5 Critical Success Factors for Raising Money Through Equity Crowdfunding This relatively new option can be a boon to entrepreneurs, if done right.
By John Panaccione •
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When President Obama signed the JOBS Act on April 5, 2012, it opened the doors for a new source of capital for small businesses by allowing the use of crowdfunding to raise up to $1,070,000. Since the Securities and Exchange Act of 1934, only accredited investors (generally those individuals with a net worth of over $1 million or income more than $200,000 per year) had the ability to invest in private equity. The JOBS Act opened the door for entrepreneurs to access an entirely new source of capital from non-accredited investors. The new law allows non-accredited investors to invest up to $2,000 per company every 12 months, giving them the opportunity to participate in economic growth while supporting the companies they want to support.
Related: 5 Ways Digital Marketing Powers Your Equity Crowdfunding Campaign to Succeed
Equity crowdfunding often gets confused with pledge crowdfunding. Pledge crowdfunding sites like Kickstarter and Indiegogo raise money for organizations and causes who can only legally offer a gift in return for a contribution. Equity crowdfunding involves selling shares in a company or raising money using a debt offering, which allows for a financial return on a person's contribution.
While the JOBS Act was signed in 2012, the regulations that facilitate the oversight and enforcement of crowdfunding didn't come online until January 2016. By the end of 2017, over 44,000 investors invested close to $80 million in over 200 companies.
The JOBS Act also allowed individual states to adopt similar legislation to be used by companies located within their state and offered to only state specific residents. To date, 35 states have passed intrastate crowdfunding. For example, under North Carolina's Providing Access to Capital for Entrepreneurs and Small Business (PACES) Act of 2016, small businesses in North Carolina can raise up to $2 million, non-accredited residents can invest up to $5,000 per company every 12 months, and accredited residents can invest as much as they want to.
Related: 3 Essentials to Succeeding at Equity Crowdfunding
While the new laws at the federal and state level have created a large pool of new capital for entrepreneurs, there are unique aspects to it that must be considered to be successful when it comes to raising capital using equity crowdfunding:
Have a compelling business case and a fundable offer.
It's not unusual to have thousands of people considering an investment in a business, with hundreds of them investing small amounts. Raising money this way requires that the documentation and supporting material be well-written, concise and comprehensive. This information is often solely what a potential investor uses to decide whether to invest. As a result, there are no shortcuts when it comes to having an attractive financial offer that is supported by a compelling business plan, sound financial projections and required regulatory documentation.
Plan an effective marketing strategy.
Marketing the company and its investment offering must be done within the constraints of the rules governing Title III and the various state programs. This means there is a delicate balance between informing the public about your company and its offering without violating laws associated with definitions of advertising under 74-year-old SEC laws. This means referring potential investors to authorized crowdfunding portals for information about the company and its investment offering while sharing limited information outside of the portal within compliance of the rules and regulations.
Develop your crowd.
An effective equity crowdfunding campaign includes a blend of accredited and non-accredited investors since the goal is to raise enough capital to achieve your goals. Start with the people you know and expect to tap into your personal connections to kickstart the campaign. Then deploy your marketing campaign to reach a broader audience to help fund the remainder.
Related: How to Decide Whether to Crowdfund or Bootstrap Your Business
Comply with regulations.
Receiving authorization to crowdfund is actually receiving an exemption from current securities laws that otherwise prevent us from raising capital from non-accredited investors. We retain this exemption if we follow the rules. This includes remaining compliant even after the crowdfunding campaign takes place. Compliance involves annual or quarterly reporting to regulators and investors along with other requirements.
Make it worth doing.
A successful equity crowdfunding strategy should be process driven to get the job done as efficiently as possible while remaining compliant with the laws that govern the program your using for your campaign. Equity crowdfunding offers a way for small businesses to raise significant capital at relatively low costs compared to the cost of capital from traditional sources.
Equity crowdfunding offers entrepreneurs a new, paradigm-shifting alternative to traditional capital sources like grants, bank loans, angel and venture capital, and the growing number of fintech options. Raising capital from any funding source requires an investment in time and money. The key question is which capital source has the best chance of success at a cost and within a time frame that works best for your funding requirements.
