Educational materials are available on the Learn More page. Additional links below provide investment guidance and regulations from the SEC (Securities and Exchange Commission), and FINRA (Financial Industry Regulatory Authority).
The American JOBS ACT has created a new opportunity for Entrepreneurs to raise capital and Investors to now invest in private early stage opportunities. Previously these early stage investments were limited to accredited investors with a net worth or more than $1M or income of more than $200k. This is an exciting time for entrepreneurs and investors, but there are some specific requirements outlined below from the SEC which must be followed. This is a summary.
Crowdfunding Requirements Purchasers/Investors
The rules limit the amount you may invest in all crowdfunding offerings in any 12-month period.
If you have an annual income or net worth of less than $100,000 you may invest the greater of $2,000 or 5% of the lesser amount (income or net worth).
If you have an annual income and net worth greater than or equal to $100,000, you may invest up to 10 percent of the lesser of your annual income or net worth.
Maximum for any investor in any 12 month period is $100,000.
Investors are required to hold all securities purchased for a least one year.
Crowdfunding Requirements Issuers (Entrepreneurs and Companies raising money are Issuers)
An issuer must be a registered United States Company (c-corp, s-corp, LLC, LLP) and can raise up to $1M per year. To qualify you most disclose historical financials, a business plan, management background, projected financials, use of proceeds, a methodology for pricing the equity or debt offering and more
Jumpstart Micro provides a step by step process to make it easy.
Additional details include:
Clearly define Equity Offering, valuation assumptions and Use of Proceeds
Financial statements will be provided to the SEC, investors and Jumpstart Micro in connection with an offering under the crowdfunding rules must:
be prepared in accordance with US generally accepted accounting principles;
cover the two most recently completed fiscal years of the issuer (or shorter period since the inception of the issuer, if applicable); and
(3) be certified (and accompanied by tax returns), reviewed or audited, depending upon the aggregate amount of securities offered by the issuer during the preceding 12-month period.
Offering $100,000 of securities or less; financial statements must be certified by the principal executive officer of the issuer to be true and complete
If offering more than $100,000, but not more than $500,000, of securities financial statements must be reviewed (but not audited) by an independent public accountant.
If offering more than $500,000 of securities financial statements must be audited by an independent public accountant, except that a company offering more than $500,000 of securities pursuant to the crowdfunding exemption for the first time would be permitted to provide reviewed rather than audited financial statements.
The IRS allows corporations to choose to be taxed as either a corporation or an corporation. Income from C corporations are subject to double taxation; that is, the corporation pays taxes on its net income and then the shareholders also pay taxes on the income that they receive from the corporation. S corporations have only one level of taxation. The shareholders still have to pay taxes on money that they receive from the corporation, but an S corporation does not pay taxes on its net income. While the S corporation is popular among small business owners, C corporations have greater tax planning flexibility and can shield shareholders from direct tax liability.
The most common type of Corporation which has investors is a Corporation. The shareholders benefit from the appreciation in the value of the shares and cash flow if the company issues a dividend. Corporations issue shares of stock to it's investors. This may be common stock, or preferred stock which has a higher priority over common stock in the event of a liquidation of the company. Each share has a PAR Value and Purchase price.
A limited liability company, or LLC, is a business entity created under state law that combines characteristics of both a corporation and a partnership. Like a corporation, the owners of an LLC are generally not personally liable for company debts. Like a sole proprietorship or a partnership, an LLC has operating flexibility and is, by default, a pass through entity for tax purposes. This means that the LLC does not pay taxes on its profits, but instead, profits and losses are passed through to the owners, who must then pay tax on their share of LLC income.
Name: Most commonly your company's name, but also a line of products or sub-entity directly tied to the marketing and sale of your products and services.
Logo: Your company logo or other symbol or design used to create brand recognition.
Phrase: Your company slogan or other phrase used as a brand for your products or services.
