Raising Millions With Equity Crowdfunding Will Cost You, But How Much?

Raising Millions With Equity Crowdfunding Will Cost You, But How Much?

Originally Published at Entrepreneur.com on May 20, 2015

Image credit:  Brook Ward | Flickr

Image credit: Brook Ward | Flickr

The recently released Regulation A+ is the first section of the JOBS Act that allows a company to raise capital from the general public. By opening up private company investments to the “crowd,” Regulation A+ promises to be a game changer for how emerging companies are funded. It's the first nationally available form of equity crowdfunding to non-accredited investors.

This will not be as easy as a Kickstarter campaign, however. Raising capital with Regulation A+ will involve more than going online, creating a crowdfunding campaign and watching the money flow in. Regulation A+ involves the sale of equity or debt in your company and is governed by securities laws. This means (cue maniacal laughter) attorneys’ fees, accountants’ fees and compliance costs. Raising $50 million under Regulation A+ is going to require your company to invest money in the process.

The question is: Can Regulation A+ be affordably used by startups and small businesses?

The first thing to understand is that there are two “tiers” of Regulation A+. Tier 1 allows a company to raise between $1 million and $20 million, and there are no limits on the amount that an individual non-accredited investor can invest. Tier 2 allows a company to raise between $1 million and $50 million, but non-accredited investors can only invest 10 percent of their income or net worth in each tier 2 offering. 

There are different rules and costs associated with each tier. Both tiers will have sizeable costs for SEC compliance and legal fees (damn those lawyers). Tier 1 will have costs for compliance with state securities laws or "blue sky laws." While tier 2 doesn’t require you to comply with the blue sky laws for each state, it will have more onerous accounting, auditing and ongoing SEC reporting requirements.

Both tiers have legal fees and SEC compliance costs, so let’s tackle that ugly subject first. When the law becomes effective on June 19, expect most of the big securities law firms and lawyers to quote ridiculously large bills of more than $100,000 in legal fees and compliance costs.

The reality is, there are competent entrepreneurial-minded lawyers who will charge far less, so shop around, but be sure to check credentials and hire someone who knows the JOBS Act and the Regulation A+ process. Also, as time goes on, expect to see legal fees and compliance costs come down, particularly as innovative companies find ways to automate the compliance process, and as lawyers become more comfortable with the new law.

The two remaining factors are the cost of complying with state blue sky laws (in tier 1) and the cost of two years of audited financial statements (in tier 2).

The tier 1 cost of complying with blue sky laws in all 50 states could run in the tens of thousands of dollars. Some big law firms may even quote six-figure fees. Worse than the cost, the time wasted by having to deal with 50 different state securities regulators could make this process akin to having all of your teeth pulled, one at a time, without Novocain. Because of blue sky compliance, tier 1 only makes sense for a business that is raising money in a contained geographic area and does not need to comply with more than one or two state blue sky laws. Other than that, I believe most companies will use tier 2.

The major expense of tier 2, two years of audited financials records, seems like a deal killer for many small businesses. CPA audit costs of more than $25,000 per year are not uncommon for a revenue producing, young business. One CPA I discussed this with says innovators in the accounting industry will find ways to make these audits work.

“If a startup is new, and does not have significant financial history, there is no reason an audit should be so expensive,” says Craig Denlinger, who left a big six firm to start an accounting business geared towards the JOBS Act market.

Denlinger is right. I have seen quotes from entrepreneurial-minded CPA firms willing to do startup audits for as little as $2,500.

So what will the ultimate cost of Regulation A+ be? As a crowdfunding and JOBS Act attorney who has been fielding Regultaion A+ calls non stop for the past month, I suspect that the minimum a company will need to spend at the onset, with the right lawyer, the right accountant and the right compliance company, will be at least $50,000.

While that seems like a lot for a startup to swallow, how often can a company invest $50,000 into something that will allow them to raise $50 million from the general public? The best news is Regulation A+ allows a company to “test the waters” before spending a ton of money. This means you can approach potential investors and gauge their interest before you spend thousands on putting together all of your filings with the SEC.

Before You Crowdfund an Invention, Consider Patent Protection

Before You Crowdfund an Invention, Consider Patent Protection

Originally Published at Entrepreneur.com on February 2, 2015

Crowdfunding has become a successful way for an inventor to raise the money needed to create, manufacture and distribute a new product. You just need to look at the successful crowdfunding campaigns of the Pebble Watch or the Coolest Cooler to see what the power of the crowd can do for a new consumer product. The days of begging friends, family and angel investors to fund a new invention are over for someone with a great new idea and access to "the crowd."

But access to the Internet is a mixed blessing. Millions of people can now quickly see, evaluate and potentially donate to help an inventor get his or her product off the drawing board. But amongst those millions of people are a few bad apples who will see a great idea and try to steal it. Even the great Steve Jobs was once quoted as having said, “We have always been shameless about stealing great ideas.”

As a crowdfunding attorney, I caution excited product creators about one important aspect of the online crowdfunding process: Legally protect your invention, if possible, through the patent process.

InventHelp is one of the industry leaders in helping inventors and entrepreneurs get a product to market. InventHelp’s CEO, Robert Susa, says that inventors should consult with a patent attorney early in the process.

“We use a patent referral system to give our inventors access to patent attorneys who can advise them of the best way to be protected, before they put their product online for the world to see,” he says.

A patent is the best legal means to protect an invention from being sold or used by another person or business, and provides a remedy if an idea is stolen. Patents are very expensive, however, and many product creators will take a far-less expensive step and first file a provisional patent application.

A provisional patent application is a document filed with the U.S. Patent and Trademark Office that establishes an early filing date and gives the inventor one year to file a regular patent application. The provisional application is a shorter, more simplified version of the patent application. Some people mistakenly say that filing this document gives them a “provisional patent” even though no such thing exists. The correct term after filing any patent application, provisional or not, is that the invention is “patent pending.”

Does the “patent pending” label protect the inventor from online thieves and pirates? While filing a provisional application can act as a deterrant that dissuades your competition from stealing your product, it does not provide an enforceable patent that gives you the best protection under the law. However, as a practical matter, filing a provisional patent application can be a valuable advertising tool, and one that helps attract investor capital, whether through crowdfunding or more traditional investor funding.

Susa also notes another benefit to filing the provisional patent application. 

“If an inventor’s goal is to license their product, many large companies often want to see that an inventor has made that effort before they go into business with you,” he says.

The bottom line is simple: Protect your idea the best you can before you put it on display on a crowdfunding platform for the world to see. Talking to an attorney who specializes in patent and intellectual property law is an investment every inventor and product creator should make before diving into the crowdfunding arena.

