Outlook is bright for equity crowdfunding for startups in 2022.
Founders considering crowdfunding their startups will begin the New Year with exciting prospects. Regulation Crowdfunding (Reg CF or equity crowdfunding) exploded in 2021 as it continues to democratize capital raising and create opportunities for previously underserved demographic and geographic groups. Crowdfunding for startups will emerge in 2022 as the breakout way to raise capital, build brand loyalty, and create awareness for young companies.
Crowdfunding broadens the startup world.
Reg CF has turned the traditional capital-raising narrative upside down. In past years, conventional founders in elite zip codes exclusively secured startup capital. No more.
As reported, in the past two years Black founders received 1.2% of venture capital funding and women just 2.3%. But those same cohorts were 40% of crowdfunded startups that raised over $1 million.
Similarly, Crowdfund Capital Advisors (CCA), which curates equity crowdfunding data, found 92.4% of all Reg CF offerings took place outside known venture-capital meccas.
Crowdfunding for startups booms with new rules.
But the news gets even better when considering new Securities and Exchange Commission (SEC) rules. The changes included raising the offer limit from $1 million to $5 million, loosening communication rules, raising investor limits, and allowing ‘special purpose vehicles’ which simplifies cap tables and smoothens transitions to institutional raises.
The new rules and growing number of Reg CF successes have made crowdfunding for startups more viable than ever. CCA reports Reg CF has now amassed over $1 billion in investment from 1.2 million investors backing 4500 companies in 450 industries. In 2021 alone, 1,117 companies raised $409 million through the third quarter.
This has produced real results not only for the companies themselves but the communities where they thrive. Just this year, Reg CF companies have created over 120,000 jobs.
Crowdfunding for startups offers founders unique advantages over other raising methods.
Reg CF offers a unique community-based way to source capital. In any raise, tradeoffs exist. Reg CF requires a “campaign” not just a VC check. But benefits abound, here are some:
- Broaden your investor base: Unlike other funding models, Reg CF can diversify your investor base from both a financial and geographical standpoint. Portals can accept investors from anywhere in the US, giving your business a potential foothold in all 50 states.
- Turn your customers into marketers: Reg CF allows your customers to become financially invested in your business and see their investment grow as your business grows. This provides a free marketing campaign for your business with every new investor.
- Incentivize your investors: Reg CF allows you to provide perks as part of the investment. Depending on the product this could include the product itself, ‘founder’ status on your website, access to events, or anything else that may induce an investment.
- Prove value to institutional investors: A successful Reg CF raise can show larger, institutional investors your business is ready for the big money. Many larger investors are now requiring “social proof” of a company’s business model. Your business can show larger investors value and momentum and provide your business “bridge money” while larger investors evaluate your model.
Founders should hire counsel before crowdfunding their startups.
Despite the amazing success, simplified rules, and benefits of crowdfunding for startups, founders should take precautions before plunging in. Reg CF involves selling securities, which is a highly regulated area of federal law.
Founders should hire experienced counsel to guide them through the process. The original SEC Regulation Crowdfunding release is almost 700 pages and the commission has added guidance and interpretations several times. Moreover, the SEC Enforcement Division brought its first Reg CF case last year as success has heightened scrutiny on compliance issues.
NEXT powered by Shulman Rogers can help with crowdfunding for startups. We offer: (i.) fixed-price Reg CF packages, (ii.) advice and preparation of legal documents, including financial instruments; (iii.) review of risks and SEC compliance; and (iv.) personal introductions to major portals. Contact us today at [email protected].