Patent and Patent Pending:
The exclusive right granted by a government to an inventor to manufacture, use, or sell an invention for a certain number of years. Many inventors and manufacturers apply for official patents through the United States Patents and Trade Office (USPTO), but the approval process can take at least 18 months. In order to establish ownership of a product idea, inventors and manufacturers often place the words Patent Pending (abbreviated Pat. Pend.) Directly on the products until the official patent is issued. This term lets other inventors and marketers know that the USPTO application process has already begun and it's only a matter of time before a 20 year patent is granted, at least in the case of products. In some rare cases the Patent may not be issued if its to found to infringe on a prior existing Patent.
There are 2 types of patents. 1) Design Patent protects the ornamental design, configuration, improved decorative appearance, or shape of an invention. This patent is appropriate when the basic product already exists in the marketplace and is not being improved upon in function but only in style. For example, designer eyeglass frames (improvement on eyeglasses). A U.S. design patent lasts for 14 years. 2) Utility Patent protects any new invention or functional improvements on existing inventions. This can be to a product, machine, software, a process, or even composition of matter. For example, a new self-fastener diaper. A provisional patent is a fast way to get protection and gives the filer 12 months to file the full patent application.
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. A board's activities are determined by the powers, duties, and responsibilities delegated to it or conferred on it by an authority outside itself. These matters are typically detailed in the organization's bylaws. In a stock corporation, the board is elected by the shareholders and is the highest authority in the management of the corporation.
If an LLC is Manager-managed, the power and authority of the company's management lies within its Board of Managers, which is similar to the Board of Directors of a Corporation. If an LLC is Member-managed, there is no Board of Managers, and the LLC is directly managed by its Members (the owners).
An advisory board is a body that provides non-binding strategic advice to the management of a corporation, organization, or foundation. The informal nature of an advisory board gives greater flexibility in structure and management compared to the Board of Directors. Typically these are experts in your industry who provide experience, knowledge and guidance to the management team. Compensation may be in the form of stock or cash.
Income Statement. Also known as profit and loss statement or statement of revenue and expense. The income statement is the one of the three major financial statements. The other two are the balance sheet and the statement of cash flows.
If a company distributes its financial statements to the public, it is required to follow generally accepted accounting principles (GAAP) in the preparation of those statements from the Financial Accounting Standards Board (FASB). This is required to raise funds through Jumpstart Micro as defined by the American JOBS ACT. The Statements need to be either Audited or Reviewed (See Audited and Reviewed Financials section).
The Income Statement is a financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year.
The income statement is divided into two parts: the operating and non-operating sections.
The portion of the income statement that deals with operating items is interesting to investors and analysts alike because this section discloses information about revenues and expenses that are a direct result of the regular business operations. For example, if a business creates sports equipment, then the operating items section would talk about the revenues and expenses involved with the production of sports equipment.
It's commonly said that business valuation is more art than science.
Nevertheless, entrepreneurs need to put a value on their startups in order to raise money, and investors need to put a value on their investments to generate liquidity. By definition, startups don't have a history of financial performance on which to base a valuation. Therefore, it's up to the entrepreneur to develop a process for valuing the company based on comparables and financial projections.
Find out how much similar companies in your industry and geography are worth. You can use sites such asBizBuySell and BizQuest to determine how much businesses are selling for in your industry. If you have a high-tech or high-growth startup, accountants and lawyers are among the best advisors to help you determine the market rate for comparable companies at your stage.
Jumpstart Micro is not a Advisory firm and can not help determine the value of your business or amount of investment capital to raise. But here is an quick way to state your valuation.
Company has formed their corporation and authorized 2,000,000 shares of common stock. Authorized Shares is not the amount held by shareholders. It is just the amount as a corporation, you are making available for future use. This number can increase over time. A PAR Value such as $.01 per share is also set.
Authorized Shares: 2,000,000 with PAR Value of $.01
Initially issue some shares to the Founders such as 1,000,000 shares
Now you have your business plan, financial statements and some market valuations ready and decide that you need to raise $200,000 to launch your business. Based on your assessment of the market and advice from advisors, including future value based on your projections you believe the value of the Company is $1,000,000. Since you have 1,000,000 Issued shares this makes the value per share $1.00
Next Step is to create a Series A Security Offering for $1.00 per share and offer 200,000 shares of common stock to investors to raise the $200,000 you need.