SEC Delays Equity Crowdfunding Piece of JOBS Act for Another Year

SEC Delays Equity Crowdfunding Piece of JOBS Act for Another Year

Originally Published at Entrepreneur.com on December 8, 2014

The Securities and Exchange Commission recently released a rulemaking agenda revealing that it plans to finalize the Title III Equity Crowdfunding rules and the Title IV Regulation A+ rules from the JOBS Act by October 2015. Given that these rules will then require 60 days to be published in the federal register and become law, it appears likely that the earliest date small businesses will be able to utilize these JOBS Act provisions to raise capital will be the beginning of 2016.

This announcement comes nearly three years after the overwhelming bipartisan passage into law of the JOBS Act, a historic piece of legislation designed to help small businesses raise funds to launch and grow. The announcement is also a remarkable 700 days past the deadline the law itself contains mandating the date that the final crowdfunding rules were supposed be released by the SEC.

The additional delay will certainly darken the spirits of entrepreneurs who have been patiently waiting to use equity crowdfunding and Regulation A+ to raise millions of dollars to start and grow small businesses.

Under Title III of the JOBS Act, small businesses will eventually be allowed to use an online crowdfunding portal to sell equity in their business to the general public and to raise up to $1,000,000 in capital. Equity crowdfunding under the JOBS Act has been seen as a democratization of the startup and small-business investment process, and one which will put the ability of entrepreneurs to raise capital into the hands of “the crowd” and not just wealthy investors, banks and Wall Street brokers.

Title IV, or “Regulation A+,” holds even more excitement for some, given that it will allow a small or emerging business to raise up to $50,000,000 in capital from “the crowd” through a relatively inexpensive form of a public offering. For now, both appear to be on hold for at least another year.

Most industry insiders expected the final rules on crowdfunding and Regulation A+ to be released in late 2014. As recently as October, SEC Chair Mary Jo White stated in her opening remarks to the SEC’s Investor Advisory Committee, that the agency would “be pushing forward in the near term” on “finalizing our remaining JOBS Act mandates.”

Apparently, “near term” means “next year” to the SEC.

In its recently published rulemaking agenda, the SEC set a target date of October 2015 to adopt final rules regarding the offer and sale of securities through crowdfunding and small and additional issues exemptions under Regulation A+.

Will the SEC actually follow through on these agenda items at or before that time? The SEC has often not met the target dates included in its rulemaking agendas, so the October 2015 target date should not be seen as set in stone by anyone waiting to utilize these valuable funding laws.

Will the SEC Redefine Who Can Be an 'Accredited Investor'?

Will the SEC Redefine Who Can Be an 'Accredited Investor'?

Originally Published at Entrepreneur.com on October 7, 2014

For years, federal law has only allowed “accredited investors” to invest in most private-securities offerings for startup and growing businesses. This will change to a certain degree with the enactment of equity crowdfunding under the JOBS Act, but there will still be a large number of private investments limited to accredited investors.

This month, the Securities and Exchange Commission will consider revising the definition of who qualifies as an accredited investor. Unfortunately, some of the proposals the SEC is considering would make qualifying as an accredited investor more difficult, and thereby limiting the pool of investment money that presently is available to small businesses.

Currently, an investor is accredited if his or her net worth exceeds $1 million, excluding a primary residence, or if their income is $200,000 or more. Most estimates say there are more than 9 million people in the United States that qualify under this easy-to-verify standard. Of that number, it is estimated that a small percentage actually invest in startups and small businesses.

The theory behind the accredited investor rule is that someone who makes a lot of money, or has a high net worth, is sophisticated enough to determine if an investment is risky or not, and can withstand the loss if the investment goes bad. More than 60 years ago, the U.S. Supreme Court decided that someone who has a lot of money “can fend for themselves” when it comes to investments.

Of course, this reasoning is idiotic. Anyone who hears the horror stories about millionaire athletes or lottery winners who lose everything knows that a high net worth does not equal investing sophistication. But having a simple, income-based definition of accredited investor gives everyone involved in the process certainty that the investor is accredited, thereby avoiding legal troubles when an investment goes bad. 

The reality is, there are millions of financially-sophisticated people who are not able to invest in private offerings because of this rule. Yet, if you are a securities lawyer, an investment banker, a stock broker, a certified public accountant or a tax advisor, but do not have a net worth of more than $1 million, or did not earn $200,000 last year, the SEC does not consider you sophisticated enough to be called an accredited investor.

Think about it. These people can give advice to others about investments, accounting and taxation, but they cannot participate in the investments themselves because they do not meet an arbitrary amount of earnings or wealth.

The Dodd-Frank financial reform law requires the SEC to review the accredited investor standard this year, the first time a review has been done since 1982. The SEC is meeting this week to consider major changes to the definition of accredited investor, a decision that will have far-reaching implications to entrepreneurs in the near future.

What will the SEC decide to do? Here are four possibilities:

1. They could increase the monetary requirements. 

Some people believe that the 30-year-old $200,000 salary and $1 million net worth thresholds are too low, and should be raised. Small businesses will suffer if the already-small number of people who qualify to invest is restricted even more.

The SEC estimates that increasing these numbers to account for inflation since 1982 would exclude 60 percent of those considered accredited investors from being allowed to continue investing in private placements.

2. They could scrap the monetary requirements, and require proof of investment sophistication.

The SEC might allow people with certain professional licenses to automatically be labeled as accredited investors, and for others to provide other demonstrable proof. While this seems like a good idea, having a license to dispense investment advice, for example, does not mean that someone is able to handle the loss of a large investment in a private placement. And how will others be tested or qualified?

3. They could broaden the number of people who are accredited, but limit the amount they can invest.

In the equity crowdfunding provisions of the JOBS Act, there are limitations of how much someone can invest in certain offerings, and these seem reasonable on their face as a way to protect investors from catastrophic losses.

But is it truly fair for the government to tell someone who is a “sophisticated investor” that their investment is limited to some arbitrary percentage of their income? If so, why doesn’t the government prevent anyone, even non-accredited investors, from “investing” as much as they want in slot machines at casinos? Does the government prevent grandma from using her retirement nest egg to buy as many lottery tickets as she wants?

4. They could do some combination of the above. 

This is my best guess of what will happen. I suspect we will see new, slightly higher financial thresholds, a group of licenses or occupations that become accredited investors automatically and, unfortunately, some limitation on the amount certain accredited investors will be allowed to invest.

How to Invest for Equity in a Startup

How to Invest for Equity in a Startup

Originally Published at Entrepreneur.com on September 22, 2014

When making an equity investment in a startup, there are many issues to consider. 

The U.S. Securities and Exchange Commission is expected to release its final JOBS Act equity crowdfunding rules, and entrepreneurs will be allowed to sell equity in their companies through online crowdfunding portals to more than just accredited investors. The law promises to be a game changer for startups. As a result, investors will have easily accessible investment choices at their fingertips.

