Looking for ways to help portfolio companies find funding? Equity Crowdfunding also known as, Reg CF, may be a creative way to help your companies fill the rest of their round or leverage a small bridge round! Before any company decides to go down the Reg CF path, there are a few important points to consider. This blog aims to lay out the pros, cons, and other important aspects of pursuing Reg CF funding to consider when deciding on which path is best for a company.
Benefits of Reg CF
In recent years, Reg CF has become a normalized alternative for companies to raise capital publicly from both accredited and non-accredited investors in exchange for equity. There are key differences between reward crowdfunding such as Kickstarter, which operates as pre-sales, and equity crowdfunding (Republic, Wefunder, etc), where companies give up equity. Successful companies like Beyond Meat, KnightScope, Zenefits, Heliogen, NowRx, The Hustle, BeatBox, and many others have used Reg CF to raise capital in recent years. Here are some common benefits companies receive when raising a Reg CF campaign:
- Ability to raise capital from a larger pool of investors
- Providing an opportunity for your supporters to join you in your venture in the early stages
- Brand exposure to increase customer base while marketing for their campaign
- Creating a community of mini-champions in the world for their brand
Trade-offs of Reg CF
Like most things, there are trade-offs to Reg CF which should be considered. Similar to venture capital investing, it’s important to find the right platform to partner with. Each platform has their own processes, fee structures, and investor community, but for now we’ll stick with common trade-offs that come with every platform.
- Upfront costs:
- There are upfront costs that come from filling a Form-C, along with financial and legal reviews, and financial audits for raises over ~$1M. Some platforms may additionally charge your company part of their commission up-front*.
*Note: Be wary of platforms that say they’ll cover these costs as it may be in the fine print that they pay themselves back from your campaign on the back-end
- Filing Form-C with the SEC:
- Companies are required to file a Form-C for a Reg CF and as with anything that deals with the SEC, it’s not a fun or short process. The process is long and some questions can be confusing for first-timers.
Pro tip: Depending on company management you might consider working with a platform that provides white-glove services to help companies fill out their Form-C and any applicable amendments.
- Some companies will be required to undergo a financial review and audit and legal review.
- Some platforms have their own compliance team to review your campaign before it goes live, which may add time to the fundraise, but could reduce the risk of the SEC coming after you when you’re near the finish line.
- Long timeline:
- The due diligence process is usually about 40 - 60 days depending on the preparedness of founders. Once live, depending on which style of raise it could take 2 - 3 months (short raise) or 5 - 6 months (long raise)
- The most common mistake companies make here is that they forget that they’re STILL IN FUNDRAISING MODE, the only difference is they’re raising publicly
- This is the reason for the SEC to place requirements for a Reg CF raise is to make sure non-accredited investors are protected and fully understand the risks they are taking on by investing in startups. Some companies aren’t comfortable with opening their doors to such transparency for various reasons.
As you can see, depending on the company and their unique circumstances a Reg CF campaign may not be the right fit.
So let’s say your company wants to move forward but is currently having pushback from its board due to misconceptions about Reg CF. Here are some common misconceptions and ways to clear them up to a hesitant board:
Misconceptions About Reg CF
First things first, you should NEVER create friction with your current board members or investors due to Reg CF. You can, however, ask them about their hesitations and dispel any unfounded misconceptions and why you believe it’ll be beneficial to scale your company with Reg CF. Here are the most common misconceptions:
- Messy or too many names on the cap-table
- Nowadays, most platforms have created their own type of vehicles such as a Crowd Note/Safe Note that operates as a debt vehicle but doesn’t have an interest rate or expiration date that allows for just a one-line item on the cap table till conversion. Usually, it’s up to the founder when they want to convert and it’s commonly done at the exit.
- Reporting to or waiting on too many investors
- During a live campaign, companies will want to have someone that manages their discussion board to answer questions that potential investors have about the business but it’s the same as if you’re working with investors off platform.
- After the campaign, most platforms have a system in place where companies can forward their investor updates or newsletter to the platform so the platform can share those updates with the investors that participated in your campaign by using an updates@email address.
- Reg CF signals to future VCs that the company can’t raise capital from VCs because it’s “dumb money”
- This is mainly about educating a more traditional VC that’s giving you this pushback by explaining why you raised a Reg CF.
- If anything a successful Reg CF campaign can prove a market fit for customers as well as investors.
- The term “dumb money” is quite offensive. Just because someone doesn’t fit the SEC’s term of being an accredited investor doesn’t mean they are uneducated when it comes to investing. You never know who is in the crowd that could be a potential customer to bring your service into their business, neighbor to a Tier 1 VC firm, childhood best friends with the CEO, or your dream customer, etc.
I hope I was able to provide some clarity about equity crowdfunding to equip you with enough information to dive deeper into Reg CF to see if it’s a possible funding alternative or complement to traditional VC funding to help your companies survive and thrive in any market. Reminder, equity crowdfunding is just another tool to have in a founder’s toolbox to be able to use if the time is right. It is often said that great companies don’t have problems raising capital and that’s true but I would challenge you to go further - keep in mind that “great companies don’t have problems raising capital because they are equipped with most resources and tools to raise the capital they need to scale their company.