Here is a summary:
Authorized Shares 2,000,000 shares
Founders Shares Issued at Incorporation: 1,000,000 shares
Pre-money Valuation of $1,000,000 Value before the Series A Round
Series A: 200,000 shares issued at $1.00 per share to Raise $200,000
Post-money Valuation is now Pre-money Valuation ($1,000,000) + capital raised in Series A ($200,000) = $1,200,000.
Balance Sheet shows an increase in cash for $200,000 and an increase in Shareholder Equity for $200,000
Balance Sheet. If a company distributes its financial statements to the public, it is required to follow generally accepted accounting principles (GAAP) in the preparation of those statements from the Financial Accounting Standards Board (FASB). This is required to raise funds through Jumpstart Micro. The Statements need to be either Audited or Reviewed (See Audited and Reviewed Financials section).
The Balance Sheet is a financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.
The balance sheet adheres to the following formula:
Assets = Liabilities + Shareholders' Equity
The balance sheets gets its name from the fact that the two sides of the equation above assets on the one side and liabilities plus shareholders' equity on the other must balance out. This is intuitive: a company has to pay for all the things it owns (assets) by either borrowing money (taking on liabilities) or taking it from investors (issuing shareholders' equity).
How to Interpret a Balance Sheet: The balance sheet is a snapshot, representing the state of a company's finances at a moment in time. By itself, it cannot give a sense of the trends that are playing out over a longer period. For this reason, the balance sheet should be compared with those of previous periods.
Cash flow is the net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses and provide a buffer against future financial challenges. Negative cash flow indicates that a company's liquid assets are decreasing. Net cash flow is distinguished from net income, which includes accounts receivable and other items for which payment has not actually been received. Cash flow is used to assess the quality of a company's income, that is, how liquid it is, which can indicate whether the company is positioned to remain solvent.
For Issuers to sell securities and raise capital for their business the JOBS ACT has requirements for either Audited or Reviewed Tax Returns. Newly formed companies do not have these requirements.
Requirements for first time offerings of securities on a Crowd Funding site:
2 Years for Financial Statements and Tax Returns. Or from inception of the Company if shorter than 2 years.
Raising Less than $100,000 Certified by Principal Executive Officer to be true and accurate
Raising between $100,000 $500,000 Reviewed by an Independent Public Accountant
Raising between $500,000 $1,000,000 Audited, except if this is the first time offering securities on a crowd funding site they may be reviewed.
An audit is the highest level of financial statement service a CPA can provide. The purpose of having an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are prepared in accordance with the proper financial reporting framework. An audit enhances the degree of confidence that intended users, such as lenders or investors, can place in the financial statements. The auditor obtains reasonable assurance about whether the financial statements as a whole are free from material misstatement, and whether the misstatements are from error or fraud.
A review engagement is conducted to provide limited assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with the financial reporting framework. A review differs significantly from an audit. Review engagements provide less assurance to the reader of the financial statements because the CPA does not perform many audit procedures.
Companies issuing new stock to investors will produce forward looking financial statements (Income Statement, Balance Sheet and Cash Flow Statement) in addition to their present day financial statements using generally accepted accounting principles (GAAP).
This is a way to provide investors with a better understanding of projected operating results with the new investment capital. For example, a company's 2015 GAAP financial statements which have been reviewed or audited may show a break-even business. The Company then raises $500,000 by selling common stock shares. The Pro forma Balance Sheet now has $500,000 in cash and $500,000 in Shareholder Equity. With this new cash the Pro forma Income Statement, Balance Sheet and Cash Flow Statements will show how the Company will use the cash over the coming years.
Pro forma Financials should be prepared for 3-5 years and be broken down by month or by year. Investors need to assess whether they have confidence in the projections before making an investment.
