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Fact vs. Fiction: Exploring 6 Common Equity Crowdfunding Myths

Fact vs. Fiction: Exploring 6 Common Equity Crowdfunding Myths

As a relatively new industry, there is certainly no shortage of misconceptions surrounding equity crowdfunding. From the costs of running a campaign to the difficulties of adhering to regulations, we’re discussing some common myths that may deter business owners from pursuing equity crowdfunding as a source of funding.

Debunking 17 of the Most Common Startup Myths

1) Equity crowdfunding is too expensive

We’re not going to tell you there are no costs involved if you want to run a successful crowdfunding raise. A Form C is required by regulation, and essentially provides a snapshot of your company’s finances. In order to make filling out the Form C quicker and easier (see #4), we use iDisclose, which is $1,500.

Additional costs to consider would be a legal review, marketing or video production, and accounting. Legal review runs around $1,000, and accounting costs can vary depending on how well-maintained your financials are. And if you handle accounting or marketing in-house, those costs can be cut completely. MicroVentures also does not charge startups the commission fees most other crowdfunding platforms charge, so that’s more money in your pocket.

While there is no getting out of spending a little bit to run an equity crowdfunding campaign, the maximum amount startups can raise is currently $1.07M, so the initial investment has the potential to pay for itself.

2) Running a campaign diverts too much time away from day-to-day business

It’s true that running a successful campaign takes planning, time, and effort, just like anything else worth having. While some may consider this time better spent focusing on running your day-to-day operations, we would argue that a well-run campaign feeds directly into your day-to-day efforts.  A good campaign will develop relationships with current customers, help to acquire new customers and market your business – all things you should be doing anyway if you want your business to be successful. Undoubtedly, this takes work, but the juice is worth the squeeze when thinking long-term.

3) Equity crowdfunding is only for early-stage startups

This misconception likely stems from the fact that lots of early-stage companies utilize equity crowdfunding to get their ideas off the ground. While equity crowdfunding is a great option for young, early-stage startups, its benefits aren’t limited to those, and can even be used by companies who have already secured funds through traditional venture funding. In fact, for companies that are in later-stage rounds, an equity crowdfunding campaign could potentially run alongside or as a part of a larger funding round. Besides, what business can’t benefit from exposure to new potential customers?

4) There are too many complicated forms

We’ll concede the fact that disclosure regulations can be intimidating. Luckily, we’ve worked to make this is streamlined and painless for the startups that raise on our platform by using iDisclose, which we briefly touched on earlier. iDisclose is an automated system that generates a Form C that our due diligence team then reviews before filing. If you try to complete this on your own, it can get hairy, so we feel the $1,500 spent on iDisclose is money well spent.

Another misconception about equity crowdfunding is that you must complete a financial audit. In some cases, this is true, but only if you’ve already raised via Reg CF in the past. You are, however, required to do a financial review if you want to raise more than $107,000.

You also are not required to provide your crowdfunding investors with an annual tax report – you’re only required to file a Form C-AR.

5) Regulations around marketing & advertising are too restrictive

Upon first inspection, some of the rules around verbiage you can and cannot use to market your raise can be a bit perplexing. The main things to remember are:

  • You cannot publicly announce your raise before it goes live
  • You cannot mix terms and non-terms communication

For more details on terms and non-terms communication, check out one of our recent blogs, where we go more in-depth on the do’s and don’ts of marketing your raise.

Marketing Your Regulation Crowdfunding Raise: What Issuers Should Know

6) Equity crowdfunding limits potential VC funding

Many assume you can’t raise money through regulation crowdfunding and through traditional VC methods simultaneously. While it would certainly be a large undertaking, there is nothing legally prohibiting a business from seeking out other fundraising methods simultaneously.

Another misconception we would like to address is the assertion that businesses who raise money through regulation crowdfunding become less attractive to venture capitalists for future raises. On the contrary, running a successful crowdfunding campaign can signal to VC’s that you have a strong base of supporters, which is a competitive advantage that shouldn’t be discounted.

Because equity crowdfunding is still young, many investors are still getting comfortable with this new way of investing and may still be more inclined to invest through existing connections. In this way, crowdfunding offers businesses a major advantage, affording them the chance to leverage their base – who already know and trust them.

Interested in raising capital for your business through MicroVentures? Apply for an offering today.