Investment Crowdfunding is a way to raise capital by selling debt or equity or hybrid securities to a “crowd” of investors instead of to one of more big investors. You find the investors by advertising or conducting a general solicitation. Often this involves using an Internet platform to facilitate offers and sales, but use of the Internet is not required.
Investment Crowdfunding was a $45 Billion industry in 2016, which rivaled the amount of loans and equity investments venture capital funds make. Loans are the biggest Crowdfunding sector, but several billion of equity investments were made during 2016.
Selling securities in a general solicitation used to require registering the offers and sales of securities with the SEC, which is expensive and time consuming. That changed following passage of the JOBS Act of 2012.
The JOBS Act created several exemptions from registration, including Rule 506 (c), Regulation CF and Regulation A+. Many states have enacted similar exemptions from registration. These exemptions collectively form the legal basis for Crowdfunding. Each exemption has its own conditions, which may include the types of investors, dollar amounts and limits on how you communicate with investors.
The diagrams below show the different macro structures of traditional financings vs. Crowdfunding. Crowdfunding replaces the financial institutions that hold people’s money and make investment decisions for people with a system where people make their own investment decisions – often aided by software.
Crowdfunding is a useful tool for dealing with the Death Valley problem, which has plagued start-up founders and early-stage investors. For decades venture capital and private equity investors have been able to negotiate favorable valuations after early-stage investors run out of money. Often, that occurs just as the business is launching its product. Crowdfunding is a tool for climbing up the Death Valley Wall while minimizing dilution.
The bottom line is that there is a form of investment Crowdfunding that is suitable for businesses at all stages of development from start-up to traditional A and B rounds to mezzanine to exits.
Our blog posts and books describe each type of Crowdfunding offering in detail, but effective capital raising requires a plan specifically developed for each business. Contact us to help you develop and implement your plan.
For additional resources see our books and blogs:
Crowdfunding: A Legal Guide to Investment and Platform Regulation (Thomson Reuters)
Crowdfunding Opportunities and Challenges (Lulu) https://www.amazon.com/Crowdfunding-Opportunities-Challenges-Jim-Verdonik/dp/1483442802
Entrepreneur Intersection http://jimverdonikintersection.blogspot.com/2013/03/technology-law-wild-fun-ride.html