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How Does Equity Crowdfunding Work?

Published by Salvador Briggman. Find him on Twitter.

The crowdfunding platform Kickstarter has taken the world by storm, having raised more than $3 billion for entrepreneurial and creative projects.

While this is extremely impressive, Kickstarter is limited in one key way.

You can’t actually own equity in the companies that you support. You can only pre-order the products that they create.

This has all changed!

As of May 2016, retail investors can now gain access to previously closed off deals via Title III of the Jobs act. This is also known as regulation CF or regulation crowdfunding.

Equity crowdfunding platforms have emerged to connect startups with investors looking to get on the ground floor of new companies that have the potential to be the next Uber, Facebook, or Google.

Despite this first step towards the democratization of funding, there is still a lot of confusion around how equity crowdfunding works and how you can use it.

I’m going to answer a lot of the common questions in this post, along with explaning the different types of equity crowdfunding.

How can YOU use equity crowdfunding?

You can use “equity crowdfunding” to raise money online for a startup company from a pool of investors, referred to as “the crowd.”

Each equity crowdfunding campaign has:

  • a fundraising goal
  • funding duration
  • deal terms
  • and pitch that investors can use to learn more about the startup company.

After looking through the pitch video and the campaign text, an investor can decide whether or not they’d like to own a bit of the company. There may be an investment minimum, which varies from deal to deal.

As long as the deal is still open, you’ll be able to invest in the company and own equity in the startup. Pretty cool, huh?

Previously, a founder might raise money initially from a small group of angel investors. In later stages, they might bring in more angels or a VC firm.

Under this model, rather than investing $25,000 – $1 million in a company, investors are putting in smaller amounts (think $1 – 5k).

So you’re getting the attention of A LOT of investors, who end up turning into your brand ambassadors. It can be very powerful.

How well has it worked for platforms?

As a platform, you can either raise funds for startups under Regulation CF or Regulation A+ of the Jobs Act.

Regulation CF of the Jobs Act was put into effect in May of 2016. One year later, over $36 million has been funded through these new rules. The major Regulation CF platforms include:

According to the WeFunder statistics, at the time of writing, there have been over 50,000 successful investments in the marketplace and 164 successful offerings over $50k.

In total, this is about $34 million in total funding in the first year. If we were to compare this to Kickstarter, this platform raised ~$27 million in their first full year and $99 million in 2011.

While $34 million in total funding under Regulation CF might appear dismal in comparison to VC or Angel funding, it’s important to remember that massive new trends start small.

We’ll be able to tell just how much Regulation CF catches on in the next couple of years.

Startups have also used Regulation A+ to raise money from non-accredited retail investors. These have been referred to as mini-IPOs. This has been available since June of 2015.

According to an sec white-paper, “Between June 19, 2015, and October 31, 2016, issuers in 147 offerings sought up to $2.6 billion in financing, including up to $1.5 billion across 81 qualified offerings. Approximately $190 million has been raised during that period, and the average issuer was seeking approximately $18 million.” – Source

As you can see, Regulation A+ has raised more money than Regulation CF and the average raise has been larger. I’ll go more into why when I talk about how these two raises differ.

It’s important to note that Regulation A+ has also been used to raise money for real estate offerings, not just startup ventures.

Finally, as a platform, you can raise money for a startup under Regulation D (506b or 506c). This is similar to a traditional offering to angel investors.

How does it work for investors?

As an investor, there are limitations regarding which types of offerings you can invest in.

I know, it sucks, but that’s the rules!

The major limitation is on the status of YOU as an investor. Mainly, are you an accredited or un-accredited investor?

An “accredited investor” is simply a fancy way to say that you’re a high net worth individual and can afford a financial loss.

While there is more to the definition, in general, accredited investors must have an annual income of $200,000 for the last two years with expectation that this will continue into the future. They could also have more than a $1 million net worth (excluding their house).

