By Marc Zorn on October 8, 2014,
You need capital. Your business needs money. If you ask 100 entrepreneurs what the best way will be for your business to raise the capital it needs, there’s a good chance that you’ll get 100 different answers. The best advice is to run lean and mean for as long as possible, but eventually your time will be up. You’ll need some cash and you’ll need it fast.
Because of this need, many businesses are turning toward equity crowdfunding as a way to raise the capital they need. Is it right for you? Surprisingly, the answer might actually be “No.”
There Are Three Different Types of Equity Crowdfunding
Equity crowdfunding is a lot different than reward-based crowdfunding. Instead of receiving money to develop and then deliver a reward, investors are actually receiving a pitch through a term sheet for your business. What does this means for you? It means you’ll need to select one of three different equity fundraising types.
• Equity I: In this version of equity crowdfunding, you’ll only be able to market your business to investors that are accredited. They’ll be able to view your investment opportunity privately on a password protected platform. You can raise an unlimited amount of capital from accredited investors in this method and it doesn’t take the fundraising public, but it diminishes the amount of potential investors.
• Equity II: This version of equity crowdfunding is based on Title II of the JOBS Act. Enacted in September 2013, a business can publicly advertise that they need capital. Unlimited funds can be raised through a crowdfunding platform, but once again, these investors must be accredited. It’s more open and transparent, but the benefit is that you’ll get your business pitch in front of almost 8 million investors at once. The downside is that everything becomes public record.
• Equity III: This form of equity crowdfunding is expected to be authorized in the US in the near future. It will allow for virtually anyone to invest into a business because unaccredited investors will be authorized. Your business will be allowed to offer securities online, but because there will be more accountable investors, more time will be required to navigate the regulatory requirements of the capital raised.
For many businesses, this means a solid business model must be in place to handle the maze of regulations that come from any investment. If you don’t have one in place yet, then equity crowdfunding isn’t for you until it is. You’ll also need to have a private placement memorandum in place, which means you need a lawyer on retainer. If you don’t have one or can’t afford one, wait until you do.
Do You Truly Understand Your Audience?
Crowdfunding is used to throw ideas out at the general public to see if they stick. The only problem is that this causes some businesses to waste their time on an idea that won’t be supported. If you take the time to understand your audience and know what it is that they want, then your equity crowdfunding campaign will have a better chance of achieving the results you want to see.
If you’re not prepared, an equity crowdfunding campaign that is successful could put you out of business instead of help you grow it. Use this information to plan your next campaign and you’ll see better results – guaranteed.