Until a couple of weeks ago, we didn’t know much about equity crowdfunding. (Thanks to Startup Southerner contributor Alexander Davie for fixing that.) And thanks to an informative session at 36|86 yesterday, we now know even more. The rules recently changed, opening up the opportunity for more and smaller startups to leverage this funding mechanism, so here’s what you need to know:
A lot of people are interested in equity crowdfunding.
When moderator Cat Clifford of Entrepreneur.com asked who in the audience knew about equity crowdfunding, many more hands than we expected shot up.
There are three different types of equity crowdfunding.
There’s Title II, Title III and Title IV. In a nutshell, Title II connects high-growth startups with accredited angel investors, Title III is for growth companies (as opposed to high growth) and allows them to semi-solicit investments from friends and family members (and complete strangers), as long as those investors are American. And then there’s Title IV, which is for high-growth companies and requires the filing of a prospectus-like document that has to be reviewed by the SEC and commented on and all of that regulatory stuff that you should probably talk to a lawyer about.
If you can get venture capital, you should probably start there.
Geri Stengel of Ventureneer shared the stark reality that only about 1 percent of all companies will raise venture capital, while only 3-4 percent will raise angel capital. “For everyone else, Title III is a great fit.” Further, she said, before seeking Title III funding, startups should also consider reward-based plans first, like those that can be created through IndieGoGo or Kickstarter.
It’s all very complex.
Doug Ellenoff, a Title III equities lawyer with New York-based Ellenoff Grossman & Schole explained that startups that are interested in equity crowdfunding should not underestimate how complex the laws are surrounding it. “It’s very complex and you have to be mindful of all the rules,” he said. “But there are fewer problems with it than people perceive.” He said that in the last two years with Title II alone, more than $1 billion has been raised, and there were very few problems with the system.
Equity crowdfunding is not for everyone.
“If you’re very stealthy and you don’t want to publicly disclose what the timeline is for your product, then equity crowdfunding is not a good fit for you,” explained Pelli Wang of SeedInvest. She also added that from an investor standpoint, equity crowdfunding opens up an asset class that previously wasn’t accessible outside the super wealthy.
So, general public, what are we waiting for? Let’s invest in startups!
BONUS AUDIO from Relationary Marketing: Cat clifford of Entrepreneur.com suggests crowd equity funding as an alternative for startups and discusses new legislation.