of, know, and I, for lack of a better word, unsophisticated investors that you’re bringing on. So you need to be able, they need to be able to see all the disclosures and potential risks associated with running one of these campaigns.
Stephen Brown (14:26)
So used a term that I wanted to find, Reg CF, what is that?
Joseph May (14:29)
Yes,
so Reg CF, that’s so under under the jobs act created Reg CF, which is how you Reg CF is an equity crowdfunding.
That’s where the vehicle exists is under the regulation CF that was made by the SEC. And so, yes, thanks for catching that. I get kind of caught up in these terms all day long using them and don’t slow down to explain.
Stephen Brown (14:44)
Okay.
When a lot of times when you’re raising equity, you are giving up voting rights. Like how does it work in an equity crowdfunding? Like do you have, let’s say you go raise and you have 500 investors, are they able to make decisions around your business or how does that work?
Joseph May (15:01)
Yeah.
Yeah, so the way to the SEC, within the last couple of years, well, I think it was five, six years ago, because it used to be that those 500 investors would go directly onto your cap table. And yes, they needed to have common voting rights, know, whatever they needed. And basically, I haven’t seen an equity crowdfunding where somebody gave up more than 20 % of their company.
Stephen Brown (15:19)
Mm-hmm.
Joseph May (15:30)
So as far as voting rights, you’re not exactly shifting, giving up control of your company. Now, if you had 10 of you that each own 10%, you could in theory give up ownership to this equity crowdfunding where they could kind of control the company. Now, what has happened in the last couple of years is the SEC has allowed to create what’s called an SPV.
which I’ll define that if I go, an SPV is essentially it’s called a special purpose vehicle. It is an LLC that people use. People will create these to raise money to invest in specific projects. It’s very common for a venture capital firm or a private equity firm when they’re doing to create an SPV to invest in alongside them or to do a follow on fundraise. And so what you can do now under the S and C is you actually will create an SPV
you’ll create a separate LLC where the money will be fundraised and then that LLC will invest that money into your company. So that saves you on a couple of things. One on your cap table management, which can get very costly if you continue to raise money just having to deal with how complex your cap table is. So you’ll just have one line item on your cap table. And then that SPV, yes, if you’re going to do, you will need
Stephen Brown (16:32)
Hmm.
Joseph May (16:49)
a stockholder consent, if you need stockholder consent and that SPV holds 10%, you would need to go get, do some voting or some compliance with the individuals that invested in your company. But as far as like giving up like substantial or like an amount of control that you would need that someone should be worried about, I just don’t think that, I don’t think you would, you would have that level of ownership that you would raise under an equity crowdfunding campaign.
or they could potentially start appointing board members and running your company in Moogview.
Stephen Brown (17:21)
Let’s talk about ongoing. There’s a term that maybe a lot of small business owners aren’t aware of governance. Governance is basically a lot of the rules for how a company is managed. What kind of governance requirements are there with when you do equity crowdfunding?
Joseph May (17:24)
Yeah.
the
Yes.
So
yeah, so you’re going to need to put out continued, So you’ll need to set out at least once a year initially to let people know what’s going on. You need to send out updates. When you have a public company, I believe it’s called, and it’s not a K1, so the K10? 10K, okay. ⁓
Stephen Brown (17:54)
It’s a 10K. Yeah.
Joseph May (17:57)
and
So it’s like a U10 compliance or a U something, but you need to send it out about once a year, just send out like an investor update on what’s going on about the company and financials. And that obviously would include the financials.
just update on how the company is doing. It’d be similar to if you have investors sending out an investor update to let them know here’s key information about the company. Since there’s not a lot of liquidity opportunities, you don’t need to have all the disclosures that you would have with a public company. And when I talk about liquidity, that essentially allows for individuals to be able to sell the equity that they bought from you.
There’s a couple of platforms that do have marketplaces for people where they can sell their equity, which is another great opportunity for your investors. If they put in money in over five, six years, the keeps going up, they’d be able to sell those stocks. But the liquidity is pretty limited, so you don’t have to do all the disclosures you would have to do for a public company. But you do need to inform them about, send out a kind of a basic investor update every.
year.
