Crowdfunding has been around as a viable method to gain funding for new products, donations, and services. Recent legislation within the JOBS Act has made crowdfunding a new method for small business startups to gain investment capital. Startups can now legally crowdfund and offer investment opportunities as opposed to simply provide services, products, or rewards. This allows companies the opportunity to raise capital from a wide pool of investors.
Public Investors Have the Capital
By reaching out to investors publicly, companies do not have to worry about relying only on their pre-existing business relationships and networks. They can advertise themselves to investors who may be interested in their product. Once they connect with these investors, they can form a more permanent connection that could lead to continued funding and larger investments over time or introductions to other investors. Making these connections also helps companies develop a reputation and presence within their industry.
Gaining Legitimacy
Gaining capital before meeting with larger investors makes a startup appear more legitimate. When combined with a targeted audience and a solid business plan, crowdsourced capital shows that a startup has a supported idea or product that could do well in the market with the proper support and development. Many venture capital firms or other investment companies love businesses or products that have already been tested in the marketplace, and they are more willing to invest in companies that have shown traction with users, customers, or other investors. Crowdfunding helps companies validate themselves through the crowd so that they are more stable by the time they reach out to other investors.
Various Ways to Crowdfund
At its core, crowdfunding is really the ability to solicit investments from people outside of the private networks of the company raising capital. Thanks to new laws and regulations promulgated by the JOBS Act, there are multiple ways to legally conduct a crowdfunding capital raise. Title III, Regulation CF, is the newest of the bunch, and it allows for small capital raises from both accredited and non-accredited investors. It comes with a lot of limitations so it’s not very practical for most companies, but it’s definitely useful for the right company. Title IV, Regulation A+, allows for larger capital raises (up to $50 million) to both accredited and non-accredited as well. However, large upfront costs and ongoing burdens limits its effectiveness as well. Title II, Rule 506(c), crowdfunding is the one that is most practical. Under this method of crowdfunding, a company can solicit anyone, but only sell to accredited investors who they have taken “reasonable steps” to verify pursuant to SEC regulations. This seems like a burden to reach a small number of investors until one realizes that accredited investors combine to fund over a $1 trillion dollars each year.
Crowdfunding offers numerous benefits for startups and established companies. Keep a close eye on Title II, Rule 506(c), generally solicited capital raises as that’s where most of the crowdfunding dollars will come from.
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