Here are 10 questions to raise about making an equity investment in a startup company. I pass these along from my personal experience as an investor, as well as my 25-year history as an attorney helping people start and fund businesses:

1. Is the investment for equity or a convertible note?

An investor needs to know what he or she is getting in exchange for the cash infusion. Will it be equity (shares of ownership of the company) or a convertible note? The note means that the investor loaned money to the company with the right to either be paid back or to turn the loan into equity as some later date.

2. How and when does the investor get the money back? 

When an investor buys an equity stake in a startup, usually those shares cannot be sold or traded for several years. If the investment is a convertible debt, figure out the conversion date. This is when the company either pays the money back or the investor can convert the money loaned into equity according to the terms of the convertible note. 

3. How will the business make money?

I am amazed when I see business plans that don't describe a visible means of monetization. If a company has not yet started generating revenue (like most startups), look at how the enterprise plans to make money. If the company has indeed started generating revenue, examine how it's making money. Consider if the model makes sense and is sustainable. Is the model scalable?

Related: 6 Key Factors in Scoring a $1 Billion Valuation for Your Startup

4. How can the investor profit from an investment?

Equity shareholders should find out if they will receive dividends or distributions, how much and when. What happens if the company is sold, merges or goes public? Convertible note holders need to know their interest payment schedules and ask what happens in the case of a sale, merger or IPO.

5. What rights come with an investment?

Investors need to find out if they gain voting rights at the company and of what kind. Can the ownership percentage be diluted? Can the investment be sold or transferred to a third party? If so, how and when?

6. How will the investment money be used?

Research the "use of proceeds" and understand what, why, and how the startup intends to spend the money raised. The use of proceeds offers a good look inside the mind of the business owner. Is the amount being raised enough to reach profitability or is it just enough to arrive a the next financing round? Is everything the company is paying for seem reasonable?

7. Who are the founders and key personnel?

I often pay more attention to this aspect than just about anything else. I like to invest in companies with founders who know how to run a business and who have a track record of success. If the founder has no track record then he or she should surround herself with professionals with experience. A strong management team is no guarantee of success but is an important factor to consider.

8. What are the founders being paid?

I like to see the visionaries behind the business receiving a fair salary so that I know they will be focused on doing the work to make the company successful and not waiting tables at night to make ends meet. I generally make sure no salary seems out of line with market wages.

9. Are the sales projections and profit projections reasonable? 

Nearly every company trying to raise money claims to be the next billion dollar company and usually has sales projections to back up some bold claims. Sales projections for startups are usually created with smoke and mirrors, so take them with a grain of salt. But examine the method of creating the numbers presented. Is there a reasonable basis for the projections?

10. What's the risk associated with investing in the startup?

Investors should not invest money that they cannot afford to lose. Investing in any new business involves risk. But it is really more risky than investing in the “safe” stock market? Ask people who bought Bank of America stock at $82 a share in 2004 how safe their investment was in that bluest of blue-chip stocks, now trading at $17

Want to Make Equity Crowdfunding Legal? 3 Experts Sound Off.

Want to Make Equity Crowdfunding Legal? 3 Experts Sound Off.

Originally Published at Entrepreneur.com on September 4, 2014

The JOBS Act became law on April 5, 2012, with the promise to open a new world of funding for startup businesses through equity crowdfunding. Entrepreneurs were excited that Congress passed a law creating a Kickstarter-like tool to raise capital by selling stock online. Equity crowdfunding had promised to bring ideas to life, businesses to fruition and the American Dream back into play.

Then, nothing happened.

Almost two-and-a-half years since the law was passed, there is frustration in the entrepreneurial world because the SEC has not released final rules allowing JOBS Act equity crowdfunding to begin.

I don’t blame the SEC being extremely cautious implementing the biggest change in securities law in eight decades. Creating an entirely new method of selling securities requires a great deal of thought and planning. This became obvious when the SEC released 585 pages of proposed rules last October. That’s a lot of thought and planning.

Nobody thought we would be waiting almost a year for the final rules to be released so the law can be implemented. Nobody knows how well the law will work until people try to use it. I have repeatedly argued that the SEC should roll the law out, see how it works and let the collective ingenuity of the American people find creative ways to make the law function as Congress intended.

What can you do to help convince the SEC to release the final rules? Here are some suggestions from crowdfunding industry experts:

1. John Robert Clarke, who runs Midtown Partners, a FINRA registered broker-dealer in New York City, is waiting for the final rules to make his entry into the crowdfunding industry and says people should submit a polite letter to the SEC asking them to release the final rules. Clarke says the SEC will take into account each and every comment letter submitted, and they need to know that funding portals are ready to launch as soon as equity crowdfunding becomes legal.

“I’ve been waiting for the final rules so we can formally launch our funding portal FundItNation and let entrepreneurs raise startup capital from the crowd,” Clarke says. “While some have criticized the proposed rules as being unworkable, we have found ways with our portal to make the JOBS Act work for investors and entrepreneurs. We just need the green light from the SEC to launch.”

You can submit a comment to the SEC online by clicking here.

2. Attorney Anthony Zeoli, one of the top real-estate crowdfunding experts in the country, has clients ready to use Title III crowdfunding as soon as the rules are passed.

"The SEC's desire to protect investors is admirable, but failing to issue the rules hasn't stopped equity crowdfounding," Zeoli says. "It has only succeeded in forcing entrepreneurs and portals to pursue a variety of workarounds to make it happen."

He notes that real-estate crowdfunding is one of the places where entrepreneurs are already implementing crowdfunding despite the lack of final rules.

"You have debt/equity investments being made with very little guidance as to how it should be handled from a legal or a regulatory prospective," Zeoli says. "Only by issuing final rules can experienced crowdfunding professionals begin creating best practices for the equity investments that will truly protect investors."

3. Joy Schoffler, principal of Leverage PR and board member of CFIRA, the crowdfunding industry’s advocacy group, says the SEC and Congress members need to be reminded to ignore the naysayers. The critics who claim that investors are not protected and that equity crowdfunding will not produce “the next Facebook” are missing the point, she says.

“I personally invest in some businesses that will never have a Facebook-type exit," Schoffler says. "They are everyday businesses that have great cash flow and make healthy returns. Enacting Title III of the JOBS Act is about allowing all Americans that same opportunity. If you are a sandwich-shop owner with loyal customers and want to open a second location, why not allow the community a chance to own a piece of the business? They will become even more loyal customers.”

4. And some advice from yours truly. Attend a live crowdfunding event such as the Global Crowdfunding Convention and Bootcamp this October in Las Vegas. Listen to crowdfunding industry leaders speak and get educated about the latest developments and network with others who want to see this law up and running.

