In part one of this series, we talked about a fairly new type of up-and-coming crowdfunding where a business owner offers an investor equity in exchange for funding - Equity Crowdfunding. The most popular type of crowdfunding we usually hear about is very different than equity crowdfunding. So let's dig right in and break those down first:
While crowdfunding, both types, can be great potential options for a business seeking capital, these aren't the only options available. In 2012, the JOBS (Jumpstart Our Business Startups) Act was signed into law, in simple terms, to help more companies attract more investors than ever before. Written into this JOBS Act are a few very important pieces of information you need to know about raising capital.
Let's Talk About 506(c) Offerings
506(c) is a new exemption from the SEC as part of Regulation D of the JOBS Act allowing general solicitation, and public promotion of whatever your business offering may be. While both crowdfunding and 506(c) offerings are designed to make it easier for you to connect with money, there are some critical differences. For instance, 506(c) offerings are more strict about who can invest (investors must be accredited) but has no cap on the amount you can raise, while crowdfunding caps at $1 million per year.
Timing is another major difference between these two options. If you need to raise capital right away and can't wait for the money to come in on it's own time, 506(c) might be a better option for you, especially now that there is no longer a 30-day waiting period associated with this route of raising capital.
Last But Not Least, Regulation A+
Regulation A+ of the JOBS Act, acts like a mini-IPO, in that it allows private companies (you) to go out and raise up to $50 million dollars by offering shares to the general public rather than only dealing with accredited investors. If you are planning on going this route you need to know that you must first file with the SEC to get approval of your mini-IPO prior to launch.
"The final rules, often referred to as Regulation A+, provide for two tiers of offerings: Tier 1, for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Both Tiers are subject to certain basic requirements while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements." SEC Chair Mary Jo White
Should you decide to go this route, there are a few things you'll want to consider. The first one being what size of following you have starting out. If your goal is to go public and have a successful round, the public needs to know you are raising capital. A strong user-base starting out will be the wheels on your vehicle, helping you gain momentum from the start. The "if you build it, they will come" philosophy will not serve you well here. If you build it, they will remain where they are until they know you've built it. A marketing budget for public outreach should be a strong part of your plan... you do have a plan, right?
Weighing the Options
In a recent episode of The Successful Pitch Podcast, Nathan Rose, author of Equity Crowdfunding: The Complete Guide for Startups and Growing Companies, told host John Livesay, "There's a very well established thing in the equity crowdfunding world which is the concept of a lead investor. Crowdfunding absolutely has a higher rated success when you can bring an Angel investor along into the round. Effectively, they anchor the round. Equity crowdfunding is not just a case of putting your campaign on the sites and waiting for the internet to shower you with money. There's typically a two or three months process that goes on behind that to put together all the author material, the video, drum up your supporters. It's a launch, it's a marketing campaign. You got to do a lot of the things in the background before you get ready to go. Whereas an Angel can be a lot quicker and cleaner for the companies."
There's plenty to think about, but several discernable features of each option I've laid out, that will ultimately make it easier for you to understand and decide what is the right path for your business. While it may seem like a large undertaking, the devil is always in the details. And these details are the ones that will make or break your chances at getting funded.
Next Up: PART THREE of Everything You Need to Know About How to Get Funded - How to Speak Investor Not Inventor and Get Funded