Today the term “crowdfunding” can take on many contexts but it is, by definition, the practice of funding a project or venture by raising small amounts of money from a large number of people, most commonly via the Internet.

The term might be new, but the general concept is not. In fact, most people have already participated in some form of crowdfunding and may not even know it. For example, have you ever been to church and dropped a few dollars in the collection plate as it was passed around? Better yet, did you ever call into one of those P.B.S. pledge drives, give $50 or $100 and get a duffle bag (or dinner with Bob Villa) in return? You guessed it, both of these are types of crowdfunding.

There are 4 main types of crowdfunding campaigns:

  • Donation-Based: Where people “donate” money with nothing expected in return (like the church example above).
  • Rewards-Based: Where people contribute money with the expectation of receiving a promised reward (like in the P.B.S. example above).
  • Debt-Based: Where people contribute money with the expectation of being paid back, plus interest.
  • Equity-Based: Where people contribute money with the expectation of receiving a piece of the ownership of the company

Unlike the other types of crowdfunding, debt-based and equity-based crowdfunding (debt/equity-based also sometimes called “investment-based” crowding) have only recently become legal as a result of changes to federal and state laws like the introduction of the new Illinois crowdfunding exemption. Thanks to these new and changed laws, investors now have the ability and opportunity to invest in many, previously closed off, privately held companies through equity-based and debt-based crowdfunding.

Mmmm, Not exactly.

GoFundMe is a “donation-based” crowdfunding platform and Kickstarter is a “reward-based” crowdfunding platform. Both of these sites allow users to raise money, either by asking for donations (GoFundMe) or by pre-selling their products/offering rewards in return for donations (Kickstarter), but the people contributing money are not actually making an investment and they will not have the potential to make money.

Unlike Kickstarter and GoFundMe (and other donation/reward-based crowdfunding platformsi>), VestLo is an investment-based crowdfunding platform, allowing companies to raise funds by offering equity or debt to investors who then have the potential to earn a return. Put simply, unlike with the above sites, a person contributing in a debt/equity-based campaign on VestLo will be making an investment in the underlying company and will get a piece of the action.

With debt-based crowdfunding, investors are loaning money to the company. In return the company will be expected to repay the amount of the loan to investors, plus interest. The potential return to investors is represented by the interest paid on the loan.

With equity-based crowdfunding on the other hand, investors are actually purchasing an ownership interest in the company. In return for the money, the investor will receive equity in the company; usually in the form of shares of stock (if a corporation) or membership interest/units (if an LLC). As with any shares of equity/stock, the potential return will based on the future profitability of the company. If the company is successful the value of the investor's equity/stock (e.g. upon resale) will increase and the investor may even receive distributions/dividends from the Company.

A TON.

Investment-based crowdfunding was a $35 billion dollar industry globally in 2015 and all signs point to that number significantly growing in 2016 and the foreseeable future.

The “Illinois Equity Crowdfunding Exemption” is simply the term used to refer to the new law which makes investment-based crowdfunding possible in Illinois (815 ILCS 5/4(Ti>)). Here’s a little about the new law:

Traditionally, companies that needed growth or project funding had to seek out bank financing, angel investors or venture capital in order to get them to the next stage. If these types of funding could even be found, they were often costly to the company and/or required the company’s owner(s) to give up a significant amount of company equity or control. Today, under the new law, companies which are incorporated/organized in Illinois are now able to use “investment-based crowdfunding” to raise up to $4 million dollars a year from Illinois residents, whether they qualify as “accredited” investors or not. Put another way, Illinois companies who are looking for funding can now seek investment dollars from ANY Illinois resident (individual or entity); allowing the company to turn friends, neighbors, local residents and even customers into investors. Moreover, the required amount of return/control offered to attract such investors can, in many instances, be significantly more favorable to the company than under traditional options.

The new law is also groundbreaking for investors as well. Previously investment in “privately held” (i.e. non-publically traded) companies was limited almost exclusively to “accredited” investors (e.g. rich people). Not anymore. Under the new law Illinois residents, whether they qualify as “accredited” or not, will for the first time have the opportunity to invest in local “privately held” companies. Why is this important? It is important because investment in private companies, though highly risky, can offer investors the potential to earn above-average returns and now all Illinois residents, not just the rich ones, can have access to such investment opportunities.

