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Equity Crowdfunding Myths Debunked

Equity Crowdfunding Myths Debunked

Equity crowdfunding, also known as regulation crowdfunding, helped pave the way for private companies to raise capital from their “crowd”, or the community around them. While many private market investments have limits on who can invest, typically limited to wealthy individuals who meet specific criteria, crowdfunding allows non-accredited investors the opportunity to invest in startups. There are a few myths about equity crowdfunding floating around that we are aiming to debunk.

Who Raises Using Regulation Crowdfunding?

One myth surrounds who raises using regulation crowdfunding.  Some may believe that only the earliest stage companies utilize equity crowdfunding when raising capital. When comparing offerings on some of the popular crowdfunding websites, some, but not all, of the companies using regulation crowdfunding are pre-revenue early-stage companies. Some form of established traction is common, typically around 6 months of operation, and it may be more common than you would think to see companies that are already generating revenue. If a company with a regulation crowdfunding offering is pre-revenue, it typically needs to have a solid go to market strategy and established product-market fit to be successful.

There are largely two categories of companies that utilize regulation crowdfunding. Those who are using it to receive their first fundraising to kickstart operations, and companies using it as a marketing tactic, with the raised funds as a bonus. From the extra eyes on the business that come from listing the offering on a broker-dealer platform or funding portal, to the general solicitation rules that allow companies utilizing this exemption to broadly advertise their capital raise via newspapers and social media, equity crowdfunding can be used as a marketing tool to promote the business and potentially gain additional customers.

When it comes to industry, tech companies tend to be the most popular industry utilizing crowdfunding, like medtech, SaaS, fintech, and cannabis tech. However, regulation crowdfunding has become industry agnostic in recent years. Business to consumer (B2C) companies have been historically most attractive, but business to business (B2B) companies, main street businesses, real estate companies, and medical devices have all seen success through crowdfunding.

Myth: Regulation Crowdfunding is Just Like Kickstarter/Indiegogo

Hearing the term crowdfunding, some may be inclined to think of the popular crowdfunding platforms like Kickstarter and Indiegogo. While there is some overlap between Kickstarter and regulation crowdfunding, they are largely different in the offering types. Kickstarter and Indiegogo allow companies to raise capital, typically to begin production on a consumer good or similar product. While regulation crowdfunding also allows companies to raise capital, the difference falls with what the crowd receives in return for their “investment”.

With rewards-based platforms like Kickstarter, people typically receive perks like a physical good or service in exchange for the capital they put towards the company – whether a t-shirt, prototype product, gift card, or discounted or free services. With equity crowdfunding, investors may receive an ownership stake in the company (equity), a percentage of generated revenue (rev share/debt), or an instrument like a SAFE, a simple agreement for future equity. What is received in exchange for the investment is one of the differentiators between Kickstarter and regulation crowdfunding offerings.

Another difference between the two types of crowdfunding are the rules and regulations companies must follow when raising capital. Regulation crowdfunding tends to be a more diligent process than rewards-based crowdfunding. Kickstarter and other rewards-based websites are regulated by the Federal Trade Commission (FTC), while broker-dealers and funding portals who facilitate regulation crowdfunding fall under securities law and are monitored by the Securities and Exchange Commission (SEC). Because of securities law, companies utilizing regulation crowdfunding must adhere to the SEC’s regulations and typically have more reporting and paperwork to complete than rewards-based crowdfunding before launching the offering.

The pressures companies face with each type are also different. With rewards-based crowdfunding, there is pressure to fulfill perk orders once the funding has been received. With equity crowdfunding, the pressure can be greater, as the company now has shareholders to keep in mind when making business decisions. However, the two types can also work hand in hand. Some companies have begun their crowdfunding journeys on rewards-based crowdfunding platforms, and once they are ready to raise more funds, they have proceeded to launch a regulation crowdfunding offering. While rewards-based crowdfunding and equity crowdfunding are similar in the sense of raising capital from a crowd of people, they are different in the required rules and regulations, the responsibilities faced upfront and post-funding, and what is received in exchange for the investment.

Myth: If You List it, They Will Come

Just because a regulation crowdfunding offering is listed on a platform does not mean the investment opportunity will immediately begin receiving investments. Direct outreach plays a large role in collecting investments, and businesses should be actively seeking out potential investors, contacting family, friends, and acquaintances that may be interested in the investment opportunity, and utilizing general solicitation to actively reach potential investors.

There is a large time and effort requirement to successfully raise capital via equity crowdfunding. Some broker-dealers or funding portals may provide a small level of marketing guidance or marketing efforts on the company’s behalf, but the onus is truly on the founders and employees of the company raising capital to seek out investments. Friends, family, and acquaintances typically can have a more vested interest in the success of a company when compared to strangers seeing the crowdfunding offering on a website, and companies should rally their crowd to potentially reach success.

Myth: Regulation Crowdfunding Will Mess Up My Cap Table

While the individual investments with equity crowdfunding are typically smaller cash amounts, this does not mean that there will be added lines on the company’s cap table. Regulation crowdfunding utilizes financial instruments like crowd notes to consolidate the investments into one line on the cap table. The broker-dealer or funding portal the raise is hosted through will typically manage the details of consolidation, but regulation crowdfunding may not muddy up a cap table.

Myth: I Need to Hire a Marketer for my Raise to be Successful

This myth is highly subjective, as some companies may find more success through hiring a marketer, while other companies may find more success through directly marketing their raise themselves. Truly dependent on the size and strength of the company’s personal network, an outside marketer may be able to uncover new audiences of potential investors and customers. However, if a company already has a large and established crowd who is personally vested in the success of the company, an outside marketer may not be necessary to help find success. Outside marketers can be used to find additional interest once the company’s own crowd has been exhausted to bring in additional funds.

You may be wondering, why would I use a crowdfunding platform if I’m just going to reach out to my own network? Crowdfunding platforms provide a level of administrative knowledge and support a startup may not have the resources to devote the time. Crowdfunding platforms provide another channel for potential investors to find your business while also providing a way for businesses to collect investments in a regulated environment while upholding SEC rules and regulations. 

So Why Use Regulation Crowdfunding to Raise Capital?

As mentioned before, companies may choose to utilize regulation crowdfunding to raise capital and also as a marketing tactic. Crowdfunding can serve as an immediate capital injection for a business to expand operations, keep up with growing demand, or hire new employees. Rolling closes can be helpful in this regard. A rolling close allows a business to withdraw some of the raised capital without having to cease incoming investments. A business can utilize some of the funds immediately while still collecting new investments. Rolling closes can be beneficial because they are less intensive than closing a round and beginning a new funding round. The immediate capital injection can be useful for many businesses.

In addition, regulation crowdfunding can be beneficial as a marketing tactic. Existing customers have the opportunity to become a stakeholder in the business, and investors may eventually become customers as well. Done well, these marketing efforts can have a lasting impact on the business through customer acquisition, brand recognition, and establishment as a thought leader.

Final Thoughts

Regulation crowdfunding helped open new doors for private companies to raise capital from their friends, families, acquaintances, and others. It can be useful for capital injections, but also as a marketing tactic for potential customer acquisition. While there is some overlap with rewards-based crowdfunding, equity crowdfunding it its own method that comes with its own set of rules, regulations, benefits, and risks. Many businesses and industries use equity crowdfunding to raise capital, regulation crowdfunding is not limited to specific business growth stages, and it may not muddy up a cap table through accepting smaller dollar investments. Do you think your business is ready to raise capital? Visit our website to apply to raise capital through MicroVentures’ platform.

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.