Crowding into Crowdfunding: What PR Pros Should Know

New federal regulations permitting crowdfunding have prompted some public relations outfits to offer their services to prospective entrepreneurs.

The 2013 Jumpstart Our Business Startups (JOBS) Act allows startups to solicit funds directly from the public through the Internet. Since many startups couldn’t obtain funding through traditional sources like banks, Congress believed, they should be able to tap the public for capital. The new law and changes to Securities and Exchange Commission (SEC) regulations opened the doors for fundraising startups like Indiegogo and Kickstarter.

It also lead to a crop of PR pros focusing on helping CEOs of startups pitch their ideas to the public. Crowdfunding consultants, both firms and solo freelancers, offer media kits, press releases and email templates as well as their expert advice. While similar to other types of marketing and PR campaigns using social media marketing, media relations, videos and email lists, crowdfunding PR is a new kind of PR niche.

The crowdfunding specialty suffers from a degree of dishonesty and has its share of disreputable salesmen. PR consultants may tell prospective clients they worked on a campaign that produced millions of dollars of capital but neglect to mention they were had just small role in the campaign.

Deliver What’s Promised

Keeping promises is a PR and general business tenant but evidentially isn’t so obvious in crowdfunding. The Forking Path Co. raised $122,874 from 1,246 backers for a new board game, far exceeding its goal. It then decided not to produce the game, claiming that moving costs, licenses and employee salaries had depleted their funds.

In its first crowdfunding case, the Federal Trade Commission (FTC) found that Forking Path never incurred those expenses and instead used donations for personal expenses. In its announcement Don’t Let Crowdfunding be your “Doom,” the FTC said Forking Path misrepresented how it would use funds raised on Kickstarter and broke promises about providing rewards to his backers. The FTC banned Forking Path from crowdfunding and ordered it to pay restitution.

The FTC provides some blunt advice: If you promise rewards, give them. If you promise refunds, provide them. Use the money raised from crowdfunding only for the purpose represented. If you collect money for a project, use the money only for that purpose, not for personal purposes or to start another project.

“Practitioners working with startups that elect to use crowdfunding as a means to solicit capital contributions need to impress upon their clients that guarantees to potential backers must be honored at the risk of legal penalties,” writes Cayce Myers, legal research editor for the Institute for Public Relations and an assistant professor at Virginia Tech’s department of communication.

Myers also offers this advice:

Know the regulations. Looser regulations on raising capital do not mean no regulations. SEC regulations still apply to startups, and they must meet disclosure requirements of the Sarbanes-Oxley Act.

Expect more rules. Federal regulation may expand as crowdfunding grows. Protecting small investors from deceptive promotions, an issue when Congress passed the JOBS Act, will likely remain a concern of regulators. The SEC, FTC and other agencies may introduce new rules. That necessarily does not mean new rules will stifle crowdfunding growth or entrepreneurial innovation.

More Crowdfunding PR Tips

Other experts offer these tips for PR pros working in crowdfunding:

Contain expectations. Budding entrepreneurs read articles about successful crowding campaigns and may have unrealistically high expectations. However, most crowdfunding attempts fail due to lack of preparation.

Be selective about clients. Investigating the startup and its proposed plan prevents future problems. It’s vital to the reputation of the PR practitioner to work only on projects with the potential for real success and to work with clients with experience, resources, and the willingness to do what’s needed.

Spread out payments. Agreeing on a pricing plan that satisfies both the PR consultant and entrepreneur can be challenging. A combination of a percentage upfront followed by a performance fee at the campaign’s conclusion can motivate both parties to succeed. PR firms many need to hire consultants during the course of the campaign. Spreading out payments helps keep those specialists motivated.

Jump out if needed. If you believe a campaign is faltering or lose faith in the startup’s management, the best strategy may be to abandon the assignment and consider it a learning experience.

Bottom Line: The JOBS Act that loosened federal regulations has enabled crowdfunding to mushroom and has created a new PR sector. Looser regulations do not mean no regulations. It is essential for PR pros and their startup clients involved in crowdfunding to follow federal laws that apply to them if they are to avoid legal and financial risks.

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