There is no better place to collectively pool the resources of those who are passionate about finally being able to use this law to bring investors and entrepreneurs together in a way that could change the American economy.

Potential Game Changer for Funding Awaits Final Approval From SEC

Potential Game Changer for Funding Awaits Final Approval From SEC

Originally Published at Entrepreneur.com on July 3, 2014

Regulation A+, a little-discussed provision of the JOBS Act, would allow a company to raise up to $50 million selling stock to the general public through a mini-IPO that would not be overly expensive or burdensome from a regulatory perspective. Earlier this year, I boldly predicted that this provision could have a game-changing effect on how new and emerging companies raise capital once it went into effect. 

As the law was written and the rules were proposed by the SEC, it might not cost a company much more to raise $50 million under Regulation A+ than it would cost to raise $1 million under the equity crowdfunding provisions of the JOBS Act.

At the time of my article, the SEC had proposed rules to enact Regulation A+, and the public was allowed to comment on the proposed rules. The public comment period has ended and we are all still waiting for the SEC to release its final rules so we know whether this potentially game-changing law will have the economic bite Congress intended, or whether the SEC will buckle under the pressure of state regulators and make Regulation A+ a virtually useless piece of legislation like its predecessor, Regulation A.

Hopefully, these SEC rules will keep Regulation A+ as a powerful tool for funding small businesses. To do so, I hope we find the following in the final rules when they are rolled out:

1. No state Blue Sky compliance. The SEC got this one right in its proposed rules, but state securities regulators are not happy and have flooded the SEC with comment letters and lobbyists trying to get the SEC to reverse its position. If the SEC changes its mind and requires a startup company to register the Regulation A+ offering in all 50 states, the new law will likely be as worthless as the old law to most companies.

The expense and regulatory nightmare of dealing with 50 states and their securities laws is totally unnecessary, given the SEC's disclosure requirements for any company to use Regulation A+.

2. The ability to sell to the general public. Regulation A+ allows a company to sell stock through a mini-IPO to the general public, with the limitation that each purchaser cannot invest more than 10 percent of their annual income or net worth in a Regulation A+ offering. Some states and other commentators want the purchasers of Regulation A+ offerings to be limited to accredited investors or others who are wealthy and connected.

If the SEC changes its position and limits purchases of Regulation A+ stock to rich folks, the "public" part of the initial public offering would disappear, and there would be little reason for a company to use Regulation A+ instead of Regulation D, the most popular private-equity exemption presently in use. If this happens, Regulation A+ will sit on the shelf collecting dust next to Regulation A, the law it is supposed to replace.

3. A streamlined process. One of the reasons Regulation A has failed to be a viable method of raising capital is that it reportedly takes an average of eight months to go through the SEC process needed to make a Regulation A offering. To make Regulation A+ work, the SEC needs to make the document filing, compliance and other regulatory issues easier by streamlining this process. A startup business cannot wait eight months to do anything, much less raise capital.

4. The law's original intention. The SEC did a fantastic job in its proposed rules of making Regulation A+ a viable model for small businesses to raise money. It apparently took the mandates of Congress seriously by removing Blue Sky compliance, allowing a company to raise up to $50 million, and allowing anyone to be an investor within the income limits proposed.

This law was proposed to give the small business and entrepreneur community a game-changing way to raise money and to give the lower-end IPO market a much-needed boost. When the final Regulation A+ rules roll out, let's hope Congress remembers that this law was created to help small business raise capital, and at the same time, to stop state governments from imposing costly fees and needless repetitive regulations that strangle startups and emerging companies.

Crowdfunding Can Be Really Effective -- If You Know What You're Doing

Crowdfunding Can Be Really Effective -- If You Know What You're Doing

Originally Published at Entrepreneur.com on June 17, 2014

Most people do not understand crowdfunding. "I built it, but they did not come" is a common complaint. Some people are shocked and unable to understand why nobody donated to their crowdfunding campaign on Indiegogo or GoFundMe.

Crowdfunding is hard work. On many sites, the vast majority of people who try crowdfunding fail to meet their goal. But for those who plan ahead, prepare properly and execute a plan the right way, the chances of success are much greater. 

Many entrepreneurs see rewards-based crowdfunding -- when a perk or a product is provided to a donor as opposed to equity -- as an easy way to raise money. But if you don't have a very good idea or a product that excites people, it's not going to work. 

Here are some important things to understand when trying to raise money through crowdfunding:

1. Make sure you have a product that works for crowdfunding. Campaigns for gadgets, video games and films have a high level of success.

Campaigns centered on causes in the news or that truly touch people's hearts are often successful but raising tens of thousands of dollars for a new nonprofit group supporting an arcane issue is not going to work. Raising a lot of money for a personal need rarely works. Browse through Indiegogo and look for campaigns like yours. If you see a high number of failures for those with ideas similar to yours, take heed.

2. Set a realistic funding goal. According to Kickstarter, only 2 percent of the campaigns that successfully raised funds on the site raised more than $100,000. Compare that to the 73 percent of the successful campaigns that raised $10,000 or less. If you are looking to raise more than $10,000, rewards-based crowdfunding will be a long shot, with very few exceptions. 

3. Plan to spend 30 to 60 days before a crowdfunding campaign launches. That's the time required to hone the project, create a great video, develop compelling rewards, build a following for the launch on social media, reach out to potential supporters who will be ready to donate on Day 1, write and schedule all the social media postings and emails, and contact media sources and bloggers to build rapport for possible public relations opportunities. If you do not take this part seriously, your chances at success may be greatly diminished.

Nearly every successful campaign has about 30 percent of its crowdfunding goal committed through family, friends and a network of close connections before it's launched. Without that initial boost of donations hitting a campaign early, the success rate is very low. 

The overwhelming majority of successful campaigns that raise significant funds involve products that are preordered. Don't try to compare preselling a cool iPhone gadget on Indiegogo with raising money to start an orange juice stand. It's like comparing apples and oranges, pun intended. If you are not preselling a product, do not expect to raise more than $10,000 through rewards-based crowdfunding.

Be prepared to have a second full-time job during the campaign's 30 to 60 days. The campaign will require your constantly being on the phone and promoting online, looking for supporters, dealing with questions, reaching out to the media, fulfilling rewards and handling social media. Imagine how much work it will be, then triple that.

The good news is, when it works, significant amounts of money can be raised. The process can net low-cost publicity and buzz for a product or business. It's possible to test the market for an idea or product without spending much money. Another bonus: You may build a rabid social media following and an excited and vocal base of customers who want the company to succeed.


Crowdfunding Growing at a Startling Rate, New Report Says

Crowdfunding Growing at a Startling Rate, New Report Says

Originally Published at Entrepreneur.com on June 14, 2014

Just a couple of years ago, providing answers to some of the most common questions on crowdfunding was based evenly between limited anecdotal evidence and my gut feelings as an attorney with keen business instincts.