Stephen Brown (19:08)
Another thing usually doing when you’re doing investment is evaluation. Do you have to do a formal valuation as part of equity crowdfunding or how does that, do you get to kind of just be like, hey, this is what I think the value of my company is. How does that work?
Joseph May (19:21)
Yeah, so it depends on the platform. Some of the platforms make you do a 409A valuation, but a lot of it is just kind of like the other ones. just kind of beauty is in the eye of the beholder type of thing. If people will invest that valuation, yeah, think you can get, if you can get people to invest that valuation, that’s kind of the valuation you’re setting in your company.
Stephen Brown (19:41)
Gotcha. And then are the people that invest, are they getting common shares in a business? Is that essentially what they’re getting when you’re doing the equity side of it?
Joseph May (19:49)
Yes, so they would essentially be getting common shares. ⁓ You know, if you decide to create a different class, you know that can raise some some red flags, but essentially it be common shares in your entity.
Stephen Brown (20:00)
And do you have to be typically when companies raise money, they have to be a C Corp. Do you, there a requirement on the type of entity that you have to be to do equity crowdfunding?
Joseph May (20:11)
No, but it is I recommend to people that they do a C Corp. Because even though you have this separate LLC that people are investing through, it is nice to have the C Corp in place. Now, there’s people who use equity crowdfunding for property to raise money to buy properties. And a lot of times they’ll do an LLC just because the investors want, you they want to able to pass back through depreciation. But whereas like majority of the people, you know,
Stephen Brown (20:35)
Mm-hmm.
Joseph May (20:37)
In this instance, we’ll be thinking about it for an e-comm company. It would be recommended that you have a C Corp for those, just for the simplicity of raising money around the C Corp is much better than an LLC.
Stephen Brown (20:48)
Yeah.
What about the debt side of things? You said you can also use this to raise debt. How does that work?
Joseph May (20:52)
Yeah.
Yeah. And so basically you just create a debt vehicle and you create the fixed rate of return that you’re going to pay people back. Now you can do. Well, I’ll finish this thought and try to jump into the next one. And so, you know, say if you’re current, you know, you’re on an MCA, you’re paying 30 % interest or 27 % interest, whatever, and getting crushed. But your overall debt is, you know, $800,000.
You could in theory go raise a REG CF debt vehicle for 1.2 million payoff. What you currently have that’s kind of, you know, probably sinking your company and then have the additional $400,000 debt vehicle at a much more manageable, you know, 12 to 15%, whatever that is that you’re able to raise money under to make it. I mean, it essentially allows you to level up the type of debt vehicle you could get. You know, if you’re.
more of wholesale business that have AR that people would would give you money on so that there’s some opportunities around that and and There are actually equity crowdfunding platforms that specialize in debt vehicles instead of equity And you know you have payment options ⁓ one of the things you can do with equity crowdfunding I don’t know how many how familiar people are with safe or what what is called a convertible debt
A safe is just a simple agreement for future equity. It’s very commonly used, a very common contract that’s used to raise money very early on in a company or for speed and efficiency when people don’t want to do a formal 409 valuation, but they want to have, we’re going to have a value cap. You can actually raise under a safe through equity crowdfunding, and you can also raise under convertible debt. so basically, it’s a debt.
but the holder of it, the person who raised has the option to convert that into equity at a later date. And so that can actually simplify the process pretty dramatically because then you don’t have to bring in, you you don’t have to have everything figured out right away. You could just say, hey, you know, we’re doing 10 million a year revenue. I mean, that can be our
you know, maybe we don’t want to go do a 409 valuation and we’ll do that as our, you know, we’ll do a 15 million pre-money value cap sales that we’ll raise under and we’ll try to raise 400 grand or 500 grand or something like that. And so it can really see, you can simplify the process or you can make it very complicated. And that’s something that with the jobs act, that was really the objective is simplifying the process for small businesses to be able to raise money.
and be able to use it.
