How to Choose the Right Crowdfunding Option for Your Company
So many crowdfunding options — rewards-based, Title II, Title III and Title IV of the JOBS Act, and intrastate. Oh, my! How does an entrepreneur choose the right option for raising money?
It depends. No one size fits all. Your options will vary by:
- the stage of your company
- the size of the market that you’re targeting
- the potential your offering has
- how fast you want to grow
- how much money you need and what you will use the money for
- the impressiveness of your team
Here’s a guide to your crowdfunding options.
Using platforms such as Indiegogo, Kickstarter and Plum Alley is good for any stage company. Heck, even GE does it. It is most frequently used when companies want to fund the production of a new product. Its benefits include:
- Not paying interest or giving away a piece of your company.
- Validation that the market wants your product. Future funders, whether angel investors, bankers or VCs, will be impressed if you have done a successful campaign. A successful campaign can also mean being picked up by stores such as Brookstone or Whole Foods. Interestingly, Brookstone recognized that startups frequently don’t have the operational expertise to manufacture, ship and service the products for which they raise money. When Wenqing Yan and Victoria Hu had trouble manufacturing their wildly successful campaign for cat-ear headphones, which raised $3.4 million, they turned to Brookstone Launch.
- Getting the word out about your product and engaging customers.
- Providing insight into features, pricing and messaging for your a new product.
Its disadvantages include that it takes time, effort, money and, of course, the reality that you may not be successful. These are the same disadvantages that most funding sources have.
For tips on how women can do a rewards-based campaign, read:
- 8 Tips For Crowdfunding Success
- Why Crowdfunding is so Successful for Women Entrepreneurs and
- Crowdfunding Is A Female Founder’s Best Friend.
Because rewards-based crowdfunding is the one financing option in which women outperform men, I’m a huge fan of female founders raising money this way. It is also a great option for male entrepreneurs.
There are several forms of investment crowdfunding (aka equity crowdfunding). Three of them (Titles II, III and IV) were enabled by the JOBS Act, which loosened the restrictions around publicly raising money by private companies.
Title II went into effect on September 23, 2013. It allows private companies, at any stage, to market their securities offering to accredited investors (wealthy people) via platforms such as AngelList, CircleUp, Onevest, OurCrowd, Portfolia and SeedInvest. It is the least burdensome in terms of disclosure and financial reporting of the investment crowdfunding options. If your company is aimed at a large and lucrative market, needs money to scale and has the potential of delivering a big ROI (3 – 10x) this is the best investment crowdfunding option. For more on Title II, read:
- Equity Crowdfunding on Its Second Birthday: A Look Back and Ahead
- Equity Crowdfunding: Lessons From the Field, 6 Common Misconceptions About Equity Crowdfunding
- Stand Out In the Crowd: How Women (and Men) Benefit From Equity Crowdfunding
- How to Ensure a Successful Crowdfunding Campaign.
Title III went into effect on May 16, 2016. It enables private companies, most likely early-stage companies, to market securities to people from the general public. Companies can only raise $1 million in any 12-month period and are limited to raising only $2,000 from people of modest means and $100,000 from people of wealth. Companies could use platforms such as SeedInvest, StartEngine and WeFunder. You can certainly earn a return on your investment but it is less likely to be a chance at a big ROI you might receive through companies raising money via TItle II. Check out:
- The list of questions you should ask yourself before you raise money using TItle III
- some additional guidelines
- common misconceptions
- ground rules for determining if this type of crowdfunding is right for your company.
- And investors should know about investing in companies raising money through Title III.
- Even before Title III went into effect, people realized its limitations and wanted to fix it.
Until June 19, 2015, when Title IV went into effect, companies would have had to spend millions and deal with a correspondingly large amount of paperwork to do an initial public offering (IPO). Now, costs can range from tens of thousands to more than $100,000. Still a lot of money, but much better than it used to be. Companies can use platforms such as SeedInvest and StartEngine to raise money. There are two ways to raise money in this way:
- Tier I allows companies to fundraise up to $20 million within a 12-month period. There is no “state preemption,” which means that the security has to be registered in the state in which it will be sold.
- Tier II allows companies to fundraise up to $50 million within a 12-month period. These offerings enjoy “state preemption,” meaning that they do not have to register in each state in which the securities are sold, thus saving the issuer time and money.
Because SEC approval and ongoing disclosure is required, a more mature or better financed company would use this Title. “Reg A+” has been the sleeper of the JOBS Act. In less than a year, it has attracted bold and innovative entrepreneurial ventures that might have lacked suitable funding in the past. Examples include next generation electric cars, sci-fi aircraft, media and medical marijuana ventures,” writes Locavesting.
Out of frustration with the amount of time it took the SEC to roll out Title III, nearly 30 states and Washington, DC, have adopted their own rules that allow intrastate trading. Most states have rules similar to those the SEC just approved for Title III, though some states allow companies to raise more than $1 million and with less burdensome disclosure and financial reporting requirements. The SEC is considering updates to a federal rule that underlies the vast majority of intrastate crowdfunding laws that could make it easier to do intrastate crowdfunding, writes Locavesting.
With so many options, how will you finance the next step in your entrepreneurial journey?