Beyond Kickstarter — Equity and Regulation Crowdfunding (RegCF) Basics
Cryptocurrency isn’t the only hotshot on the block for cutting-edge finance. Equity crowdfunding is taking off as well. 💪 In fact, the equity crowdfunding sector grew 77.6% from 2019 to 2020.
Equity crowdfunding, also called Regulation Crowdfunding (RegCF), refers to startups and companies’ ability to crowdsource funds from more people than before. Up until recently, regulations from the 1930s excluded most people from investing in startups and company funding rounds. We’ll get into that soon.
But first, let’s set the context. #Crowdfunding, or asking groups of people to invest in a project or business, is not a new concept. The Statue of Liberty 🗽 was crowdfunded mainly by micro-donations from French (merci,amis! 🇫🇷) and American citizens around 1885. Many of the American donors were recent immigrants. About 120 years later Indiegogo (2007) and Kickstarter (2009) brought a reward-based crowdfunding model to the web.
Crowdfunding continues to evolve. One of the most exciting developments is equity crowdfunding which allows companies to crowdfund online from a wider pool of investors than before.
Equity crowdfunding has two versions — Regulation crowdfunding (RegCF) and A+ crowdfunding. RegCF is more common; many sources use the term interchangeably, but just be aware that RegCF is not the only type of equity crowdfunding. We’ll go into a few more details in this post.
To get to this point, advocates for equity crowdfunding had to poke the bear, or rather two bears, aka the US Congress and the SEC, to update finance regulations in existence since the 1930s. These regulations limited who could invest in startups and #venturecapital funds by stipulating “accredited investors” requirements.
Read on to learn more about the evolution of crowdfunding and today’s equity crowdfunding landscape.
You may be familiar with sites like Indiegogo and Kickstarter. These platforms popularized #reward-based crowdfunding. The reward model is what most people think of as online crowdfunding. Entrepreneurs have used this model for years to help fund everything from documentary films to new product ideas.
With reward crowdfunding, the host pre-sells rewards to raise money. The level of reward is based on the donation amount. The host promises to deliver rewards within a specified amount of time. Anyone with a credit or debit card, or, increasingly, a crypto account, can participate in reward crowdfunding.
One fundamental difference between reward and equity crowdfunding is the investor relationship. With reward crowdfunding, the official connection with the company ends after the donor receives their reward. Of course, the donor may still support the brand with advocacy and future purchases from the company.
In equity crowdfunding, there is an ongoing legal relationship with investors after the fundraising phase. If fundraising is successful, the company gains hundreds, if not thousands, of investors as brand ambassadors with a vested interest in the company’s success.
The (Sloooow) Rise of Equity Crowdfunding
Before 2016, startups seeking to raise capital could not join the crowdfunding boom. Startups had to stay with traditional options, such as seed capital and #SeriesA fundraising rounds.
Why? The Securities Act of 1933 only allows accredited investors to buy securities. An accredited investor is someone who made over $200,000 annually over the past two years ($300,000 if combined with a spouse) or over $1M in net worth. Their primary residence is excluded from the equation.
In 2012 the JOBS Act created new opportunities for equity crowdfunding. Companies could raise money by selling securities, such as equity or a convertible note, to smaller investors.
This change took four years to come to pass because the SEC took that long to write new regulations.
It was not until 2016 that equity crowdfunding became a real possibility. This was big news because now more people can invest in private companies’ fundraising efforts. Equity crowdfunding is unlocking a vast new pool of capital and opportunity for more people to benefit from a company’s growth, and also to feel the sting of flameouts, too.
Fast forward to today, and equity crowdfunding is growing across many industries. The biggest sectors include food and beverage, technology, media, real estate, banking. In 2020, over 150,000 people invested in offerings, a 75% increase over 2019.
The top 5 states for issuers, investments, and investors were: California, Texas Florida, New York, and Massachusetts. The first four just happen to be the most populous states in the US, and all have significant activity in the startup space.
Two Types of Equity Crowdfunding
Just because the SEC modified regulations for who can invest doesn’t mean the floodgates are wide open. 🤦🏿♀️ Even though companies can now raise money from non-accredited investors, there are still limits on the amount individuals can invest based on their income and net worth. In general, investors cannot resell their securities for one year.
There are now types of equity crowdfunding: Regulation Crowdfunding (RegCF), and A+ crowdfunding. The main difference between them is the limitation of the money raised (sometimes just called “the raise.”) Regulation Crowdfunding is the term used most widely, sometimes synonymously, with Equity crowdfunding.
Regulation A+ also called the mini IPO, allows companies to raise up to $75M per year. Regulation crowdfunding (RegCF) allows companies to raise up to $5M per year.
Let’s dive into some more details about equity crowdfunding.