This is roughly 8.25% of American households or 10,108,811 people who qualify according to the Federal Reserve (2013).

I find it hilarious that the term has nothing to do with your savvy as an investor and rather with your ability to absorb a loss.

Now… non-accredited investors (most of you reading this) can invest in Regulation CF offerings AND Regulation A+ offerings. However, you cannot invest in Reg D offerings.

The reason that equity crowdfunding is getting a ton of press is because previously, most startups raised money under Regulation D. These investments were reserved for the ultra wealthy.

Now, ANYONE can invest in a startup company before it goes onto the public stock market.

Cool, eh?

The only other thing I’d point out before we get into how this works for startups is that there are some rules guiding when you can SELL the shares that you purchase. These vary depending on the type of offering.

The rules are more comprehensive, but in general, Reg CF offerings require you to hold them for a year. You can sell them instantly under Regulation A+.

How does it work for startups?

This is really where many of the differences come into play, particularly when it comes to:

  • The financial costs of doing the offering
  • How you can broadcast the offering
  • The amount of money you can raise
  • Ongoing reporting requirements

Let’s start with the legal fees. According to Amy Wan on CrowdfundInsider, the legal fees for doing a Regulation A+ offering are hovering at about $100,000 per filing, exclusive of blue sky and auditing fees.

“At least two issuers spent approximately $500,000 on legal fees—one with a large law firm and another with a smaller law firm. For the most part, the legal fees are about what one would expect, with national and big law firms charging in the $150,000 – $300,000 range for representation, and smaller law firms generally charging less (although there are some notable exceptions).” – Source.

With Regulation A+, you can raise upwards of $50 million in a 12 month period under Tier II and $20 million under Tier I. Tier II requires more federal requirements but exempts you from a state-level review of your offering docs.

The great thing about Regulation A+ is that for the most part, you can freely promote the offering. You can also do a test-the-waters period to collect non-binding indications of interest and see who’d be interested in investing in the startup.

A Regulation CF offer differs a little bit, because you can only raise $1 million within a 12 month period. In addition, you are confined to basic tombstone style advertisements which direct viewers to the funding portal for more info.

Overall, Tier II of a Regulation A+ offer has the most reporting requirements. CF and Tier I are less hassle.

This might make a Reg A+ offer a better fit for an established company an a Reg CF offering a better fit for a young startup.

A Special Equity Crowdfunding Offer For YOU

I’ve been in the talks with WeFunder for a while now. As you know, they are one of the top platforms in the industry.

I’m happy to share a special equity crowdfunding offer with you here today…

You’re going to get a massive $1,000 discount when you sign up today.

Basically, you’ll get a $1000 discount from their fees when your fundraising campaign closes.

Insane, right!?

Right now, this is only being offered to members of the CrowdCrux community who sign up through my special link.

As far as I know, you can’t find it on their general website.

In order to qualify for this deal, you MUST file “Form C” with the S.E.C. and authorize them to launch YOUR Regulation Crowdfunding campaign.

Sound good?

These guys have been absolutely crushing it when it comes to equity crowdfunding campaigns. Just take a look at their stats below!

We’re in the early stages of equity crowdfunding and this platform has been rising above the rest. They’ve been consistently funding campaigns, to the tune of more than six figure just last week.

In addition, they’re pulling away from the pack when it comes to total funding for Regulation Crowdfunding offerings. Take a look at the chart below.

I don’t know what the future holds, but I do know that the early “Kickstarter successes” had a major advantage in the marketplace.

They got tons of funding, media attention, and now a days, it’s much harder to get funding on Kickstarter.

There is a window of opportunity with equity crowdfunding, but I don’t know how long it will be open before the “gold rush” starts and everyone knows about it.

Start your equity crowdfunding campaign on WeFunder.

P.S. Thank you for using my special link. Not only do you get the discount, but I also get a small commission at no expense to you. This helps me fund the production of quality educational content for the community.

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