But as with any fledgling industry moving towards maturity, more and more data has started to appear that makes answering these questions a bit easier. One recent mountain of data on the crowdfunding world that just arrived contains a plethora of information -- read on as I distill some of it for you.

Barry James and his team at The Crowd Data Center recently released eFunding & The State of The Crowdfunding Nation, a report (which can be purchased for $49) that studied more than 75,000 crowdfunding campaigns for the first quarter of 2014. The report provides a wealth of information about both rewards-based and equity-crowdfunding campaigns. It puts crowdfunding into a whole new perspective.

Those of us in the industry already knew how profoundly the crowdfunding explosion had affected society. But the report puts it into perspective, and one particular fact truly illustrates the explosive nature of the burgeoning industry. Gordon Moore, one of Intel's founders, coined Moore's Law that predicted computing power would grow exponentially for the foreseeable future, doubling every 18 to 24 months.

According to the eFunding report, crowdfunding on a global basis is doubling at nearly 10 times the rate of Moore’s Law.

The report and the infographics accompanying it offer insights into what is happening in crowdfunding worldwide by drawing on a continuous influx of data from live crowdfunding campaigns as well as studying the major funding platforms, pledges and patterns of donors and investors during the first quarter of 2014. Here are some interesting facts and numbers about the global effect of crowdfunding from the eFunding report:

  • More than $57,000 is pledged to a crowdfunding campaign somewhere in the world every hour of every day.
  • The five most popular categories of successful crowdfunding campaigns are gaming, technology, design, film and music.
  • Rewards-based campaigns on Kickstarter successfully fund 42.8 percent of the time. On Indiegogo, the success rate is 14.4 percent.
  • The average number of backers of a successful Kickstarter campaign is 255.
  • An average of 325 new crowdfunding campaigns launch every day.

These tidbits of information are a great resource for anyone who is looking to crowdfund. For example, being able to look at the statistics that are now available allows interested crowdfunders to know which platforms work and how well. James and his crew are constantly updating the site with more and more research. The site has search tools that let anyone answer almost any data-driven question about crowdfunding, questions that are crucial when someone is considering, planning and launching a campaign.

Until now, getting answers to these could take hours or days of research on many different platforms, trying to compare apples to oranges.

As someone experienced with the field, not only can I now find promising crowdfunding rising stars or rocketing campaigns far before they've become obvious to the world, but I can do so by mining the live-data (registration is required) on active campaigns on a daily or even hourly basis. The site’s analytics can also be used to dig deeper into the data for emerging trends.

While traditionally, investing has been a very closed world with information closely guarded and available at a premium, if at all, one of the things I love about crowdfunding that's transformative is its openness and transparency. Having data such as this available will assist investors and entrepreneurs as the crowdfunding world booms when equity crowdfunding under Title III of the JOBS Act soon becomes a reality.


Enlist Twitter for Crowdfunding Success

Enlist Twitter for Crowdfunding Success

Originally Published at Entrepreneur.com on June 4, 2014

Here is the worst-kept secret in crowdfundingSocial media is vital to its success. Twitter is perfect for crowdfunding if used correctly because of its reach and the speed with which news can be spread. But like everything else in the world, it is only effective if it's used correctly.

Here are five basic rules to harness Twitter for your crowdfunding campaign:

1. Build relationships on Twitter before you launch the campaign. Start cultivating followers well before you start crowdsourcing funds. Follow people who could be potential donors and many will follow your account back.

Post interesting content so that potential donors will pay attention to you before the launch. Be sure to interact with their posts. Send them @messages and retweet their posts to build a relationship whereby these individuals will be more likely to retweet your tweets promoting your crowdfunding project down the road.

Do the same with media people if you would like them to spread the word about your project. There is no better way to gain access to a journalist than through Twitter. But you have to establish a relationship first. Do your research, find those writers and bloggers who are appropriate (such as people writing content related to your company's focus), and follow them, retweet their posts and interact with them before the campaign's launch.

Then when your campaign launches, you can pitch these writers or editors the idea of doing a story about your campaign. Or ask influential bloggers to retweet your post.

2. Tweet often. Twitter is a moving target. If your post does not hit a follower's feed when that person is looking, the post is likely lost and gone forever as far as that person is concerned. Sending one tweet a day is not enough. Even tweeting about the campaign in the morning and again at the day's end means 95 percent of your Twitter followers won't see the tweets.

During the campaign tweet similar messages (but not the same one) at least four times a day -- at a variety of hours -- to catch everyone. No matter what you tweet, be sure to provide a link to your crowdfunding project in every post.

In addition, use craft additional tweets each day to thank donors for contributions, give progress reports and updates, provide links to media or blog coverage and announce the launch of new videos or rewards. Use Twitter as the news feed it's intended to be.

3. Ask people to retweet. Tweets go viral based on retweets. When your followers tell their followers about your campaign, you get into a secondary market of donors. If those people then retweet posts, you have hit the home run of crowdfunding: entering the tertiary market of donors in huge numbers.

But most people rarely retweet anything unless it's compelling news or they are asked to do so. You would be surprised, however, how easy it is to have something retweeted if you simply ask. Add “please retweet” or “please RT” to the end of every tweet about your campaign.

4. Tweet everything you post on Facebook. Don’t assume that the people reading your Facebook posts are the same individuals scanning your tweets. Post the same information on both social networks because your audience may be different on each channel.

Most people link their Facebook account to their Twitter account so that the posts on one will show up on the other. Don't just rely on this, though. If Facebook posts your message on Twitter, the link on the tweet will go to your Facebook page not to the crowdfunding campaign page. Forcing people to jump through this small hoop to contribute to a crowdfunding project is a bad idea. You have to make it easy for them.

5. Use hashtags to help spread the word. In the twittersphere, hashtags will let anyone easily find the crowdfunding project, making it easier for tweets to be retweeted and for spreading the word. Yes, #crowdfunding is a good generic hashtag. But having a special hashtag just for your campaign is a sound idea. Then be sure to use it in every tweet.

Why Oculus Didn't Betray Backers With $2B Facebook Buyout

Why Oculus Didn't Betray Backers With $2B Facebook Buyout

Originally published at Entrepreneur.com on April 8, 2014

When I penned my tongue-in-cheek-titled article “Will Equity Crowdfunding Laws Be the Death of Kickstarter?” I addressed a misconception that equity crowdfunding under the JOBS Act would have a negative effect on rewards-based crowdfunding sites such as Kickstarter, because the JOBS Act has nothing to do with rewards-based crowdfunding.