No.

Illinois is actually late to the crowdfunding game as multiple states have passed laws allowing for investment based crowdfunding. That being said, in comparison to the other states, Illinois has one of the clearest and most workable laws, not to mention one of the highest offering caps in the county (set at $4 Million per year).

VestLo is an online marketplace which provides investors with access to investments in certain local “privately held” companies. By using VestLo’s online platform, investors will have the ability to:

  • Browse local investment opportunities
  • Invest in selected opportunities entirely online. This including e-signing of legal documentation, funds transfer, and ownership recordation
  • Manage and track their investments easily through an online portfolio.
  • Receive automated distributions and/or interest payments from and regular financial reporting.

Yes.

All investments are inherently risky and investments in “privately held” companies (particularly startup or young businesses) are high risk investments. However, as you probably learned in Economics 101, with increased risk comes the potential for increased reward. That is why investments in “privately held” companies commonly offer investors the potential to earn above average returns on their money (on average between 8-13% ROI).

As with any investment, there can be no guaranty that the investor will make money. The investment opportunities presented through VestLo can be highly speculative and investors should be able to bear the loss of their entire investment.

The due diligence and other offering documents provided, online, for each offering (in-particular the “Offering Memorandum”) will provide details regarding the respective company, the company’s intended use of the offering proceeds, and certain specific risks related to the company/investment opportunity.

We highly encourage investors to review all of the due diligence and other offering documents provided, online, for each offering detailing the specific risks of the company and the investment opportunity. Investors are strongly urged to carefully read the due diligence and other offering documents provided for each offering, and to ask questions as necessary, to make sure they understand the risks of the offering before deciding to invest.

Additionally, while there are no guarantees that this strategy will reduce your risk, most investors choose to mitigate their overall risk by allocating their overall investment across multiple offerings (i.e. diversifying their investments). What was it your mother said? … “don’t put all your eggs in one basket” … that’s still good advice. Investing smaller amounts across a larger number of opportunities is a good practice can help to significantly reduce the overall risk that an investor will lose their entire investment.

No.

Each offering, whether debt or equity, can have unique terms and investors should pay attention to those terms.

With equity offerings, the differences usually relate to the type/class of equity interests being sold and the respective rights (e.g. voting, distributions, etc.) that go along with such equity. For example, one company might be selling shares/units that offer the investor the right to a specific type/amount of distribution (e.g. a “preferred distribution”), while another company may not.

In Debt offerings, the main differences typically center around the repayment terms (e.g. the interest rate, how often payments are made, how long the loan is for, etc.) and whether or not the Debt will be “secured” by an underlying asset(s) (e.g. such as a mortgage on a piece of property). In addition, certain types of Debt may be “convertible” into equity of the borrowing company.

The offering documents provided, online, for each offering (in-particular the “Offering Summary”) will spell out the specific terms of the offering. Investors are strongly urged to carefully read the offering documents provided for each offering, and to ask questions as necessary, to make sure they understand the terms of the offering before deciding to invest.

For the majority of the offerings listed on VestLo, ANYONE will be able to invest so long as they are a “resident” of the state of Illinois. To qualify as a “resident” you must: (a) for individuals, have your primary residence in the state of Illinois; and (b) for entities, be formed and qualified to do business in the state of Illinois. Prior to investing in an offering listed on VestLo each investor will be asked to provide VestLo (or its agents) with certain evidence that they qualify as a “resident” (e.g. a copy of a state issued I.D.).

From time to time certain offerings may be listed on VestLo in which only a limited number and/or type of investors may invest. In these limited instances, the offering documents provided, online, for such offering (in-particular the “Offering Summary”) will specific the particular number/type of investors who may invest.

Viewing and investing in the offerings listed on VestLo is expressly limited to residents of the state of Illinois. Accordingly, there are two times that you will be asked to verify that you are an Illinois’ resident.

First, in order to see the details of any investment opportunity, you will need to have created an account with VestLo and be signed in. As part of your account registration with VestLo you will be asked to certify that you are a resident of the state of Illinois. This is done simply by checking the required box where indicated.

