Crowdfunding has lately become a considerable source of financing for start-ups and growth companies. From the legal point of view, what should a company take into consideration to complete a successful crowdfunding round? At least the following five topics:
(1) Is crowdfunding really for you?
Before starting to plan a crowdfunding round, think carefully, whether crowdfunding is for you. Is your company likely to get the crowds excited? The crowds tend to like projects that have a higher purpose and are very easy to understand. A company aiming to help people in Africa might be a good crowdfunding object, as could also a new grocery store in the neighborhood (although they might not be that good investments). On the other hand, the crowd might not be interested in yet another new piece of software to be used in business-to-business environment (although it might be an excellent investment). Do not underestimate the importance of feelings in the investment decisions of the crowds.
If you choose to proceed with a crowdfunding round, be prepared to very actively sell and market your round and build buzz around it.
(2) Be clear in what you offer
You can raise crowdfunding in many different ways. You can collect donations, pre-sell your products, borrow money or issue shares. Different targets justify different crowdfunding alternatives.
After having chosen your method of crowdfunding, be clear and persistent in what you are offering. Please note that donations are not generally legally possible for private companies in Finland and always require a collection license. Thus, there must be reasonable consideration (products, shares etc.) for pre-purchases, lending of money or subscription of shares and they must not be mixed with donations without consideration.
(3) Start with a clean table
Before you start a crowdfunding round, ensure that your company is clean. All the administrative documentation should be in place and the company must have been managed in a diligent manner. If you have unsolved problems with your shareholders, co-operation partners or customers, clean the table before starting a crowdfunding round.
Although no prospectuses are required in the EU for crowdfunding share issues below €1,500,000, you have the obligation to provide correct and sufficient information on your company to the share subscribers. You do not want to disclose unnecessary risks in connection with marketing your crowdfunding round but prefer to take care of those risks already earlier.
(4) Shareholders’ Agreement or not?
We lawyers typically advise each and every company to maintain a shareholders’ agreement. How about crowdfunded companies then?
There are two basic issues that may hinder the crowds from investing into a company: (i) the level of the required minimum investment; and (ii) the requirement to adhere to a shareholders’ agreement. If someone in the crowd plans to invest € 500 to an interesting crowdfunding round, she/he will not be prepared to read through and sign a 30 page English language shareholders’ agreement containing liquidated damages and act of God clauses.
What would be the disadvantages of running your company without a SHA? First, if the shareholders outside the SHA owned at least 10 % of the shares, they could exercise their minority protection rights, such as the right for minority dividend or special audit in the company. Secondly, the minority owning at least 10 % of the shares could not be forced to be squeezed-out in connection with an exit.
If you consider your company to be a strong exit case targeting in further financing rounds in the Silicon Valley, you might want to consider requiring the crowdfunding investors to enter into a shareholders’ agreement. However, a SHA proposed to the crowds should be considerably simpler and shorter than those used in venture capital financing.
(5) Pay attention to your shareholders
What if you have been successful in a share issue to the crowds and received 1,000 new minor shareholders? Will it make things complicated in the future?
The minimum requirement set by the company legislation is that you will call all your shareholders to the annual general meeting of shareholders at least once per year. You will have to be prepared for larger meetings than before, although it is not very likely that the crowds would be interest to attend the formal meetings as such.
You will also have to put special attention to treating all your shareholders in an equal manner in whatever you do. In addition, you will have to ensure that you keep yours and the company’s monies in separate pockets, meaning ensuring that everything is made in accordance with the at-arm’s-length principle.
Don’t be afraid of the burden that a large number of shareholders could bring you but consider it as a great asset. If you play your cards right, you can create a fan base to whom you can regularly communicate about your company and products. The annual general meetings of shareholders can be the years’ best events for selling your products to your fans and spreading your company’s mission.