Turn Your Customers Into Investors Ever hear of Regulation D 506c? If you're raising capital, you'll want to check it out.

By Sally Outlaw

Opinions expressed by Entrepreneur contributors are their own.

Too many entrepreneurs these days are overlooking their best source of investment capital: their own communities of fans and customers. While many business owners leverage their networks for rewards-based crowdfunding campaigns, they neglect to use these same groups for investment-based growth capital.

Related: How to Finance Your Business Yourself

Typically, investment in privately held companies is associated with venture capitalists and accredited investors. But, increasingly, options are available for business owners to also sell their own company shares to the masses.

Specifically, there have been recent, dramatic changes in capital-raising regulations and new software tools that streamline the fundraising process. These tools make it easier than ever for owners to tap into their communities of followers and affinity groups and invite them to be shareholders.

Among the new equity-funding options, the most widely used is Regulation D 506c. This is an update to existing rules that for the first time in decades allows entrepreneurs to promote the fact that they are seeking investment. While this financing route is restricted to accredited investors only, it does permit those raising capital to advertise their offerings, and therefore reach those customers and fans who financially qualify. (There are roughly seven million such accredited investors in the United States.)

A capital campaign can be run either on a company's own website, using software tools such as the CommunityLeader solution for a one-off investment campaign, or through an equity marketplace, such as AngelList, Crowdfunder or any number of other online portals.

If a business' customers are mostly local, it can take advantage of an intrastate crowdfunding exemption as the best way to harness capital from that crowd. The intrastate exemption is an investment offering sold to the general public, and exempt from most federal registration and compliance requirements. As of a few months ago, 19 states had enacted intrastate crowdfunding regulations, and 21 had proposed them.

Related: 7 Tips for Investing in Your First Company

While there are limitations to this approach -- such as a $1 million dollar raise cap in most states and restrictions on advertising the offering -- the intrastate crowdfunding exemption can be a viable and compelling option for local, growing businesses. Imagine being able to offer company shares to loyal customers in addition to your product at checkout.

The newest investment method, Regulation A+, meanwhile, offers a key benefit that other paths do not. With Regulation A+, entrepreneurs can "test the waters" before committing to the time and expense of filing a formal stock offering through the SEC. This means that a business owner can spread the word among his or her customers and the public at large, to assess interest in the offering by inviting potential investors to reserve shares.

If enough interest is generated, entrepreneurs can then embark on the official registration of the offering, and prospective buyers can convert their reservations, once the federal registration has become effective, into a purchase of actual shares. The entire offering process can be promoted right from an entrepreneur's own website. An example of this occurred when Elio Motors successfully completed an almost $30 million dollar raise for its two-seater $6,800 car.

Regulation A+, however, is best reserved for later-stage companies with the resources to oversee the ongoing reporting and SEC compliance required, as this funding option makes the business entity a public company.

Regardless of the financing approach, now is the time to focus on building a community of users, fans, customers and vendors who are excited about your company. Even though much of this engagement now happens online, offline opportunities to share your story and get the public excited about what you are building, through meet-ups and other in-person events, should not be overlooked.

So, whether you're using an established equity platform as an intermediary or raising capital on your own website with software you can integrate, these new pathways to capital take the traditional financing gatekeepers out of the equation. The result is that entrepreneurs can build online communities of shareholders who can be of true long-term value.

Related: Are Investment Advisors Worth the Investment?

Wavy Line
Sally Outlaw

CEO and Co-Founder of Peerbackers and Worthy Financial

Sally Outlaw is the co-founder and CEO of peerbackers.com, a leading crowdfunding consulting and services provider. She's the author of Cash From the Crowd (Entrepreneur Press, 2013) and speaks nationally on the topic of crowdfinance and the JOBS Act.

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