Second, once you decide to invest in your first offering, you will be asked to provide VestLo (or its agents) with certain evidence that you qualify as a resident a resident of the state of Illinois. There are several acceptable forms of evidence, such as a copy of your Illinois drivers license/state issued I.D. or passport. Once you have completed your first investment you will (in most instances) not need to provide further evidence that you are a resident.

Minimums are typically $500 per investment. In some cases, the minimum may be higher or lower but it will always be clearly disclosed on the individual offering page.

If you qualify as an “accredited investor” you can invest as much as you like. However, if you do not qualify as an “accredited investor” you may only invest up to $5,000 per offering (though you can invest in as many offerings as you want).

An “accredited investor” is a term defined by the U.S. Securities and Exchange Commission under Regulation D, Rule 501. Generally, in order to qualify as “accredited investor” the investor must meet at least one of the following:

  • If an individual, he/she had an individual income of more than $200,000 per year (or a joint spousal income of more than $300,000 per year) in each of the last two years and expect to reasonably maintain the same level of income;
  • If an individual, he/she has a net worth exceeding $1 million (excluding the value of their primary residence), either individually or jointly with his/her spouse;
  • Is a bank, insurance company, registered investment company, business development company, or small business investment company;
  • Is a general partner, executive officer, director or a related combination thereof for the issuer of a security being offered;
  • Is a business in which all the equity owners are accredited investors; or
  • Is an employee benefit plan, a trust, charitable organization, partnership, or company with total assets in excess of $5 million.

Absolutely.

Just like you might tell others about the Kickstarter campaign you just contributed to, or the shares of Apple stock you just bought, there is nothing wrong with telling others about a company you invested with through VestLo. In fact, word of mouth is the best support you can give a company who is doing a crowdfunding offering. The more you can get the word out about your favorite companies the more likely those offerings are to be successful. Social Media fuels crowdfunding success.

Yes (to a limited degree) and No.

Prior to placing any investment opportunity on our platform, VestLo will perform a limited due diligence review of the company and the intended offering. The amount and types of information reviewed will vary from deal to deal but we do perform background and credit checks on each listing company and, in most instances, each of their primary officers. Our vetting process however, is NOT intended to be, and should not be considered to be, comprehensive in nature. We simply review the due diligence/offering materials provided by the listing company to see if the proposed offering passes a basic sniff test and to see whether the listing company is complying with the applicable statutory requirements and disclosures.

Similarly, while VestLo provides investors with relevant information regarding each offering (including related due diligence and offering materials) neither VestLo, nor any of its agents or employees: (a) makes any representation or warranties about the truth or accuracy of any of the offering materials presented with respect to a particular company/offering; or (b) makes ANY recommendations regarding a particular investment opportunity or the suitability of such investment opportunity to any particular investor. Further, prospective investors are NOT to view the contents of the materials presented on VestLo as, in any way, providing legal, tax or investment advice.

Each investor must do their own due diligence before making a decision to invest and should consult his/her/its own counsel, accountant, investment advisor or manager, and/or business advisor, as to the legal, tax, and related matters concerning any potential investment presented on VestLo.

We do perform background and credit checks on each listing company and, in most instances, each of their primary officers of the company, before an offering is listed on VestLo. We also require that each company provide its organizational documents (i.e. its articles of incorporation, articles of organization, or similar documentation) for your review.

The identities of the founding team members are all verified through a third party service. However, each investor ultimately responsible for conducting their own due diligence before making a decision to invest and should only make investments in which they feel comfortable.

The investment period will vary greatly depending on the type of investment. Debt investments typically range from 1-5 years. Equity investments on the other hand, typically require the investor to hold the investment for an indefinite period of time (e.g. until they are able to resell it or the happing of a specified event such as being acquired by another company or the company going public).

The offering documents provided, online, for each offering (in-particular the “Offering Summary”) will spell out the expected (though not guaranteed) investment period of the offering. Investors are strongly urged to carefully read the offering documents provided for each offering, and to ask questions as necessary, to make sure they understand the expected holding period of the investment before deciding to invest.

Yes and No.

