Since President Obama passed the JOBS act in 2012, we’ve been witnessing the beginning of a new movement in the U.S. – one that empowers entrepreneurs to raise money from almost anyone, anywhere. It’s a movement that removes the barriers to fundraising so that it’s not just those who know the right people or who are in the right place at the right time that can work on their passions.
Title III of the JOBS Act, passed in May 2016, opened doors for both entrepreneurs and investors alike. Now, entrepreneurs can raise money from investors all over the world.
In November 2016, Indiegogo and MicroVentures launched First Democracy VC, a registered equity crowdfunding portal. As one of the foremost players in the space, we’ve learned a thing or two.
Here are a few things founders should know about Title III, also known as Reg CF, equity crowdfunding.
1) It’s called equity crowdfunding, but you don’t necessarily have to do an equity raise.
You can do an equity, debt, or even revenue share offering. Different structures are better or worse depending on your specific company, industry, stage, and financials. We suggest researching the different options to see what structures might work best for your company, and once you’re ready to move forward, our team can help you figure out what the best structure is for your particular company.
2) Equity crowdfunding isn’t only for tech startups.
Equity is all about empowering entrepreneurs, and over the last six months we’ve helped fund founders in categories as diverse as hardware, software, food and beverage (including restaurants, distilleries, and bars), gaming, film, and media.
3) An equity crowdfunding raise can be part of a larger raise that you’re doing with institutional investors and angels.
You can carve out a piece of the round for your community and let them invest right alongside the more traditional investors.
4) Your engagement directly influences the success of your raise.
It’s very important that you as founder/CEO are engaged both during the due diligence process and during the raise itself. We’re not going to lie: it’s an intensive process and there are a lot of “i”s to dot and “t”s to cross. The entire process is a partnership, and while we as the platform will promote your listing to our audiences, it’s critical that you do your part and engage with yours. As an engaged founder, the setup process will move along more quickly and smoothly, and you’re likely to raise more money when your deal goes live.
5) You can decide your minimum and maximum raise.
For example, you might attempt to raise between $100K-$500K. $1M is the maximum amount you can raise via Reg CF in a 12 month period.
6) Equity crowdfunding is more than just about money.
It’s also about engaging your passionate community of friends, family, customers, and supporters, building a tribe of ambassadors for your company and brand, and also letting those key people share in the potential upside of your company’s success. Plus, as we’ve seen in Indiegogo perks-based crowdfunding, equity crowdfunding can also provide market validation for your company and/or product.
7) Anyone can invest.
Under SEC Title III/Reg CF, the companies raising money need to be incorporated in the U.S., but anyone over 18 can invest from anywhere in the world as long as your country allows it. Investing in startups and private companies is no longer limited to just the wealthy.
8) SPVs currently aren’t allowed but there are ways of dealing with lots and lots of small, individual investors.
Special purpose vehicles (SPVs) where all investors are pooled into one entity, and therefore one line on your cap table, aren’t currently allowed for a Reg CF raise. One way of dealing with lots of individual investors is a revenue share structure. This structure doesn’t make sense for every company, but for some it’s a great way to reward your investors without giving away any equity.
Another option is a Crowd Safe. This is similar to the popular SAFE (Simple Agreement for Future Equity), but you can extend the conversion to equity beyond your next round of financing. For example, you can set the conversion to an exit so that even if you get hundreds of investors in the raise, they won’t actually be converted to equity holders on your cap table until an exit.
Equity crowdfunding is the next generation of how fundraising works. Since day one, our mission has been to empower entrepreneurs to work on projects they’re passionate about. If you’re interested in pursuing equity crowdfunding for your company, let us know at equity.indigogo.com/entrepreneurs.