What is Equity Crowdfunding?
Equity crowdfunding allows people to invest in an early-stage, private company (a company that is not listed on any stock exchange) in exchange for equity (shares, or a percentage of ownership) in that company. This is different from rewards-based crowdfunding, where people can contribute money to campaigns in exchange for perks.
Reg CF Equity Crowdfunding (also known as Title III): Startups raising $100k up to $1M in seed capital fit newly expanded REG CF Equity Crowdfunding nicely. This means that main street investors (both accredited and non-accredited individuals) worldwide can now buy shares in your company. Effective date – May 16th, 2016.
Reg D (Accredited) Equity Crowdfunding (Title II): Startups raising $3M and above fit the existing style of equity crowdfunding platforms, raising capital from accredited (wealthy) investors. Effective date – Sept 23rd, 2013
Regulation A+ Equity Crowdfunding (Title IV) : Successful mid-stage companies, corporate spin-outs (think management buyout), and low risk, large upside startups – fit Reg A+ platforms. You can raise up to $50M per year using Reg A+. Shares can be liquid immediately after the offering, and Reg A+ can be used to take companies public and list on the NASDAQ or NYSE. Effective date – June 19th, 2015
Who can invest in equity offerings?
Since the passing of Title III, any American 18 years or older is eligible to invest in an equity offering. International investors can invest as long as they follow their countries’ securities regulations, so we recommend checking local securities laws before investing.
What are the benefits of investing in equity offerings?
As with any investment, there are always risks. There is always the possibility of losing all or a portion of your investment. However, the unique nature of investment crowdfunding offers many benefits that investors won’t find anywhere else. Because most offering companies are early-stage startups, you get a chance to be a part of the journey, with the potential to participate in the company’s upside. You’re showing your support early on, which gives you the chance to feel more engaged and as though you are actually a part of the business. Plus, you can diversify your portfolio, while supporting new ideas as they come to life. If you have ever wanted to be a part of a company’s journey to success, equity crowdfunding could be for you. Investing in an innovative startup gives anyone the opportunity to own a piece of the company and be along for the ride, whether up or down. It’s also a great option for early-stage companies to bring together their communities and engage with their biggest supporters from the beginning.
How much does a crowdfunding campaign cost?
For a REG CF offering of $1.07M expect to spend an average of $46,000 (2020) plus your digital ad costs. Digital ad costs vary project-to-project but it’s advisable to spend at least $10,000 per 30 days of your live offer. Expect total costs of a REG CF raise to be around $65,000 for a $1.07M raise.
For a Regulation D offering of $3 million, you might spend up to $20,000 for a lawyer, $10,000 for platform hosting fees, up to $25,000 for the build of your marketing stack plus around $10,000 per million which includes Digital Advertising costs. If you are raising more it will cost you more. I always advise clients to be prepared to add funds to extend the marketing campaign if the need arises.
Expect to budget around $75,000 to raise $3 million and up to $150,000 to raise $10 million. There is no limit on the amount you can raise using REG D.
Note: The costs of the offering are routinely charged to the investors and recouped by the company when the offering is completed. So, the company has no out-of-pocket costs from the offering when all is said and done.
There are “adjustments” that can be made to some offerings that allow the company to recoup the costs they expended before the full amount is raised. In those cases, the initial legal and marketing costs can be redeployed to provide additional marketing spend to complete the offering.
Reg A+ offerings are time consuming and expensive. It can sometimes take 6 months or more for lawyers to prepare the paperwork and for the SEC to review, comment and approve an offering. Legal and accounting fees alone can easily reach
Reg A+ offerings make sense if the company (issuer) is consumer facing (B2C) and are attempting to raise at least $10 million. Expect total costs, including Digital Advertising for a $10 million raise to be in the region of $250,000 or more.
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