It is possible for an investor to sell their debt/equity investment to a third-party once the required holding period has expired (subject to the specific terms of the investment of course). However, investments in privately held companies like those offered through VestLo are extremely illiquid and there currently is no real established market (i.e. secondary market) to easily sell such investments. Although such a secondary market may later be established, potential investors should not expect such market to exist in the near future. Accordingly, an investor will probably will not be able to liquidate their investment in the event of an emergency or otherwise (at least not in a timely manner and/or without a substantial loss of their investment).

No.

Under the new Illinois law, a company must establish a maximum target amount, a minimum target amount (which cannot be less than 50% of the maximum target amount) and a funding deadline in advance. In order to protect investors, a company will be required to reach at least the established minimum funding target, prior to the funding deadline, before the offering can be closed and the company can collect the funds.

As a result, investments are not finalized until the company raises enough money to meet its minimum funding target (and completes all other closing conditions, if any). When investments are initiated through the VestLo platform, the subscription proceeds are held securely in an independent escrow account with an unrelated, third-party, escrow agent until the offering is closed.

Once the company’s minimum funding target has been reached (and all of the other closing conditions, if any, have been met), the company can close the offering, at which point all of the money which is held in escrow will be released to the company and investors will receive the applicable securities. If the minimum offering target is not met before the expiration of the funding deadline, all subscription amounts received (if any) will be automatically returned to investors by the escrow agent and the offering will be terminated.

Neither VestLo, nor any of its agents or affiliates, ever receives or takes custody of investor funds at any point during the investment process.

No. No one can else other than you can see your investments.

To enhance transparency in the offerings, each offering page will have its own unique discussion board where potential investors can communicate directly with the listing company. Registered users will be able to post questions to, and receive responses directly from, the company through the discussion board. Additionally, users will also be able to see, and respond to, all of the questions posted by other users and the company’s responses to those questions.

As and when payments are to be made to investors, VestLo will receive the payments from the company (or from a third party servicing company) and will remit such payments directly to investors through our online system, net of any applicable servicing or processing fees.

Projected returns and distributions (if any), and the timing of such returns/distributions (if any), are specific to each offering and will be noted in the offering documents for that offering. Investors are strongly urged to carefully read the offering documents provided for each offering, and to ask questions as necessary, to make sure they understand if, and when, returns/distributions from the investment are to be paid before deciding to invest.

Each investor will have access to their own, personalized, VestLo investor dashboard as part of their account. Through the dashboard, investors can track how much they have invested, which transactions are active, and how much they have earned on the investment to date. Investors can also expect to receive performance updates directly from the companies they have invested in. These updates will also be made available through your investor dashboard.

There are multiple reasons why you might want to use crowdfunding.

The first is simply access to capital. Many small businesses and entrepreneurs need money to take their company to the next level and other sources of capital (e.g. bank financing, angel investors, venture capital, etc.) can be extremely difficult to find, let alone obtain. Moreover, even if these types of funding can be found, they are often costly to the company and/or will require the company’s owners to give up a significant amount of company equity or control. For many businesses, crowdfunding can offer a faster, more flexible, lower cost of source of capital than other sources by allowing the company to turn friends, neighbors, local residents and even customers into investors.

Crowdfunding also offers benefits to entrepreneurs and small businesses well beyond simply raising money, including:

  • Increased Company Control: With other types of equity investment (e.g. angel investors, venture capital, etc.), the company is often subject to multiple rules and restrictions as to how it runs its business. In fact, many times the investor(s) will have a direct vote on more material decisions, such as what projects the company might participate in or the general direction of the business. With crowdfunding however, equity investor are typically “non-voting” interests leaving the company free to run its business as it sees fit (subject to general fiduciary duties of course).
  • Marketing and Brand Loyalty: Crowdfunding provides a source of brand loyalty and social marketing that just cannot be bought. It allows people to get behind a product/business that they truly have a connection to and, in turn, incentivizes them to tell the world about it. As a result, investors are quite literally paying businesses to advertise their products.
  • Positive Publicity and Community Support: Crowdfunding can be a great way to give back to a particular local community, and/or get local residents involved, which can help generate local publicity, support and sales.

Under the new Illinois law, a company can raise up to $4 million dollars a year through Illinois crowdfunded offerings.

One point that is important to note is that the new law may be used by a company (i.e. a “special purpose vehicle” or “SPV”) specifically formed for the purposes of completing a particular project such as a real estate construction project. By using separate SPV’s, the developer seeking funds could potentially raise up to $4 million dollars per project (i.e. per SPV).