Stephen Brown (23:34)
Let me pull on that thread a little bit, because it definitely sounds like an easier vehicle, but it doesn’t sound like something you want to go figure out on your own, which is probably why you’re doing what you’re doing, right? Are you basically helping businesses walk through this process? And would you recommend that you use a professional who’s familiar with these things to do it?
Joseph May (23:36)
Okay.
Yes, I would. Now, if you go to start engine or some of these platforms, they’ll tell you not to use an attorney. Here’s a couple of reasons why I recommend people work with me when they’re doing this. Number one is for cap table management planning. What it means if you take around under common stock now versus a safe. What are some implications around that? second reason, the second thing that I think is kind of lost and it’s starting to come
more in the focus of people is the type of investors, one, don’t know exactly who your customer is and who uses your product and who would potentially invest in you. So, Gosley Pizza Ovens just ran an equity crowdfunding campaign out of the UK. They raised over $3 million. I think it was like 2.9 or 2 million in change in British pounds, which converted to 3.5 million or whatever in American cash or US dollars.
One of the things that the Tom Gosling, the founder mentioned is that one of the co-founders of Instagram actually invested it. And what I recommend that people do is yet set up the equity crowdfunding, the form C, that’s not a heavy lift for an attorney to put together a form C. just, have to have, know, you have to really an entrepreneur can do that. It’s just, you have to fill out the information, you know.
risk disclosures, type of stuff. Most people can do that on their own. What I actually recommend is that they bring on, they also do a 506C raise and sorry to throw in another SEC, got a term there, but a 506C raise is basically, allows you to raise money from accredited investors publicly. So you can, if you’re doing, there’s two types of fundraisers.
Stephen Brown (25:34)
Hmm.
Joseph May (25:37)
There’s what’s called the 506B and a 506C. 506B is only people you know. 506C you can talk about publicly. And so what’s gonna happen is you’re gonna get out here and start fundraising and you’re gonna have people show up that are accredited investors that have the ability to write a bigger check, love your product, might be able to see the vision along with you and want to participate in the upside.
I recommend to people they have a 506C fundraise set up alongside their Reg CF fundraise so that they can redirect those people into a 506C. And that can open you up to getting a bigger check. It also helps not only on the current fundraising round, if you need to raise money subsequently in different fundraising rounds, now you have access to additional.
potential investors who can write bigger checks. And so that’s where kind of when I work with people, I do recommend they at least go, you know, have a conversation. Let’s go through your form, see, let’s think more holistically about your company. What are you trying to achieve? You know, are you trying to have an exit in five years? How does this play? You know, how does that work with what you’re currently doing? But also I like, you know, I recommend that people set up a 506C fundraise.
Because if you can go out and raise a million dollars from your users, that’s amazing. But why not also go out and do a bunch of accredited investors and say, hey, we were able to raise a million dollars from people who buy our product. Would you like to invest alongside us? Alongside those investors. And you can give them different preferences, preferential treatment, not better terms, but they can get preferred shares as part of that. there’s a way to incentivize
credit investors to write bigger checks, they can have a huge impact on the company. So that’s why I recommend that people come and talk to me, because I can set them up on that and help guide them through that process.
Stephen Brown (27:21)
That’s awesome.
So let’s just talk about, we’ve talked about some the things you gotta do. Let’s talk about some of the costs. I mentioned what audited financials, in our experience, audited financials range from thousands to tens of thousands. Although if you’re a really simple early stage business, it won’t be too bad. The bigger issue I see from audited financials is are your financials in good shape? A lot of times what we see is they’re not.
Joseph May (27:32)
Yeah.
Yeah.
Yeah.
Stephen Brown (27:51)
And then they have to work with somebody like us and doing a cleanup can be thousands of dollars and maintaining good financials, know, investment ready financials. You know, if you’re thinking it’s going to be hundreds of dollars a month for your business, unless you’re super small, you’re probably misguided. usually, our engagements are usually thousands a month because we are doing audit ready financials. How much…
Joseph May (28:09)
Yeah.
