The crowd can offset equity shortfalls for fintechs
Crowdfunding to raise capital is attractive because of the potential to reach a large pool of investors, and has become an increasing option for fintechs and payment apps.
E-commerce became successful because companies could cast out to a global net of potential customers. Equity crowdfunding follows a similar dynamic, where the power of internet crowds opens the possibility to raise significant sums. However, setting up an equity campaign requires more than a few clicks on Kickstarter. An equity-based crowdfunding initiative for a business demands a well-constructed marketing and business plan as well as realistic and attainable funding goals. Here are four tips for creating a successful equity crowdfunding campaign that raises cash and follows the rules:
Know the Regulations. You have a fledgling business and are eager to raise some capital. It’s as simple as signing up for a crowdfunding platform, setting a multi-million goal, and sending out an Instagram post— right? There’s more to it. The SEC still requires businesses to follow certain regulations. Most of these regulations are based on the amount of money you’re looking to raise, as well as the types of investors involved in the funding:
Higher dollar value capital raising goes under Regulation A, which is an exemption from registration for public offerings. There are two tiers, one for raising up to $20 million and another for up to $50 million. At this level there are more filings and paperwork involved, and it’s recommended to retain an experienced attorney for guidance.
And for smaller endeavors, you can go under Regulation CF, which allows for raising capital up to $1 million. This type of capital raising is more straightforward, and it’s unlikely you’ll need an attorney to handle the regulator filings. Regulation CF capital crowdfunding campaigns have experienced consistent growth of approximately 59% year-over-year since 2018, according to Crowdfund Capital Advisors data.
Regardless of the type of regulations involved, you’ll need to set certain specific details. These include the amount you’re hoping to raise, the valuation of the company, and the duration of time people can invest.
Pick the Right Return. So, you have a plan in place to raise money with crowdfunding, but what are you offering in return? Remember this is not a Kickstarter-style campaign where you offer free products or T-shirts to contributors. This is an investment in your business, and serious investors are expecting a return.
The type of business you’re running will determine what you offer investors. For a tech startup, it’s very likely you issue equity in the company. Tech investors are hoping for a later buyout from a bigger firm or even an IPO. If instead you’re hoping to raise just $1 million to fix and flip houses, then you will probably offer a stated return (paying interest) to investors over a certain period.
Another example is raising money for a new doctor’s office. Google won’t buy this type of business, and neither is there a $2 billion IPO on the horizon. However, a successful physician’s office can be an attractive long-term investment. To garner investors in this scenario, you want to offer a debt instrument such as a bond where you agree to pay back the investment with interest over a certain time period. You’re effectively taking on a partner and creating a revenue-sharing agreement.
Brand Your Business. The level of PR and marketing buzz needed for a crowdfunding equity campaign depends on the company’s circumstances. For example, a popular brewery or a whiskey company that wants to raise funds for expansion might not need a fancy pitch deck or video about the investment opportunity. The branding is already dialed in. Or a small hotel chain might offer crowdfunding, but they just need to receive investments from the same 10-15 people that invested in previous campaigns.
These examples are the exception. Many startups and businesses looking for equity crowdfunding will need to conduct PR and marketing efforts to attract a bigger investor pool. Start with the crowdfunding portal, which should offer promotional services and ideas. Marketing content is a must and should emotionally engage potential investors. Develop content that speaks to the investor’s perspective while also detailing your short- and long-term goals.
Pick the Right Partners. Regulated crowdfunding for businesses requires the usage of an SEC-approved crowdfunding portal. When vetting different crowdfunding platforms, pay attention to the company’s track record, including experience with your exact type of regulated crowdfunding. Also pay special attention to which technology providers are running the platform’s back-end processes. Managing a crowdfunding campaign is complex, and the right partner will handle all the moving parts that happen behind-the-scenes. This includes shifting money into and out of escrow, handling compliance issues, accounting, managing discrepancies, and automating all the processes. The top-tier crowdfunding platforms will use the most trusted back-end partners, so they can focus on attracting investors and making the funding process as smooth and user-friendly as possible.
Equity crowdfunding is a popular and powerful way to raise money for your business. Moving forward with a campaign is a significant responsibility because you’re taking on investors and making promises about your future performance. Following these guidelines (and your attorney’s advice) is a great start toward an equity crowdfunding campaign that opens new doors for your business.