Estimation of the costs to raise money via securities based (equity) crowdfunding
Although the SEC is still reviewing the process to allow the issuance of crowdfunding securities, the SEC has furnished an estimation of the costs involved for the issuer as it pertains to raising money via equity crowdfunding. The table shown has been provided by the SEC.
Examine and compare the costs of equity crowdfunding with the costs associated for the Regulation D market. For example, from 2009 to 2012, the estimated cumulative dollar amount of finder fees charged for Regulation D offerings (up to $1 million) was approximately $18 million for the 437 offerings. From these figures the average amount per offering was $41,189. In similar fashion, from 2009 to 2012, the estimated cumulative amount of commissions charged by broker-dealers for Regulation D offerings (up to $1 million) was approximately $76.6 million for the 1,480 offerings. This would put each offering at an average (in commissions) of $51,756.
truCrowd, in an intentional effort to minimize the risks for issuers seeking equity crowdfunding, has decided to waive all fees associated with compensation to the intermediary, during the beta period. This not only reduces risk but also allows potential issuers to utilize the savings from such said costs. Additionally, this would reduce the amount requested. This reduction would then allow the issuer to reach his/her goal relatively sooner through equity crowdfunding via truCrowd.
If you are considering raising money via securities based equity crowdfunding, would the affordability and reduction in risk be enough to choose this type of capital formation? What would be the pros and cons? Please share any additional concerns you would possess. How will truCrowd’s waiving of fees (during the beta period) benefit you, the issuer?
[i] For purposes of the table, we estimate the range of compensation that an issuer would pay the intermediary assuming the following: (1) the compensation would be calculated as a percentage of the offering amount ranging from 5% to 15% of the total offering amount; and (2) the issuer is offering $50,000, $300,000 and $750,000, which are the mid-points of the offering amounts under each of the respective columns. The compensation paid to the intermediary may, or may not, cover services to an issuer in connection with the preparation and filing of the proposed filings identified in this table.
[ii] We estimate, for purposes of the Paperwork Reduction Act, the cost of outside counsel at a rate of $400 an hour. We recognize that the costs of retaining outside professionals may vary depending on the nature of the professional service and that many small issuers are likely to face substantially lower costs. Small issuers also may choose to prepare the proposed forms without seeking the assistance of outside counsel. The table shows only those costs we attribute to outside professionals, for purposes of this analysis, as we believe internal costs would vary greatly among issuers.
[iii, iv, v, vi] For purposes of the table, we estimate that 25 percent of the hourly burden would be carried by outside professionals retained by the issuer at an average cost of $400 per hour.