This week on NVTC’s blog, Alex Castelli, CPA, is partner and Technology and Life Sciences Industry Practice Leader at NVTC member company CohnReznick, explains how crowdfunding has become such an attractive financing vehicle for technology companies.


7K0A0597[1]The technology industry stands out as a major beneficiary of this promising method of capital raising. In 2014, technology was a leading sector in terms of capital commitments – at around $98.5 million – and led the number of raises that have been offered since inception, according to Crowdnetic’s Quarterly Private Companies Publicly Raising Data Analysis.2 Capital commitments in the technology industry trailed only behind the services industry.

So why has crowdfunding become such an attractive financing vehicle for technology companies? And what is required to launch a successful crowdfunding campaign?

Proving legitimacy and demand

Obtaining financing from traditional lenders such as banks, angel investors, and venture capital firms can be difficult for some early-stage technology companies. Crowdfunding offers an additional source for raising capital. Many investors are eager to support innovative ideas or services, and the growing legitimacy among accredited investors to provide financial backing through the internet has contributed to the popularity of crowdfunding. For tech startups, crowdfunding is an effective way to demonstrate to lenders the demand for a product or service and also to justify the company’s financial projections. Technology companies that have successfully secured accredited investors via the web are especially attractive to traditional lenders as their ideas have reached a level of legitimacy and approval.

Testing the markets and building brand awareness

In addition to raising capital, crowdfunding provides a platform for technology entrepreneurs to test the success of their product or service once it is officially on the market. Through this process, an entrepreneur can determine whether to continue investing time and money in a particular product or service based on feedback from potential customers. Doing so avoids involvement in a venture that may ultimately prove to be futile. The exposure of a product or service through crowdfunding offers the ability to build brand awareness and develop a loyal community of customers right from the start. Developing a loyal following can generate word-of-mouth advertising that can boost a startup business to success.

Finding success

There is a commonality among crowdfunding success stories. Deals receiving funding typically have outside sponsors who advocate on behalf of the deal. These are usually prominent investors who are willing to put their names on the deal and endorse them personally. This signals to other investors that it is a quality opportunity. “This is not so different from the way investments have always been done,” said Steven Dresner, CEO of Dealflow. “In the past, one prominent venture capitalist would put a million dollars in a deal, and then the startup could use that as leverage to attract more VC money. Now it is just taking place in a whole new forum.”

What does the future of crowdfunding hold?

Notwithstanding its popularity within the technology industry, to date, equity crowdfunding may be best characterized as a “growing” source of capital formation available to private companies. Entrepreneurs continue to test the market in determining how best to utilize crowdfunding as an alternative strategy for obtaining financing, gaining exposure, validating their products or services, and ultimately, expanding their businesses. The influence of crowdfunding on the middle market sector has yet to be fully realized. However, crowdfunding is on track to not only transform how privately held companies raise capital and interact with investors, but to also influence how businesses formulate and implement their go-to-market strategies.

1 https://www.fundable.com/infographics/economic-value-crowdfunding
2 http://www.crowdnetic.com/reports/jan-2015-report


Alex Castelli, CPA, is a partner and CohnReznick’s Technology and Life Sciences Industry Practice Leader. He can be contacted at 703-744-6708 or alex.castelli@cohnreznick.com. To learn more about CohnReznick’s Technology Industry Practice, visit the company’s webpage and follow CohnReznick on Twitter @CR_TechInd.

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This week on NVTC’s blog, John Calanog of member company CohnReznick LLP  offers an overview of Bitcoin in the first of two blog posts on the subject.


Despite the fact that there are nearly 14 million Bitcoins in circulation, most people are not using this newest form of currency. In fact, the vast majority of the population has never even heard of Bitcoin. But that is changing – and changing quickly.

This article – the first of two on this subject – offers an overview of Bitcoin. The second article will analyze a number of U.S. tax implications related to the usage of Bitcoin.

Bitcoin: A Virtual Currency

Bitcoin is, quite simply, a virtual currency. It is a digital representation of money that can be used to purchase goods and services like cash. But Bitcoin differs from cash in that it is not backed by any bank or nation, is unregulated, and has no formal organizational structure behind it. Instead, Bitcoin is supported entirely by a peer-to-peer (“P2P”) network of individuals who manage balances and transactions on their own. Bitcoin functions as an online payment platform with reduced fees when compared to other online payment forms.

