The Benefits of Crowdfunding as A Capital-Raising Method
When you hear the word crowdfunding, you probably almost instantly think of Kickstarter, GoFundMe or Indiegogo. Although these platforms have benefited hundreds, if not thousands, of businesses over the years, they are not the only crowdfunding method out there. Regulation crowdfunding, although still quite new, is a rising star in this niche and has many different benefits as a capital-raising method.
What is Regulation Crowdfunding?
So first things first, what is regulation crowdfunding? Also known as equity crowdfunding, regulation crowdfunding became legal in 2016 — making it the new kid on the block. This type of crowdfunding allows companies to raise capital by selling securities, like equity.
In 2021, the Securities and Exchange Commission (SEC) made a couple of big announcements that seemingly solidified the growing strength of this method. These changes included an increase in annual limits from $1M to $5M, an increase in Regulation A annual limits from $50M to $75M, and a couple of other changes that would make equity crowdfunding much easier for startups.
Now, unlike other types of crowdfunding, regulation or equity crowdfunding is regulated by the SEC. Furthermore there are three security laws that apply to this type of crowdfunding. Without going into the nitty-gritty, all you really need to know is that these laws allow non-accredited investors to buy securities in any business. This is a huge deal, especially since before the regulation crowdfunding law was passed only accredited investors could buy equity in a start-up. Not only that but the list of prerequisites for these investors was so long that only a small percentage of American households were even qualified to invest. The introduction of regulation crowdfunding meant that ANYONE could invest in a start-up, and that is a big deal.
This type of crowdfunding was introduced as a way to disrupt early-stage financing, making it one of the main competitors of venture capital. But can it compete and is it worth the hassle for start-ups?
Regulation Crowdfunding: How It Helps Start-Ups
So how can regulation crowdfunding help start-ups and small businesses? Here are three ways that businesses can benefit from raising capital in this specific manner:
First and foremost, equity crowdfunding means that your pool of potential investors is limitless, almost anyone can become an investor. Unlike VC, as a small or medium-sized business, you can raise capital from any type of investor, including your friends, family, customers, fans, or the general public. This is especially good news for women and minority founders which are still vastly underfunded by venture capital.
Second, this type of crowdfunding gives you the freedom to make the rules. Unlike VC, as an entrepreneur, you can control the terms and your valuation when you raise capital. In this scenario businesses also have more control in terms of who they get the capital from.
The last reason might be the most appealing of them all — building a strong base of advocates and ambassadors. For example, let’s say that you’ve launched an equity crowdfunding campaign and have successfully brought on 2,000 new investors. This means that you now have 2,000 brand ambassadors that are personally invested in making sure that your company succeeds. Why? Because if your company wins, they also win. They are now your biggest cheerleaders. They can also be an invaluable resource if you or your company needs help or advice.
How to Get The Public On Board
So now you want to give regulation crowdfunding a try, but are you ready to raise? To get people to invest in your company, you first need to build the right community around your business and your brand. If people don’t believe in what you do, then they probably won’t invest in your business. But it isn’t only about believing in your brand. So what does your brand for? People want to invest into businesses that have a strong mission or are impact-focused. As a business, you should also make sure that you are profitable, no one wants to board a sinking ship. This leads us to the last prerequisite which is transparency. People are more hesitant to invest in businesses that are not fully transparent, people want to know what they are investing in, so make sure that you communicate everything to them clearly and transparently.
In the end, regulation or equity crowdfunding has immense potential with start-up businesses that are looking for smaller initial investments. This method is perfect as it allows SMBs to control the whole process of raising-capital while also onboarding a slew of ambassadors who are ready to take your business to the next level.
So what are you waiting for? Have you considered regulation crowdfunding?