Stephen Brown (28:14)
These platforms, how much do they typically take as part of the process?
Joseph May (28:20)
So it depends on the platform. Some of them are more heavily weighted on how much you raise. And so they might take between 8 % and 15 % on your fundraise. Some of them have like an initial upfront cost of $10,000. And that will be more inclusive and they’ll help you with, you know, fill out your form C and get everything ready. And then they might charge a little bit less on the back end. So it’s not
It’s not cheap to do, but it opens up your opportunity to get to capital that can solve a lot of problems that you wouldn’t have had access to otherwise.
Stephen Brown (28:56)
And then if somebody wanted to work with an attorney like you who specializes in this, like, there’s probably more cost upfront getting it going. I’m assuming, do you support the annual filing as well?
Joseph May (28:59)
Yeah.
Yeah.
Yeah, I mean, we do. have kind of a template that we help them with. I mean, it’s something that we can help them review it, but it’s really, it’s not as heavy of a lift as it sounds as far as compliance that you would expect. Like I mentioned, difference between like an IPO or a public company versus someone who’s gone to Reg CF, but yes, we do support them with that. ⁓
Stephen Brown (29:28)
So the initial fundraisers where more of the cost would be, what’s a ballpark? I know this is always hard. People say, how much do we cost? I’m like, well, there’s a range, right? But for us, it’s anywhere from $100 to thousands of dollars a month. We’ve even done some large customers where they’re paying over $10,000 a month. ⁓ Maybe give me a ballpark what it would be like to work with somebody like you on a fundraise.
Joseph May (29:32)
Yeah.
Yeah.
Yeah.
Yeah.
Yeah. it, like you said, it depends for a very simple company who needs to come and get a reg CF. You know, it could start anywhere from around $1,500 and then it can go up from there all the way up to dependent on the complexity. You know, if you have 30 people on your cap table currently, you know, that we need to review, you know, stock hold it because there’s going to be like, if you’re already a C corp and it’s simple.
But if you show up you’re an LLC, you’re going to want to convert to a C Corp. There’s costs associated with all those things. So I mean, it could be all the way up to $30,000. that’s very complex. You need to do a lot of things. Maybe you need to do corporate cleanup. But from the very simple side, from $1,500 and kind of…
Stephen Brown (30:29)
Yeah.
You gave us one public example. ⁓ Any other examples of people that have used this vehicle to raise money that might, know, brands that might be well known or easy to look up?
Joseph May (30:48)
Really.
There’s a couple I’ve seen on there that, and of course I can’t remember it when I’m on here with you, but if you go through these equity crowdfunding sites, you’ll be surprised at some of the names of these companies that are on there
I think that there is a lot of fear that these are kind of like, people view these as, you know, scams or, you know, stuff that, they want to nobody wants to take advantage of their customers, obviously, you know, they want to provide value back to people.
not only the products they’re doing, in the, you if they were to come in and invest in their company. So, you know, you got to be smart about it. Obviously you don’t want to overvalue, you don’t want to over promise, but you know, there’s a real opportunity. And I think this is something that’s slowly been adopted by companies because, you know, people want to control the destiny of their company. And where you’re giving up a small enough equity that shouldn’t impact your controls.
as far as your control of your entity. It’s a very unique opportunity for a lot of these e-com brands. Some of them have hundreds of thousands of customers who bought their products over the years, who still use them. So why not give these people an opportunity to participate in the upside of your company and solve some of the financial issues that you’re dealing with as a company?
Stephen Brown (32:16)
Alright, one last question. Why do you think that we’re not seeing more e-commerce brands use this vehicle to raise money?
