Let’s suppose that somewhere along your path toward raising capital, you’ve decided equity crowdfunding might be the best approach. You’re not quite ready for an IPO. You want to maintain a greater degree of control over your business than venture capital (VC) investment might allow. And you want to offer investment opportunities to a wide range of investors, from retail investors to accredited investors.
You understand that there are different capital-raising tools available to you. But which ones might be more suitable for your needs?
To figure out which crowdfunding model might be right for your business, you need to answer a few basic questions:
● How much capital do you need?
● What’s the size of your company?
● What kinds of investors are you looking for?
● How might you want to promote your offering?
Let’s go over the three most common models in the US equity crowdfunding market—Reg CF, Reg A+, and Reg D—and try to figure out which one might best match your profile and needs.
Note that Reg CF requires you to work with a registered broker-dealer (BD) or regulated crowdfunding portal for all deals. This isn’t necessarily the case for Regs A+ and D. Although some states require businesses to work with a registered BD, many companies have chosen to do so anyway for the significant advantages that such a working relationship offers (contact us to learn more about the potential benefits of working with a BD in a Reg A+ versus going at it alone).
What is Reg CF and is it right for your company?
Reg CF, or Regulation Crowdfunding, is a rule that allows small businesses to raise up to $5 million in capital from investors, regardless of their accreditation. Think of it as an upgraded form of retail crowdfunding.
Reg CF rules allow you to raise capital from smaller retail investors as well as deep-pocketed investors. Note, however, that the SEC does place limitations on the amount investors can allocate toward your offerings depending on their annual income and net worth.
$5 million may sound adequate for some, but is it right for you? 6-26-2022
● Size: Most who file for Reg CF run small and early-stage companies.
● Industries: The top industries offering Reg CF comprise restaurants, personal services, and diversified media (according to various sources).
● Capital: Your business can raise up to $5 million through Reg CF offerings.
A major step up from your average Kickstarter campaign, Reg CF may be the right match for you if your company falls within the small and early-stage category.
What is Reg A+ and is it right for your company?
If you need to raise capital beyond the Reg CF limit but aren’t interested in pursuing a fullfledged public offering, then perhaps Reg A+, aka “mini IPO,” might be the right capital-raising tool for your business.
Reg A+ (Regulation A) of Title IV of the JOBS Act allows private businesses to raise up to $75 million in funds from retail and accredited investors. The amount of capital you can raise through Reg A+ offering is divided into two tiers.
Tier 1 offerings allow companies to raise up to $20 million in a 12-month period. Tier 2 allows companies to raise up to $75 million within a 12-month period.
Raising up to $75 sounds like a sizeable amount of capital, but is it right for you?
● Size: Most companies who filed to issue Reg A+ offerings were young companies with relatively small revenues and assets.
● Industries: Around 53% of the companies issuing Reg A+ offerings were concentrated in the finance, insurance, and real estate industries.
● Capital: Your business can raise up to $20 million through Tier 1 offerings and up to $75 million through Tier 2.
Once again, think of Reg A+ as a “mini IPO.” Not only are you able to raise capital from the general public as well as accredited investors, you can also market or advertise your Reg A+ shares to the general public as well. This gives you the option of reaching out to your customers who know your products and services well in addition to promoting your investment opportunities to retail investors across the country and beyond.
Here’s another set of scenarios: Maybe you’re looking to raise more than $75 million but aren’t interested in launching an IPO. Or, maybe you want to raise much less but want to work specifically with a select network of accredited investors. In either scenario, Reg D might be the exception that best matches your capital-raising needs.
What is Reg D and is it right for your company?
Reg D is a regulation that allows small businesses to raise capital via private offerings without having to register their securities with the SEC. Despite this exception in SEC registration, those who invest in Reg D shares still enjoy the same legal protections as other investors.
So, what advantage might Reg D offer businesses? First off, Reg D requirements are less onerous than public offerings, making it easier to raise capital. Another advantage is that you can raise an unlimited amount of funds from an unlimited number of accredited investors.
Some companies may not be interested in a public offering or promoting their securities to the general public. Additionally, some business owners may simply want to work with a small network of private accredited investors.
If this sounds like your situation, then Reg D might be something to look into.
Is my business ready for this stage of crowdfunding?
● Size: According to a 2020 SEC report, most companies issuing Reg D offerings were small-scale with revenues less than $1 million.
● Industries: In the same report, the SEC noted that among Reg D issuers, 40% were private funds, 25.5% were in real estate, and 20% comprised tech companies.
● Capital: Reg D allows businesses to raise an unlimited amount of capital from an unlimited number of accredited investors. Between 2020 -2021, there are numerous states in which businesses have raised up to $20 billion combined. You can view Reg D funding trends here.
Plenty of opportunities in between
The middle ground between a Kickstarter campaign and a full-fledged IPO is wide and offers plenty of opportunities. Deciding on the right capital-raising tool depends on the amount of capital you need, the size of your company relative to your scaling aspirations, and the type of investors you’re looking for.
If you’re looking to raise capital through a Reg CF exemption, you’re required to work with a registered provider like a BD or funding portal. Again, this is not necessarily the case for Reg A+ (though some states may require it) and Reg D.
However, working with a BD presents a number of significant advantages you might want to consider. An experienced BD can not only lead you through the entire offering process but provide guidance with regard to what works and what doesn’t, marketing and PR challenges, and cost-effective ways to keep dollars in your pocket without compromising your crowdfunding campaign.
Understanding your choices and keeping dollars in your pocket (or your investor’s pocket as some platforms choose to offload their fees to investors) is a critical yet overlooked aspect of a capital-raising campaign—one that can make or break an offering. If you have any questions or if there is any way we can help you make a successful crowdfunding launch, feel free to contact us. The Dalmore Group is ready to help.
