*OPINION: Regulation Crowdfunding for Early-Stage Companies. Expert David Gosselin Shares the Ins-and-Outs of this Kind of Fundraising and Success Stories….
This was written by David Gosselin, a CPA with dbbmckennon.
Until 2015, early-stage startups were relegated to a path of funding that included: friends and family, personal capital/debt, angel investors, VC’s, private equity, and if you get through some or all of those rounds, maybe an IPO.
The JOBS Act of 2012 started to change that narrative by changing 80 years of existing securities law. The JOBS Act, among other things, removed general solicitation requirements which allowed funding to be taken online rather than an investment bankers rolodex; and provides entrepreneurs the ability to raise money from their physical and digital communities and affinity groups through Regulation Crowdfunding (Reg CF), an improved Regulation A (Reg A+), and a more traditional Reg D – 506(c).
The most prevalent of these funding mechanisms for early-stage companies is Reg CF.
Reg CF allows companies to raise $1.07M online, through funding portals or broker-dealers, from accredited and unaccredited investors every 12 months.
That means the potential to raise money from 100% of US adults.
Offerings can be for debt, equity, SAFEs, SAFTs, revenue share, and almost anything else that one could think of.
Red tape is minimal and the cost to start is relatively affordable for a savvy startup. Upfront costs can be nearly nothing for a very small offering of less than $107,000, but typically run $5,000 – $20,000+ for a bigger more complex startup.
Ultimately, raising money under Reg CF is a practice in utilizing your current investors and email list, along with digital advertising.
It’s not easier than traditional funding, and in many aspects it may be harder. But most importantly it is different since not all startups fit the traditional funding model.
Since 2016, companies undertaking Reg CF offerings have raised a cumulative of over $200M.
Small potatoes in the grand scheme of early stage funding, but consider this: Only one to two startup companies seeking funding from VC’s receive VC funding, and those are heavily concentrated in the Bay Area, Boston, and other tech hubs.
Those deals are heavily weighted by gender and race, which has been well documented and have caused a black-eye for the VC community.
Reg CF looks to change all that by putting the power back in the entrepreneur’s hands. I can’t be convinced that out of 100 startups, only one to two are viable.
My guess is 10 may be viable, but the other eight to nine don’t get funding because they don’t fit a VC mold?
So, what does the Reg CF process look like?
A company undertaking a Reg CF campaign will first find itself looking to find the right funding portal.
Currently there are about six portals that do the vast majority of funding in the US. Some have niches that may not fit the business and others won’t accept all companies.
After a portal is chosen, the company then has to decide its funding goals and pick its professional service providers, if needed.
This generally includes legal help to draft an offering document if the portal doesn’t provide it, a CPA firm to review your financial statements if you plan on raising a maximum over $107,000, and a marketing firm if you decide you need one.
The company then creates a campaign page in preparation of filing what is called a Form C with the SEC.
The company completes a From C which includes offering material, financials, risks, etc… The Form C is filed with the SEC and then the company’s campaign goes live on the funding portal website. The company is now off to the races.
This is when the real hard part begins. The process of reaching out to your email list, doing targeted Facebook advertisements, and driving traffic to your page (compliantly) is a practice in digital advertising.
This separates the stars from the duds. It’s easy to have a great product and a great company and fail in this stage thinking that everyone that sees the page will invest. They won’t.
Reg CF is kind of like shopping at a grocery store for an investor. When you get to the checkout aisle there are impulse buys consisting of candy, gum, and other snacks.
Once the impulse buyers check out, they aren’t going back to the store for the gum.
Reg CF campaigns are much the same; you have to inspire an impulse investment with a message that resonates. At the end of the day, Reg CF companies are generally so early-stage, they are selling hopes and dreams and ideas. rather than revenue streams and profits.
So, what types of companies are good fits?
Consumer products, easy to understand businesses, brick-and-mortar restaurants, beverages (alcoholic beverages do the best…surprise, surprise), and companies with affinity groups.
For instance, many healthcare related companies get funded because people who have related health issues want a solution.
Below are some success stories:
Hylete raised $1M on StartEngine in 2017. They followed that by doing a few Reg A+ rounds of financing to continue to raise money but maybe more importantly, engage their audience; making them investor-customers. Owners of companies are generally loyal to the product being produced. In the next step on their journey, the company recently filed an S-1 with the SEC to conduct an IPO transaction.
20/20 GeneSystems raised $1M on Microventures, then parlayed that into a Reg A+ raising more than $4M on SeedInvest. The company is in the process of deploying a test for early cancer screening.
Native Hostel Austin Raised just under $400K on NextSeed in 2016. They have some of my favorite marketing material of all time and were one of the yearly issuers to succeed in their goals. They used their Reg CF funds with other funds to build out their facility. Now they operate with great reviews on Yelp and travel sights.
SharkWheel has raised two Reg CF rounds of funding on StartEngine netting over $1M in aggregate. The company may be familiar as they were featured on Shark Tank. Their wheels are made for skateboard and potentially other industrial uses. A truly unique product.