Joseph May (32:23)
I think there’s a perception of fundraising. I was recently talking to a friend of mine and they are doing 20 million year revenue. trying to raise 5 million from investors. And I asked them, I said, why aren’t you doing equity crowdfunding? And they didn’t want to disclose their financials because they were afraid of competitors taking advantage of them or they were afraid of, I mean, there’s kind of like,
It’s similar to a crowdfunding campaign that you would see on Kickstarter that a lot of companies kind of have this sense of, well, I’m a grownup brand. I don’t do Kickstarters. And I think there’s kind of similar to, I’m a grownup brand. I don’t need to raise money through equity crowdfunding. Which I understand, there is like a certain maturity in a company and where you see how you fit into things. But I just think it’s something that
is so underutilized by companies and one because it’s not widely used. Like people, it’s the adoption curve has been slow. It’s slow. There’s a nervousness of putting out all your financials, you know, people actually buy your equity. I think those, those fears around it, but I think this is something that we’re going to see over the next five to 10 years, even as, fundraising for e-comm brands specifically is really slowing down because of some of the big failures are
know, lack of return that have happened in that space, there’s going to be, you know, people need to get creative. And this is an area where people can get creative, raise money from their users and, you know, allow those users to participate in the ride and get some upside beyond just buying one of their products.
Stephen Brown (33:57)
And from my perspective, think awareness is a big issue. I was very vaguely familiar with this concept. I think most e-commerce business owners are familiar with crowdfunding, but I don’t think they’re familiar with equity crowdfunding. So I think part of the problem is just awareness, which is one of the reasons we’re talking now is to raise awareness on this vehicle. I actually had one more question. We’ve talked a lot about how it benefits the business. For the investor,
Joseph May (34:01)
Yes.
Yes.
Yeah. Okay.
Stephen Brown (34:23)
Let’s say an equity investor, how do they get their money back? I’m assuming that the business has to go through some sort of a liquidity event, which is a fancy term for, there’s got to be a sale of the business typically, or another investment of the business that will buy the shares of the investors. Is that the appropriate way to say how a retail investor is going to get their money back?
Joseph May (34:37)
Yeah.
Yeah, that’s going to be the simplest way that they can do it. mean, there’s a world where somebody runs a Reg CF and then they follow it up with a Reg A where they’re actually able to provide people who own shares an opportunity to get liquidity. And a Reg A allows you to raise more money. You can raise it to $75 million instead of $5. There’s obviously more compliance that goes into that than you see on the Reg CF.
Yeah, essentially, needs to be a liquidity event, whether it’s fundraising more money or you get sold or you go through an IPO, which would be the best case scenario. Not best case scenario, but provide your stockholders an opportunity to sell their stock on a NASDAQ or a similar exchange. But there are, with that said, Start Engine and a couple of these platforms do have
a marketplace for people to sell their shares on a secondary, the marketplace being considered a secondary mark. Yeah. So there is ways they can do it. If you have the shares, if you buy them, you have to hold them for 12 months before you can sell them. Once that 12 months is over, you can sell them. So there’s marketplaces. Yeah, marketplaces and then any other liquidity event that could come along with those.
Stephen Brown (35:43)
Kind of a sick, yeah. Yeah.
Interesting.
That’s awesome. Are you personally invested in any of these companies?
Joseph May (36:09)
I have not, I was gonna get into the Gosney one, but you had to live in the UK to be able to buy one. And so I did not, because as a user of my Gosney pizza oven, I was pretty excited about that, they would have not needed that one.
Stephen Brown (36:15)
⁓ gotcha.
Yeah, well
I’m gonna start paying attention, seeing what’s out there. This has been really awesome. I’m hopeful that we will be able to help brands that had no idea, find a new vehicle. If somebody wanted to connect with you, what’s the best way to do it?
Joseph May (36:34)
Yeah.
You can reach out to me on LinkedIn. I’m on there, Joe, Joe May, I make a lot of posts about pizza on there. Or you can reach out to me directly at Maylaw Group. My email is Joseph at Maylaw Group. And you reach out directly to me and love to talk to you about what we’re doing. I don’t have a lot of other social media going on for my law firm at this point, but yeah, you reach out to me through LinkedIn or directly through my email.
Stephen Brown (37:01)
Awesome. Well, thanks for joining us today, Joe, and look forward to seeing how we can help the industry learn and hopefully raise some additional capital using this incredible vehicle.
Joseph May (37:12)
Yeah, absolutely. Awesome. Thanks for having me on.