Under the new Illinois law, a company must establish a maximum target amount, a minimum target amount (which cannot be less than 50% of the maximum target amount) and a funding deadline in advance. In order to protect investors, a company will be required to reach at least the established minimum funding target, prior to the funding deadline, before the offering can be closed and the company can collect the funds.

Investments are not finalized until the company raises enough money to meet its minimum funding target (and completes all other closing conditions, if any). When investments are initiated through the VestLo platform, the subscription proceeds are held securely in an independent escrow account with an unrelated third-party escrow agent until the offering is closed.

Once the company’s minimum funding target has been reached (and all of the other closing conditions, if any, have been met), the company can close the offering, at which point all of the money which is held in escrow will be released to the company and investors will receive the applicable securities. If the minimum offering target is not met before the expiration of the funding deadline, all subscription amounts received (if any) will be automatically returned to investors, without charge or interest, by the escrow agent and the offering will be terminated.

Neither VestLo, nor any of its agents or affiliates, ever receives or takes custody of investor funds at any point during the investment process.

Investments above a funding goal are called oversubscriptions. A company will have the discretion to approve or deny investments over its established maximum target amount (subject to the maximum $4 million dollar aggregate cap). However, this is something the company, and its legal team, need to consider and take into account before starting to raise funds so that the company is prepared to do this properly.

  • Formed, and qualified to do business, in Illinois;
  • Located, and doing most of its business, in Illinois (i.e. which meets the requirements of Rule 147 (17 CFR 230.147); and
  • Which is not otherwise subject to disqualification (pursuant to the rules of the new Illinois exemption).

If your company meets the above criteria and you would like to raise funds through VestLo we invite you to submit a preliminary application by clicking HERE (NOTE: You’ll need to register before you can submit the form).

No.

We do not allow just any company to raise money on VestLo. Each company must apply to be listed on VestLo and must meet our internal criteria before their offering can be listed on the platform. Our goal is to be the leader in Illinois crowdfunding, which means that we need both companies and investors who have positive experiences and a level of trust with our process. That’s why we curate investment opportunities according to our internal requirements.

In general, regardless of the scope of your endeavor, our expectation is that the company can demonstrate that they have dedicated significant time and effort to researching, validating, and executing their business plan/idea. Investors on VestLo are typically not interested in financing idea stage companies, but rather in funding companies and businesses that are either revenue producing, or who have a clear plan for using the offering proceeds to become revenue producing in the foreseeable future.

We invite all companies who meet the general criteria (see “What types of companies can raise money on VestLo?” above) to submit a preliminary application by clicking HERE (NOTE: You’ll need to register before you can submit the form).

Yes.

VestLo requires background, criminal and credit checks on each listing company, and each of the primary officers of the company, as part of our due diligence process.

Companies should expect that it will take a minimum of 60 days to complete their offering. That being said, the time it takes to complete a successful crowdfunding offering can vary widely from offering to offering, particularly based on how much the respective company markets its offering. Moreover, not all companies who list offerings on VestLo will succeed in raising capital.

We would say Yes.

While a company does not technically need to have a video to conduct an offering through VestLo, we strongly suggest that they create one. Early-stage investing is a very personal endeavor and investors really like to feel connected to the company and the management team. Videos not only help a company to explain their story/pitch/concept and more easily engage potential investors, but they allow investors to really see the people behind the company.

Yes.

PPM) describing the terms, conditions and risks of the offering. The PPM will include, at a minimum:

  • The established minimum/maximum target amount;
  • The established funding deadline;
  • A description of the Company (name, address, etc.);
  • A detailed description of intended use of the offering proceeds (including compensation to be paid to employees);
  • The identity of all persons/entities owning > 10% of voting equity of the company;
  • The identity of all directors/managing officers of the company; and
  • A description of applicable risk factors.

YES, YES and again YES!

We cannot stress enough that proper and effective marketing is the single most important aspect of any crowdfunding campaign and will absolutely determine whether your offering is ultimately successful. As with any crowdfunding offering, it will simply NOT sell itself. You will NEED to heavily market your offering if you want it to be successfully funded. This includes leveraging all modes of advertising and social media once, and even before, the offering is made live. In fact, the more your marketing team is able to get the word out before the offering goes live, the more successful your offering is likely to be.