Despite this, a recent New York Times editorial and a Bloomberg column, “Attention Suckers: Please Send Us Your Money,” show that even the media fail to grasp the huge difference between rewards-based and equity crowdfunding. Both articles offered harsh criticism for crowdfunding as a whole and for Oculus, a company that utilized rewards-based crowdfunding to raise capital for a virtual-reality system it was building. When Oculus was recently acquired by Facebook for $2 billion, the Bloomberg article accused Oculus of pulling off a “scam” because the supporters of its Kickstarter campaign did not get a share of the profits from the Facebook buyout.

The crowdfunding industry is relatively new, so it’s understandable that members of the general public don’t recognize the distinction between rewards-based and equity crowdfunding. But the public relies on the media for awareness and education, so it is less understandable when large publications can’t be bothered with researching the facts in a rush to throw fuel on the fire of misguided outrage.

A bit of relevant background: Oculus used Kickstarter, the largest rewards-based crowdfunding site, to fund the Oculus Rift virtual-reality headset for video games. Oculus raised $2,437,429 from 9,522 backers. Each of these backers knew that they were not buying stock in Oculus when they donated, and each received something of value in return for their donation. For example, more than 5,000 people donated $300 each to get a developer kit that could be used to create software for the headset. Some of these backers saw future profit potential from having early access to the developer kit, and others likely just wanted to be the first to enjoy the new technology. Even if Oculus had wanted to sell stock at the time rather than giving away tangible rewards, they were not legally allowed to do so, because equity crowdfunding under the JOBS Act is not yet legal.

Eighteen months later, Facebook bought Oculus for $2 billion and the Twittersphere exploded with people upset that they donated $35 to Oculus for a t-shirt that did not magically turn into a financial windfall they never expected in the first place. When I go to McDonald's, I don’t look at the bottom of the bag beneath the spilled french fries hoping to find a stock certificate for MCD preferred shares I can trade on the New York Stock Exchange. Yet, some people were outraged that Oculus did not convert their $15 Kickstarter pledge for a cool poster into Facebook shares or cash.

The New York Times editorial board chimed in with their take on the Oculus deal with “How to Harm Investors,” referring to the SEC’s proposed equity crowdfunding rules as “a joke.” The Grey Lady said that under the JOBS Act, “investors could end up with next to nothing even if they invested in the next big thing.” The Times failed to emphasize that the donors to the Oculus crowdfunding campaign were not “investors” and that the SEC rules only apply to equity crowdfunding, not the rewards-based crowdfunding Oculus undertook on Kickstarter.

The Bloomberg article by Barry Ritholtz was worse. Apparently Ritholtz, whose bio includes being a lawyer, has never read the JOBS Act and has no idea that Kickstarter could not have legally offered equity crowdfunding. But this did not stop Ritholz from writing for the otherwise respectable publication that the Oculus deal showed the JOBS Act “has been revealed as the massive bait-and-switch it is.” Ritholtz further misstated that “regardless of strenuous objections, the JOBS Act became law, making it all-too-easy for companies to raise money.” He topped off his trio of inaccuracies by adding “perhaps there will be some embarrassing litigation from those people who feel duped.”

When The New York Times and Bloomberg do not understand the difference between rewards-based and equity crowdfunding, the crowdfunding industry has a problem. Equity crowdfunding under the JOBS Act, when it becomes legal, could be a game-changer for startup businesses who have no other way of raising capital in today’s economic environment. But when huge media conglomerates scare the public into thinking equity crowdfunding is a scam, even though it does not even exist yet, the chances diminish of entrepreneurs being able to utilize this valuable tool to grow businesses and create jobs. It’s a shame the media did not do their homework before putting out misleading headlines and factual inaccuracies about the good fortune enjoyed by Oculus after using rewards-based crowdfunding exactly as it was intended to be used.

Your Crowdfunding Campaign Is Doomed Without This

Your Crowdfunding Campaign Is Doomed Without This

Originally Published at Entrepreneur.com on March 3, 2014

To be successful in rewards-based crowdfunding, effective use of social media is critical. Gaining financial support through social media is not as simple as posting a picture of your lunch on Facebook or retweeting the latest joke from Jimmy Kimmel. Successful crowdfunding through social media requires planning, dedication and determination. A few tips from your favorite crowdfunding expert also can’t hurt.

The process of using social media for crowdfunding starts weeks before a crowdfunding campaign launches. Having up-to-date profiles on the three major social media sites (Facebook, LinkedIn and Twitter) is imperative. Building followers before you launch is even more important. A typical rewards-based crowdfunding campaign lasts only 30 to 60 days, so it is too late to try to build a following on social media during the campaign. Adding quality contacts on social media must start weeks, if not months, before the campaign launches.

In the days before a campaign launch, successful crowdfunders do two things. First, they create a list of “core” supporters who will contribute funds and spread the word about the project. Second, they write the majority of the social media posts they will use throughout the campaign and create a posting schedule for themselves and for their core supporters. Having these two things out of the way before launch is essential because once the campaign is underway, a crowdfunder needs to spend time on the tasks that could not be done in advance, such as reaching out to media, interacting with donors and fulfilling rewards.

Facebook. For the duration of a crowdfunding campaign, posts containing links, videos, photos and useful information must be posted several times per week. Remember, only a small fraction of your Facebook friends see what you post on Facebook. In order to get the largest exposure, Facebook posts need to be frequent, and at various times of the day. Every post needs a link to the campaign page, a plea for a donation and a call to action to share the post.

Facebook posts should include photos from the campaign, links to the crowdfunding video, “thank you” posts for donors and posts detailing each reward. One important series of posts should highlight benchmarks attained and goals being approached. For example, proudly announcing that a campaign has reached 25 or 50 percent of its goal tells potential donors the campaign is gaining momentum and that successful funding is within reach. Similarly, telling a Facebook audience that only $1,000 remains to reach the final goal with two days left puts pressure on potential donors to act quickly.

Twitter. The Facebook page should also be linked to the campaign’s Twitter account so that posts are tweeted automatically. Twitter also offers great way to generate awareness and excitement about a campaign, and to spread the word even faster than Facebook. Tweets should be written and scheduled so that they are run at least 10 to 15 times per day for the duration of the campaign, at all hours of the day. Remember: Twitter is a news feed, so most people will only see what comes across their feed at the moment they are on Twitter. With the scheduled Tweets, Facebook posts being Tweeted and additional Tweets being added as the campaign goes on, it would not be overkill to have at least one Tweet per hour by the middle of the campaign.

LinkedIn. The network allows a crowdfunder to approach others in similar industries and professionals who can help with donations and marketing. Post updates on LinkedIn about the campaign, and also join crowdfunding groups to engage their membership. Many business people engage on LinkedIn far more often than other social media, so take advantage of this tool by tailoring the approach to that audience.