The Executive Summary is a summary of the company's business plan. For Issuers raising money Jumpstart Micro provides a detailed template to create your summary and business plan. The Summary includes a description of the project, market opportunity, competition, financial information, value proposition, management team, security being offered, use of proceeds and forward looking statements about the prospects for the business.
A pitch presentation includes slides for each of the sections of an executive summary and lets the issuer expand the plans with graphics, and highlights key points for discussion during a presentation.
There is nothing more powerful than a video to show potential investor who you are. This should be less than 2 minutes and gives your pitch to investors. Describe your idea, experiences, enthusiasm, and team. Unlike the Pitch Presentation there is no real guidelines except to be yourself and focus on your big idea. Investors can read the Executive Summary and Pitch Presentation to understand the financials and other details.
This can be as simple as using your phone and definitely doesn't need to be professionally done.
In addition to the Executive Summary, Pitch Presentation and Company Video an Issuer is required to a have a set of Financials which include an Income Statement, Balance Sheet, Cash flow Statement and a detailed Use of Proceeds from the investment.
Jumpstart Micro provides an Issuer the tools to present these.
Most companies use a combination of debt and equity financing, but there are some distinct advantages of equity financing over debt financing. Principal among them are the fact that equity financing carries no repayment obligation and that it provides extra working capital that can be used to grow a company's business.
Equity Financing is the issuance of securities (Common and Preferred Stock) to investors who will then own a piece of the Company. For example, a Company might have 1 million authorized shares of common stock and choose to sell 20% of these shares to investors (200,000 shares) at a predetermined price. Typically these are done in Series. The first offering would be Series A. In this example if they determined a price of $1.00 per share they would receive $200,000 from the sale of these securities. In another year, they may decide to do a Series B offering and sell another 100,000 shares at $2.00 per share; assuming they did a good job with the first $200,000, the value of the company should have increased. This is a typical Equity transaction for a private company.
Debt Financing requires the repayment of the Debt at a predetermined time with interest. Companies that use debt typically have strong cash flow to service the debt payments each month. There are many variations of debt including interest only with balloon payments and different payment schedules.
Most companies use both Equity and Debt. Equity to raise capital based on the value of the business (and future value) and debt to finance the purchase of assets such as office furniture or equipment. This might be a bank loan or lease. This is very common in real-estate transactions. Equity might be for a down payment or acquisition of land or property and debt/mortgage financing for the balance of the mortgage.
Employee stock options, or ESOs, represent one form of equity compensation granted by companies to their employees and executives. They give the holder the right to purchase the company stock at a specified price for a limited duration of time in quantities spelled out in the options agreement. A typical option plan is a grant of shares (example: 12,000 share) with a purchase price (example: $1.00 per share), a schedule such as quarterly vesting over
3 years with an expiration date such as 10 years. Based on this example 1,000 shares would vest each quarter the employee stays with the company. That gives the employee the right to purchase 1,000 shares each quarter for $1.00 per share which the employee can do at any time until the Option expires in 10 years.
A Warrant is a derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame. Warrants are often included in a new debt issue as a sweetener to entice investors. For example, a Issuer may take out an unsecured loan for $100,000 and offer 10% Warrant coverage on the loan which if the stock price is $1.00 per share this would be the right to purchase 10,000 shares at $1.00. If the value of the company increases the Warrants are in the money and the Warrant holder could exercise his right to purchase the shares at $1.00 and immediately sell them at the current higher price.
Important Disclosure: Jumpstart Micro, Inc is a Registered Funding Portal under SEC regulation Crowdfunding 4(6)(a) and a member of FINRA. Under the regulation, Jumpstart Micro acts as an Intermediary platform for Issuers (companies selling securities in compliance with the regulations) and Investors (individuals purchasing services offered by Issuers). Jumpstart Micro does not provide any investment advice or make any investment recommendations to any persons, ever, and at no time does Jumpstart Micro come into possession of Investor funds which are transferred directly to a bank escrow account. Please see disclosures. for more details.