Render Capital's Beginner's Guide to Reg CF

Looking for ways to help portfolio companies find funding? Equity crowdfunding, also known as Reg CF, may be a creative way to help a company fill the rest of its 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 guide lays out the pros, cons, and other important aspects of pursuing Reg CF funding.

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, and others), where companies give up equity. Successful companies like Beyond Meat, Knightscope, Zenefits, Heliogen, NowRx, The Hustle, and BeatBox have used Reg CF to raise capital. Common benefits include:

• The ability to raise capital from a larger pool of investors
• An opportunity for your supporters to join you in your venture in the early stages
• Brand exposure that can grow your customer base while you market the campaign
• A community of mini-champions for your brand

Trade-offs of Reg CF

Like most things, there are trade-offs to Reg CF. As with venture capital investing, it’s important to find the right platform to partner with, each has its own processes, fee structures, and investor community. Here are the common trade-offs that come with every platform.

Upfront costs: There are upfront costs from filing a Form C, along with financial and legal reviews, and financial audits for raises over roughly $1M. Some platforms may also charge part of their commission up front. Be wary of platforms that say they’ll cover these costs, 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 raise, and as with anything that deals with the SEC, it’s not a short process. Some questions can be confusing for first-timers. Depending on your management team, you might consider working with a platform that provides white-glove services to help you complete the Form C and any amendments. Some companies will also be required to undergo financial and legal review. Some platforms have their own compliance team to review your campaign before it goes live, which may add time but could reduce the risk of an SEC issue near the finish line.

Long timeline: The due diligence process is usually about 40-60 days, depending on the preparedness of founders. Once live, a campaign can take two to three months (short raise) or five to six months (long raise). The most common mistake companies make is forgetting that they’re still in fundraising mode, the only difference is they’re raising publicly.

Transparency: The SEC places requirements on a Reg CF raise to make sure non-accredited investors are protected and fully understand the risks of investing in startups. Some companies aren’t comfortable opening their doors to that level of transparency.

As you can see, depending on a company’s unique circumstances, a Reg CF campaign may not be the right fit.

Misconceptions About Reg CF

Let’s say your company wants to move forward but is getting pushback from its board due to misconceptions about Reg CF. First things first: you should never create friction with your current board members or investors over Reg CF. You can, however, ask about their hesitations and dispel any unfounded misconceptions. Here are the most common ones.

“It will make the cap table messy with too many names.” Nowadays, most platforms have created vehicles such as a Crowd Note or Crowd SAFE that operate as a debt-style vehicle without an interest rate or expiration date, allowing for just a one-line item on the cap table until conversion. It’s usually up to the founder when to convert, and that’s commonly done at exit.

“We’ll have to report to and wait on too many investors.” During a live campaign, companies will want someone to manage their discussion board and answer questions from potential investors, but that’s the same as working with investors off-platform. After the campaign, most platforms have a system where companies can forward their investor updates to the platform, which then shares them with participants.

“Reg CF signals to future VCs that the company can’t raise from VCs because it’s ‘dumb money.’” This is mainly about educating a more traditional VC by explaining why you raised a Reg CF. If anything, a successful Reg CF campaign can prove market fit with customers as well as investors. The term “dumb money” is offensive, just because someone doesn’t fit the SEC’s definition of an accredited investor doesn’t mean they’re uneducated about investing. You never know who is in the crowd: a potential customer, a neighbor to a Tier 1 VC firm, or your dream customer.

I hope this provides some clarity about equity crowdfunding. Reg CF is just another tool in a founder’s toolbox, to be used if the time is right. It is often said that great companies don’t have problems raising capital, and that’s true. But I’d challenge you to go further: great companies don’t have problems raising capital because they are equipped with the resources and tools to raise the capital they need to scale.

Additional Reading

• Equity Crowdfunding by Nathan Rose
• “Equity crowdfunding appears immune to market volatility, on track for its best year yet”, TechCrunch
• “The next era of equity crowdfunding is here”, TechCrunch