One last important bit of advice: Be sure to respond to and interact with each and every person who tries to engage you on social media. Social media works when people feel a connection. Simply posting something, then ignoring comments or interactions is a big mistake. When someone “likes” your Facebook post, thank them, and post a comment asking them to donate and share your post. When someone retweets you, thank them using their Twitter handle and give them a link to a reward they might like.

Interaction is the key to successful social media engagement. For the month or two of a crowdfunding campaign, success requires that daily time be set aside to utilize this incredible tool, not only to tell people what is going on, but to talk to your audience directly, and to respond to them as quickly and as thoroughly as possible.

The JOBS Act Provision That Could Change IPOs Forever

The JOBS Act Provision That Could Change IPOs Forever

Originally published at Entrepreneur.com on February 21, 2014

There is excitement on "Main Street" about equity crowdfunding democratizing the investment process. Most people are unaware of another provision of the JOBS Act that could have a much larger impact on entrepreneurs and small businesses: Regulation A+. This provision will allow entrepreneurs to raise up to $50 million in a simplified form of an initial public offering.

Depending on how the SEC rules look when finalized, raising $50 million under Regulation A+ could have a similar cost and require nearly the same regulatory compliance required to raise only $1 million under the JOBS Act “equity crowdfunding” proposed rules. If the SEC keeps its proposed Regulation A+ rules intact, I will give this JOBS Act provision an A+ grade.

When congress passed the JOBS Act in 2012, they tried to fix Regulation A, a little-used provision of federal law that permits new and emerging companies to raise up to $5 million in a public offering. Regulation A is rarely used because it requires a company to register their public offering in every state where it is offered. The cost of complying with every state’s “Blue Sky Laws” makes Regulation A unattractive, given that more commonly used laws such as Regulation D allow a business to raise the same amount of money and not have to deal with 50 different state regulators and expensive state-by-state compliance. This is one time where a D is better than an A.

In the JOBS Act, Congress attempted to fix Regulation A by amending it. The new version had been dubbed Regulation A+. Congress increased the amount that can be raised from $5 million to $50 million a year, and removed all state registration and compliance requirements. Under Regulation A+, a small business must only sell their stock to “qualified purchasers.” The good news is the SEC proposes making everyone who wants to buy the stock, including anyone in the general public, a “qualified purchaser.”

Regulation A+ seems like a great fit for most small and emerging businesses. In fact, it could be a game-changer for the way small businesses are funded.

Unfortunately, Regulation A+ has some opponents. Not surprisingly, state securities regulators are unhappy that they are being cut out of the picture. These bureaucrats want the SEC to require a small business to register and follow the law of every state where they wish to sell their stock. Some even want the SEC to define the term “qualified purchaser” to mean an “accredited investor,” thus limiting the sale of stock to investors with annual incomes greater than $200,000 or a net worth of more than $1 million.

If the SEC succumbs to these critics, Regulation A+ will end up sitting on a shelf collecting dust like its elderly father, Regulation A. For less money and regulatory effort, a small business can use Regulation D to raise the same amount of money with a private offering limited to accredited investors. If a company can’t sell its Regulation A+ stock to the general public, there will be no reason whatsoever to use this exemption.

Regulation A+ offerings will only be an attractive means of raising capital if the proposed SEC rules remain intact, making these offerings exempt from state Blue Sky laws and keeping “qualified purchaser” defined to include any member of the general public who wants to purchase the stock.

We are in the middle of a 60-day comment period where the SEC allows the public to submit its opinions online. You can read my comment to the SEC on Regulation A+ here, in which I ask the commission to pass the rules without requiring state compliance and allowing the general public to purchase stock in these offerings. You can submit your own comment here until March 24.

I encourage everyone to submit a comment and to implore the SEC to define “qualified investor” as broadly as possible and to keep a company using Regulation A+ exempt from state Blue Sky laws. This law could help spur the economy with new businesses and new jobs.

6 Tips to Create a Top-Notch Crowdfunding Video

6 Tips to Create a Top-Notch Crowdfunding Video

Originally Published at Entrepreneur.com on February 17, 2014

One major key to crowdfunding success is by creating a good video that sells your campaign to potential donors. In fact including a video will up your chances of success to 50 percent, according to Kickstarter. You don’t need to be the next Steven Spielberg or have a huge budget to create an amazing video. All you need is that electronic marvel in your hand that creates bathroom-mirror selfies and endless Facebook posts of the food you are eating. With a good smartphone and a few tips, you can create a video that will help you raise money and get your startup dream off the ground.

o turn stop asking Siri questions, ignore your incoming texts, pause your Candy Crush game and turn your smartphone camera to video. Follow these six rules and you will be on your way to crowdfunding success.

1. Video and audio quality are important. Shooting high-quality video on an iPhone or Android device is possible, but make sure the phone is on a tripod (or other stabilized device) and the audio is clear.

For lighting, record your video in a well-lit room or outside to get the optimal results. Before you hit action, shoot a sample scene. Look at it on your computer to make sure the lighting is correct and clear.

Consider buying a clip-on microphone that plugs into your phone rather than using the built-in audio that will sound hollow the further you get from your phone. Speak loudly, clearly and have the phone at an appropriate distance to get good quality. Listen to a sample, and if it sounds too hollow or if every time you say a word that starts with a “p” the sound pops, do it over. Trial and error is the key here.

2. Don’t try to wing it. Unless you are a trained public speaker, don’t ad lib your video. Write a script and make sure it hits all the key points of your crowdfunding campaign. Like a journalist writing a news story, include the who, what, when, where and why of your campaign. Read it out loud and revise it until it is perfect. Then, practice. You should sound natural when you shoot the final product.

3. Mention only two or three rewards. Going through an entire list of rewards is one of the most common mistakes I see in crowdfunding videos. People don't want to hear you drone on about every reward being offered. Instead, highlight only two or three of your best rewards. You want to get the viewer excited about what you are giving away through some of your best rewards, because enthusiasm is contagious and drives donations. For the remaining rewards, just include a simple reminder telling the viewer that the entire list is on your project page.

4. Keep it short and end with a bang!  When making any video, follow the KISS rule: Keep It Simple Stupid. Unless you are Martin Scorsese, nobody wants to sit through three hours of your video, especially when you are asking people to fork over cash for your project.  

The video should be short, exciting and get the viewer fired up and wanting to read more about what you are offering. Ideally, the video should be three minutes long or less (although really great videos will hold the audience’s attention even if longer).  For those who have a tendency to ramble on, keep in mind, with a crowdfunding campaign, you have an entire page online to write out more details and to show photos to supplement the video. People have busy lives and short attention spans. Don't lose your viewers before getting to the most important part -- asking for donations and help spreading the word about your campaign.

