When it comes to small businesses and startups, funding is crucial. It’s also one of the most difficult steps in the entrepreneurial journey. Why? Because nine out of 10 startups fail within a decade of forming, and financial problems are one of the main culprits.
In recent years, startup CEOs have catered to extremely hard-to-find traditional funding options such as venture capital or angel investments. They’re now turning to investment crowdfunding, which allows everyday people to participate in a securities offering. In turn, startups can attract thousands of investors who are less concerned about gaining a majority share or the risks associated with innovative tech startups, which can sometimes be problematic for traditional investors.
As a result, the securities crowdfunding industry has recently experienced exponential growth, with platforms such as StartEngine, Wefunder, Republic and others, now helping businesses worldwide raise hundreds of millions of dollars per year. Having benefited from the community spirit generated during the pandemic, the global crowdfunding industry is currently valued at $12.27 billion — a figure expected to double by 2027.
However, as we have learned from the digital economy, growing online industries operating with little-to-no regulations can become problematic. Therefore, for online investing, the Security and Exchange Commission enabled Regulation Crowdfunding (Reg CF), part of the JOBS Act of 2021 — which caps the amount companies can raise per year and regulates who can raise money online — in order to democratize the industry. At Financial Industry Regulatory Authority (FINRA) regulated platforms, entrepreneurs can launch securities offerings to raise up to $5 million per year under the Reg CF exemption. In March of 2021, the SEC increased the funding cap of Reg CF from $1.07 million to $5 million.
And under this regulation, a couple of months ago, WiGL became the first company to successfully run a StartEngine Reg CF offering by raising $5 million. This article will explore the advantages and disadvantages of using online fundraising methods, the difficulties it presents and how to juggle them, and the lessons WiGL’s raise can teach startups along the way.
Why Choose Investment Crowdfunding?
There are many advantages to raising funds through investment crowdfunding as opposed to relying on other methods such as venture capital or angel investments, bootstrapping, or traditional bank loans. For many startups, VC funding brings with it a fear of intellectual property theft, and can sometimes mean ceding very large shares of equity to investors, which could seriously compromise company profits in the future.
One of the main advantages of regulated crowdfunding platforms is that they allow startups to get fundraising campaigns underway quickly. With StartEngine’s, for example, startups can launch their campaigns within 30 days of the platform’s approval.
That being said, determining whether or not a startup is eligible to launch a crowdfunding campaign involves a pre-approval review process that can be costly for some early-stage businesses. Startups can expect to pay between $4,000 to $10,000 to gather the necessary legal documentation and conduct financial reviews.
Once a business’ securities offering launches, however, the campaign itself can attract organic media results without having to pay for PR…which wins at a later stage in the game. Involving the general public in a startup’s quest to raise funds can also provide valuable business feedback, as well as test out people’s reactions to a product or service, in the hope they might become loyal customers further down the line.
Navigating Compliance Difficulties in Reg CF
Despite the benefits of investment crowdfunding offerings, early-stage businesses and startups should bear in mind that there are rules that govern the process, which are often difficult to comply with.
According to the SEC, all transactions related to crowdfunding campaigns must take place through an SEC-registered funding portal, or broker-dealer. Furthermore, the SEC dictates that the maximum aggregate amount of funds a business may raise across a 12-month period must not exceed $5 million.
Individual, non-accredited investors are also limited when it comes to the amount they may invest in an offering during the same year. Any information disclosed to the SEC must also be disclosed to investors and any intermediaries facilitating investments via Reg CF offerings.
In order to avoid last minute audits and reviews, preparation for SEC compliance is key. While costly, it’s also a wise idea to use a broker to help with compliance. And although this may be time-consuming, following a broker’s guidance is essential. Avoid asking too many questions and disclose everything the broker asks for.
Lessons Learned from Raising $5M on StartEngine
Using StartEngine to conduct a successful crowdfunding campaign teaches a myriad of best practices that early-stage businesses can use to prepare themselves for similar campaigns in the future.
One key takeaway is that conducting a funding round is very much an “online” venture, so any team about to embark on this venture must have a strong grasp of the digital world. One way startups can manage the noise that comes with an online securities offering is to hire a PR company from the get-go to manage a business’ online presence, allowing its internal team to focus on executing their tasks in hand. But the most important key is to be honest with your online investors, share the good, the bad and the ugly. The digital world has grown up with reality TV. They demand honesty.
Besides proficiency in all things digital, it’s also important that businesses running crowdfunding campaigns maintain a strong social media presence, as this is one of the main ways to advertise the campaign and attract investors, while simultaneously building a community around them.
And although it’s wise to interact with users or investors who are genuinely interested in the campaign, maintaining social media profiles and deleting dishonest or unwanted comments is paramount, too, in order to filter out the presence of trolls and bots. And make no mistake, a successful online campaign will attract trolls and people seeking fame by attacking you. Here is why an honest presence online is so important. Trust that your investors will be savvy enough to discern the attacking troll and mindless bots…if you’ve given them the truth to decipher the issues.
Closing Thoughts
If there’s just one lesson to take away from taking part in an online securities offering, let it be just how painfully honest your business is linked to the processes and messages on your social media.
As mentioned previously, investing in ways to tell a company’s story online and on social media through words, photos, videos, and graphics will always be worthwhile, as this is one of the main ways to draw investors into your campaign. And once they’re there, spending time interacting with them and nurturing the relationship is extremely important.
The same can be said for outsourcing third-party help for regulation compliance. If the help is out there, don’t be afraid to ask for it, invest in it, and make the most of the advice brokers have to offer. Ultimately, this will help any business get its securities crowdfunding offering underway as smoothly and quickly as possible.
Dr. Ahmad Glover, is founder & CEO at WiGL, a company that raised $5 million from over 4800 investors on StartEngine this past July. WiGL is a company that seeks to offer a smart, touchless, wireless power company.