Equity-Based Crowdfunding: The New Kid on the Block

You've come up with a great business idea, and after plenty of due diligence and sleepless nights, you're ready to turn it into something big. Naturally, your first order of business is money. There are a number of ways to raise early capital for your business, and understanding your options will set you up for the best chance of success.
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You've come up with a great business idea, and after plenty of due diligence and sleepless nights, you're ready to turn it into something big. Naturally, your first order of business is money. There are a number of ways to raise early capital for your business, and understanding your options will set you up for the best chance of success.

What we hear about all the time in the media is generally the Series A to D rounds of fundraising, where a business has shown traction, received market validation for which they can justify significant valuations, bringing in funding in the single to triple digit millions of dollars from venture capital or private equity.

But to get to this point - to build a prototype and have something to sell to early customers to get this validation - you need seed capital. Depending on how much cash you need to get started, and how deep your pockets are, you may be able to bootstrap your way to a Series A, using salary from a "day job" or levering your (and your co-founders') savings. But if that won't cut it, there are a few other options. Fundraising amongst "Family and Friends" allows an entrepreneur to legally include up to 35 non-accredited investors in their pool of early investors, while fundraising among "Angels" allows you to tap into rich individuals that qualify as accredited investors, who have an interest in the startup community.

Or there's a completely different approach - crowdfunding - that allows the general public to get behind you and your brand.

In the past decade, "rewards-based crowdfunding" began to gain traction as a viable route to raise seed capital with the launch of IndieGoGo in 2008 and Kickstarter a year later. This type of crowdfunding allows a transaction of cash, in exchange for some type of reward which could be an early version of the product, signed merchandise or ticket to an event. Typically, these campaigns have the dual benefit of building brand awareness and establishing an early customer base (getting that initial validation), but the amounts raised tend to be on the smaller side, with most averaging four-figures or below.

Which brings me to the point of this article, and to a topic that I'm actively interested in right now. It's the new kid on the block, and it's "equity crowdfunding".

In June of 2015, the SEC enacted "Regulation A+" to facilitate the creation of the equity-based crowdfunding system. Unlike the previously-mentioned rewards-based crowdfunding, where investors are repaid with gifts like merchandise or event tickets, equity-based crowdfunding actually grants investors shares in the company, giving them a level of ownership in the business. Before Reg A+, only a wealthy echelon would have the ability to invest in a startup business and reap the benefits of future increases in valuations. Thanks to Reg A+, now virtually anyone can invest up to 10% of their income this way. Private companies have a brand new avenue to raise up to $50 million from the public, and non-accredited investors - not just friends and family! - have an opportunity to get involved.

There are two possible stages of a Reg A+ crowdfunding campaign: The optional first phase is called "Test the Waters" (TTW), and this means time-interested investors can submit a non-binding expression of interest. The second phase is the "Live Offering," when actual investments are made. Both phases are done on platforms like StartEngine or SeedInvest, where companies provide a public "investor deck," inviting people to learn more about the company, the team, the market and the overall investment opportunity. There, the general public can choose a company, and invest money in exchange for equity in the form of shares.

Any company can launch a TTW campaign, but they won't transition to Live Offering until they've gone through a mandatory SEC filing and qualification process. Granted, this process does require significant preparation of audited financials, plus all relevant company information like ownership, debt, and use of proceeds must be made public. Since the process can take several months, some companies see this period as a perfect time to "Test The Waters" and choose to make the most of it by getting their company story out into the public sphere while waiting for full SEC approval. With paid media like websites and display ads, and social media like Facebook and Twitter, the internet age has made it easier than ever for word of great new inventions and technological breakthroughs to spread like wildfire.

As CEO of two start-up technology companies Ultra Mobile and Primo, raising money is always something I have in the back of my mind. And now with Reg A+, it's great to have another option. Although this route is relatively new, the word is starting to catch on. Take some time to learn more about this great new alternative - it may be exactly what your business needs.

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