As part of your preparation for doing a crowdfunding offering you should put together a thorough and detailed marketing plan which targets those potential investors you think are most likely to invest in your company (e.g. your customers or clients).

If you don't have a strong marketing team in-house, that is not a problem. VestLo can introduce you to our network of marketing professionals who can help you with anything you need

Yes.

A company that lists an offering with VestLo will be able to share information about its offering though ANY form of print or electronic marketing channels, including any and all forms of social media; provided that, by law a company is currently ONLY permitted to provide one or more of the following types of information concerning its offering:

  • a brief statement that the company is conducting an Illinois crowdfunding offering through VestLo.com;
  • the web address of the company’s VestLo offering page
  • the minimum and maximum amount of the offering; and/or
  • factual information about the legal identity and business location of the company, limited to: the name of the company; the address, phone number, and website (if any) of the company; a one-sentence description of the business of the company; and/or the contact information of a representative of the company.

It is also highly recommended that, to the extent possible, any marketing materials providing information about the company’s offering contain a disclaimer to the effect that the participation in the company’s offering will only be open to Illinois residents.

We do not believe so.

Doing an Illinois crowdfunding campaign should NOT make it any harder for a company to find other significant types of funding (e.g. bank financing, “Series A” funding, etc.) later for a couple reasons.

From the equity side, crowdfunding equity investor interests are typically non-voting (though typically have preferred distribution rights) and non-dilutive (i.e. do not have preemptive rights). As a result, subsequent equity investors should be indifferent about those interests being outstanding. Moreover, the equity agreements are typically set up with both (a) an option to buy-out the crowdfunded equity interests in the event of a “Series A” round or other significant funding or a specified threshold; and (b) a right of the company to force the crowdfunded equity holders to sell their interests upon a sale of the company (i.e. a “drag-along” right). As a result, the company will have the flexibility it needs to clean its capital table should that be required

From the debt side, crowdfunded debt is treated the same as ordinary debt. Accordingly, should the company later seek bank financing, the bank will want to see a subordination of the crowdfunded debt to the bank debt. Crowdfunded debt instruments are typically set up with provisions allowing for automatic subordination of the debt to the interest of senior lenders (subject to certain terms like notice to investors) making it easier for the company to meet the requirements of the financing bank.

A successful Illinois crowdfunding campaign can actually make a company significantly more attractive to subsequent lenders and investors. Getting people to invest in a company not only provides the company with additional capital (which lenders like to see) but also serves as a real “proof of concept” when seeking future investors. What could be better evidence of a company’s concept and interest in its product then getting people, particularly the company’s customers, to actually invest their money in the company? This can be a very powerful negotiation tool and source of leverage.

The short answer is, it will vary.

The total costs associated with doing a crowdfunding offering will depend on the particular company, the specifics of the offering, and whether the offering actually gets posted on VestLo. Here is a brief breakdown of the applicable costs:

  • A company may submit its initial application for FREE. li>
  • If the company’s initial application is approved, the company will be asked to supply certain additional due diligence items to VestLo along with a $500, non-refundable, due diligence fee. This fee is used to pay the expenses associated with conducting the required criminal, background and credit checks and with reviewing the required due diligence materials submitted by the company.
  • Assuming that the company passes our due diligence review, and we both still think VestLo is a good fit for the company and its capital needs, the company will be permitted to list its offering on the VestLo platform. For this service (and the assistance of the VestLo staff in facilitating it), VestLo charges a variable fee for its services based on the maximum proposed offering amount (not the total amount actually raised). As a result, the fee can vary significantly from deal to deal, but it will always be agreed upon by VestLo and the company before the offering is listed on the VestLo platform (however, if the company wants, this fee can be paid, in whole or in part, out of the proceeds received from the offering).
  • In addition to the above fees, a listing company will also be required to pay certain escrow, marketing and legal expense in connection with its offering.

While the total cost of each offering will be different, on average a company should budget an amount equal to 7-12% of its maximum proposed offering amount to cover all of the costs mentioned above.

Disclaimer