While seemingly everywhere now, crowdfunding is a pretty new concept, and SEC rulings are always changing the game. SEC rulings not only dictate how crowdfunding operates, but how startups can raise funds in general.
First, the end of the solicitation ban in September 2013 meant startups could publicly advertise that they are seeking investments. Another new ruling going into affect June 1 will now allow startups to approach unaccredited investors. (An accredited investor is an individual with a net worth over $1 million not including their house, or a person who makes over $200,000 a year.)
So what does this mean?
“What that basically means is you can do equity crowdfunding,” says Paul Proffitt, SunDown RunDown organizer. Potentially, instead of campaign contributors receiving a t-shirt or a first release of a product, they can chip in whatever amount of money and own a corresponding percentage of the company.
“That raises an entirely different issue for the startups,” Proffitt says. A startup now has investors that they have to manage. That means paperwork. Lots of paperwork.
“There really isn’t a good system for startup companies to be able to manage all that,” Proffitt explains.
Looking to ease the burden for startups that take on equity investors, Proffitt and SunDown RunDown have created EquiTRAC, a web-based software as a service platform that provides nearly everything a business needs to keep track of investors.
The system will automatically calculate equity positions and distributions.
“If you take on additional investments, they are going to get diluted,” Proffitt says. Because contributors need to be kept updated on their ownership share, “The system has capabilities to communicate with your investors,” Proffitt adds.
EquiTRAC also generates all the necessary paperwork for SEC filings and tax purposes.
Especially if crowdfunding is involved, a startup can quickly reach more than the the number of investors they could reasonably keep track of themselves.
“The average crowdfunding campaign has about 450 backers,” Proffitt says. “The system is there to do the heavy lifting for you.”
EquiTRAC will cost startups $9.99 per investor per year, and “We’re hoping to have everything up and running June 1 to coincide with the SEC rule change,” Proffitt says.
While there has been no official word from major crowdfunding sites, Proffitt says he doesn’t see any reason why they wouldn’t start offering equity as an option. Regardless, EquiTRAC could still be used to manage accredited investors.
“This is kind of an easy, low-cost way for startups to be able to manage equity investors that otherwise they would have to be spending a lot more money to manage,” Proffitt says.
For more information, visit sundownrundown.org/equitrac.asp.