5. Don’t forget ‘the ask.’ Every successful salesperson in the world will tell you that if you do not ask for a sale, you will not get it. In your video be sure to ask for a donation and for help spreading the crowdfunding project to the viewer’s friends and social-media network. "The ask" should be clear, carefully worded and create a sense of urgency and action. Tell people specifically what to do and don't leave it up to them to figure it out on their own. But make sure it is sincere, as this authentic message can turn a viewer into a donor and marketing machine.

6. Turn to others. Look at other successful crowdfunding campaigns and watch their videos for inspiration. People who have successfully raised a lot of money through crowdfunding typically have very good videos. Learn from their experience. 

Will Equity Crowdfunding Laws Be the Death of Kickstarter?

Will Equity Crowdfunding Laws Be the Death of Kickstarter?

Originally Published at Entrepreneur.com on January 29, 2014

There have recently been some angry grumblings from the blogosphere about the government wanting to stick its fingers in the crowdfunding pie. The concern across the internet seems to be that new regulations will destroy the rapidly-growing crowdfunding industry that brought us the Pebble Watch and the Veronica Marsmovie.

I am here to paraphrase Mark Twain and assure you that the rumors of Kickstarter’s death have been greatly exaggerated.

The JOBS Act and the proposed SEC rules have nothing to do with Kickstarter or any rewards-based crowdfunding site. The SEC rules only apply to equity crowdfunding, where a company is selling stock or equity from an online crowdfunding site. In fact, Kickstarter has already said it will not participate in equity crowdfunding, and most rewards-based crowdfunding sites will not do so either, primarily because of the extremely high cost of compliance.

Under the Jumpstart Our Business Startups Act (The JOBS Act), anyone who wants to start or grow a business will be allowed to use an online equity crowdfunding portal to raise up to $1,000,000 by selling stock in their company.

Those who do not have a million-dollar brokerage account at Merrill Lynch and could not get in on the Twitter IPO will be allowed to buy stock in the “next big thing” and be on the ground floor just like rich, accredited investors can do today. And those who need $500,000 to start a business but can’t get a bank to return your phone call will be able to use the JOBS Act to raise money online by selling part of your company to everyday folks who want to help you build your business.

The JOBS Act is nine pages long and pretty simple to understand. The concept was to help the economy recover by getting funding to small businesses and creating jobs in the process. It was passed by congress with overwhelming bipartisan support and was signed into law in April 2012.'

In late 2013, the SEC released 585 pages of rules, regulations and compliance requirements that, by their own calculations, could cost a new business as much as $30,000 to raise $100,000. Those of us who deal with securities laws were not surprised that the SEC was making crowdfunding under the JOBS Act difficult, expensive and filled with regulatory pitfalls.

For those who are excited about JOBS Act equity crowdfunding though, don’t be scared off by the apparent high cost and the seemingly insurmountable compliance issues. As it rolls out, individuals and businesses will employ creative means of making the JOBS Act work and filling the $1,000,000-and-under funding void that was formerly occupied by banks and angel investors. Broker-dealers scared off by the liability and costs of funding smaller raises will have new resources from innovative entrepreneurs that want to see equity crowdfunding work and become the trillion-dollar industry many predict it will become.

Kickstarter fans can rest assured that these new rules will not affect the rewards-based crowdfunding phenomenon -- at least for the moment. We all know that governments will eventually see the billions of dollars passing tax free through the rewards-based crowdfunding system and will want a piece of the action. Let’s all hope that congress manages to stay gridlocked enough that they never get around to doing so.

Take a Step Back. Set a Realistic Goal for Your Crowdfunding Campaign.

Take a Step Back. Set a Realistic Goal for Your Crowdfunding Campaign.

Originally Published at Entrepreneur.com on January 23, 2014

If I had a dime for every person who didn't understand the concept of setting a realistic crowdfunding goal, I could crowdfund the next Pebble Watch and a second Veronica Mars movie.

As a crowdfunding expert, many people call or write to me about great ideas that are perfect for rewards-based crowdfunding. Inevitably, after hearing their ideas, I close my eyes tight, scrunch up my face, hold my breath and ask the magic question:

How much do you want to raise?

The guy with a really cool idea for a fuel-efficient car needs $5 million. A lady with a great concept for a new kitchen gadget said $4 million would do. One filmmaker working on his first movie told me he could get by on $15 million.

We could all "get by" on $15 million, but less than a 10th of 1 percent of crowdfunding projects in the history of Kickstarter have raised over $1 million. The reality is 74 percent of successful Kickstarter projects raise less than $10,000.

If you need more than $100,000, you better have a great idea, a huge social network and a team to support your effort. If not, you need to wait for the JOBS Act to kick in and then use equity crowdfunding, where you will be able to sell stock in your business, because less than 2 percent of Kickstarter crowdfunding campaigns successfully raise $100,000 or more.

You need to set a more realistic goal.  

In order to do so, it is important to create a budget for the project and make sure to account for all expenses. Make sure to not miss expenses involved with the rewards promised to donors. You need to be sure to factor in the cost of the rewards, the expense of packaging and shipping the rewards, any marketing expenses and, most importantly, the crowdfunding platform fees and credit card processing fees, which will generally cost about 10 percent of the total amount raised. Add this all together, and you know how much you need to raise.

If the budget you create requires you to raise more than $25,000, consider breaking the campaign down into manageable sections. Raise $10,000 first to build a prototype, get the initial marketing materials finished, handle the legal and accounting and be ready to manufacture. Then, raise the rest in a second campaign for the first production run of your manufactured products.

By showing your donors that you can follow through on your first campaign, effectively raise money, build a prototype, fulfill rewards and communicate your success, you have built in a second round of donors who have a vested interest in your success, and who will not only support you in round two, but will also help you spread the word for the bigger second campaign.

Remember that there is a psychology to crowdfunding from the donor's perspective. Most donors will not give money to a campaign they believe will be unsuccessful. If your goal is high, and a donor sees you have raised very little when they review your campaign, chances are they will not donate, no matter how much they like your idea.

This is why smart crowdfunders line up 25 percent or more of their financial support before they launch their campaign, then have that money donated on the first day before promoting to the general public. Doing so makes the goal seem more attainable to potential donors and helps build momentum from the very beginning for a successful campaign.

One final thought on setting a crowdfunding goal: Taking donations and failing to fulfill rewards, or live up to your promises, could lead to legal trouble and will certainly result in negative publicity for you and your idea. Rewards-based crowdfunding has had surprisingly few instances of fraud or massive failures to fulfill rewards or promises, but when they happen, they are big news. As we all know, what happens on the internet, stays on the internet forever.  

Having a large number of angry donors writing, blogging, tweeting and otherwise spreading the electronic word about your poor business sense, or worse, your dishonesty, can have a lifelong effect on your personal reputation and even your business or employment.

So set a realistic goal, hit it, then follow through on what you promised. Keep the crowd happy, and the crowd will keep coming back for more.