Rules for Equity Crowdfunding
I interrupt this post with a message from me:
👉 👉 👉 I am not offering you financial advice on anything. I am not a registered broker-dealer, VC wannabe, or financial advisor of any kind. The following info is for informational purposes only. I’m a writer ✍️ and I support leveraging technology and updating regulations to expand opportunities for people who are not already #buku rich. ⚖️. Billionaires are cool, but the opportunity playing field needs leveling on a global scale. 🦸🏽♀️
Now back to the regularly scheduled programming, aka this post.
So now that equity crowdfunding is legal, anyone can put up a website and start raising millions from investors, right?
The SEC has detailed rules for conducting an equity crowdfunding campaign.
Companies may raise a maximum of $5M during 12 months. They must set a minimum funding goal. If they don’t meet their total goal, they can close the funding round if they have hit the minimum.
Overview of Guidelines for Conducting an Equity Crowdfunding Offer
Companies must use an SEC-registered intermediary. The two choices are a broker-dealer or an online funding portal.
Regulations require the intermediary to conduct background checks on officers, directors, and 20% equity holders. It will also conduct “bad actor” checks on issuers and participants. Certain criminal convictions and SEC disciplinary orders may result in disqualification from the process.
Companies must also disclose certain information in filings with the SEC, investors, and the broker/dealer or portal facilitating the offering.
Overview of Rules for Advertising Equity Crowdfunding Campaign
There are some restrictions for what companies can say, and when, about their campaign. 🙊 For example, company officers may not talk about the fundraising campaign in public until they have filed Form C with the SEC.
After the crowdfunding launch, companies may promote the campaign using any medium, including social media, but they may not mention specific deal terms. When linking to the crowdfunding offering online, they may use only the link to the online portal or platform, not to a company website or other location.
To cover all their bases, companies should be sure to review campaign advertising dos and don’ts with their broker-dealer or portal platform.
The Difference Between Broker-Dealer and Funding Portal
A broker-dealer is either an individual or a firm that can act as a brokerage agent for the company.
The funding portal hosts a website and ensures your offering meets security laws. A portal is more streamlined and usually less expensive than a broker-dealer. Funding portals have different requirements, so be sure to check with the specifics of each one.
Companies must disclose certain information in filings with the SEC, investors, and the broker/ dealer or portal facilitating the offering.
The Equity Crowdfunding Portal
RegCF portals streamline the regulatory compliance of equity crowdfunding. The SEC has rules governing portal dos and don’ts:
✅ Funding portals are required to:
- Provide investors with educational materials about the offer and RCF process.
- Take measures to protect investors by reducing the risk of fraud.
- Host up-to-date information about the issuer and the offering.
- Facilitate the offer and sale of crowdfunding securities.
☠️ Here are some things funding portals may not do:
- Offer investment advice or make recommendations about offers.
- Solicit offers to buy securities on the platform.
- Compensate others for solicitation or sale of securities.
- Handle investor funds or securities.
In contrast to the broker-dealer, who is able to do all of the above 🕺🏿 💃🏽 , the funding portal is more like a marketplace, giving equal opportunity to all companies on the platform.
What Experts Suggest to Look For in a Crowdfunding Platform
Some portals, or platforms, have niches for their deal flow. Others allow wider participation. Which platform is best for clients depends upon the industry and company.
Researching the platform’s investor community is important because the investor network can significantly impact the reach of the campaign.
Three leading portals dominate the industry in 2021. Wefunder, StartEngine, and Republic account for over 80% of the 2020 Reg CF deal flow in terms of capital raised.
Here are ten metrics to consider for the best crowdfunding fit for your campaign:
- Total amount of capital raised
- Number of active investors
- Types of investors
- Types of companies
- Number of campaigns
- Average raise per campaign
- Platform fees
- Due Diligence
- Valuation ranges
- Securities options
Is it possible to put an offer on more than one platform? Yes, but many experts advise against this because it spreads internal resources too thin. Their opinion is that it is better to spend the time to choose the right platform and then be “all in” with that one.
For more information about equity crowdfunding, check out these well-done videos on YouTube.
Comparisons of all kinds of crowdfunding:
Your Guide to Understanding Crowdfunding
This video is dated in that it was created before RegCF was legalized, but it has a good visual explanation of the differences of crowdfunding types. Crowdfunding vs. Equity Crowdfunding
Equity CrowdFunding 101 with Jabari Johnson https://youtu.be/WI7EuwlxcPQ
👉 👉 👉 Disclaimer 2: This post is for informational purposes only. This is not investment advice. I am a writer, not a registered investment advisor or broker-dealer. Please talk to a registered investment advisor or broker-dealer or securities attorney for up-to-date information and advice.
If you have questions, see something missing or incorrect, I appreciate constructive feedback. 🤔 Thank you!