In the past few years, Bitcoin values have fluctuated $247 per Bitcoin to over $1,000. As of publication of this article, the 14 million Bitcoins in circulation are worth nearly $3.5 billion.

How Does Bitcoin Work?

To create a digital currency with no centralized organization backing the transactions, Bitcoin was designed so that its users verify and complete transactions. This is done through Bitcoin’s “blockchain,” which is essentially a chronological log of every confirmed transaction that occurs between Bitcoin addresses. Using cryptography, Bitcoin creates mathematical proofs and records to secure the blockchain and safeguard a user’s transaction. These proofs are verified by users who have software that processes (“mines”) the blocks that are part of the blockchain.

The Bitcoin system transmits transactions to the network almost immediately and verifies them within the hour. The mining process helps to create the ledger of payments with Bitcoins. This also helps to ensure that double spending, or a user’s attempt to send the same Bitcoins to two people simultaneously, is prevented.  In this way, users contribute directly to Bitcoin, supporting the currency’s well-being.

Bitcoin in the Marketplace

Because Bitcoin technology is extremely complex, use of Bitcoin was originally limited to those with software expertise and a unique interest in alternative currencies. As the currency has become more widely accepted, an ecosystem of service providers has developed to facilitate transactions. Now, just about anyone can participate, even those without a technical understanding of the currency.  The ecosystem is still evolving and now includes retailers, payment processors, banks, e-wallet companies, trading solutions, and currency exchanges.

Some very well-known companies are among those that support Bitcoins. They include Microsoft, Dell, Overstock.com, Virgin Galactic, Sacramento Kings of the NBA, Amazon.com, Reddit, Expedia.com, PayPal, eBay, Tesla, Etsy Vendors, and Time, Inc. Even some professional services firms, including law firms and accounting firms, now accept Bitcoin.

How Does a Business Do Business Using Bitcoins?

To accept Bitcoins as payment, a business sets up a merchant account with a Bitcoin exchange.  From there, the business can issue invoices and receive payments in Bitcoins, convert them to dollars (or local currency), and then transfer them to its bank account.

If the business is not interested in converting Bitcoins to local currency, it can hold on to its Bitcoins and trade them. The business can register for a free online e-wallet, such as Blockchain.info. It can then give anyone its Bitcoin e-wallet address, and customers can remit Bitcoins as payment. The business has the ability to send its Bitcoins to any other e-wallets across the globe.

Bitcoin Exchanges

There are numerous Bitcoin exchanges on the web. They enable customers to convert physical currency into Bitcoins and vice versa. Increasingly, exchanges are offering a greater number of services including a range of both fiat (i.e., face value currency) and crypto-currencies, as well as various trading tools.

Bitcoin exchanges have fallen under scrutiny as one of the world’s first Bitcoin exchanges, Mt. Gox, mysteriously lost 850,000 Bitcoins. This left the exchange insolvent and many customers out-of-pocket. Many Bitcoin traders have since become wary of these exchanges, yet the exchanges continue to thrive. Four of today’s major Bitcoin exchanges include Coinbase, Bitstamp, BTC-e and Cryptsy. In January of this year, Coinbase launched the first regulated Bitcoin Exchange in the U.S in an effort to add stability to the Bitcoin ecosystem.

Looking Ahead

It appears that Bitcoin is a real and lasting game-changer. It has globalized currency with capabilities beyond our current monetary system. CohnReznick looks forward to monitoring the future impact of Bitcoin, and other virtual currencies, on businesses and the financial markets.

_________________________________________________________________________________

The content of this article is intended to provide a general commentary on the subject.  Specialist advice should be sought about your specific circumstances.

John Calanog, CPA, is a Tax Manager with CohnReznick LLP and is a member of the Firm’s Technology Industry Practice.  John’s experiences over the last fifteen years include U.S. tax compliance and consulting for C Corporations, S Corporations, Partnerships, and high net worth individuals who operate businesses in a wide variety of industries and taxing jurisdictions.  Contact John at john.calanog@cohnreznick.com. Follow CohnReznick’s Technology Practice on Twitter via @CR_TechInd

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