You Can Raise $5M through Regulation Crowdfunding - That's a Game Changer
Mr. Wonderful here -
When the JOBS Act came into effect in 2015, creating equity crowdfunding, I saw massive potential. Why? Well, let's think back to the world beforehand for a moment - shall we?
Before 2015, all of the benefits of early-stage investing accrued to a small group of venture capitalists and, frankly, people like me. What regulators woke up to was that this setup was fundamentally un-American. So, they decided to democratize access to capital and private investment opportunities through new funding vehicles called regulation crowdfunding (Reg. CF) and regulation A+ (Reg. A).
What Reg. CF in particular did was create a fairly low bar for privately held companies to raise up to $1M (then later, $1.07M) in small increments - say $100, $500, $1000 - from everyday people. It also had major attributes for founders: No preference for institutional investors, so the founders kept control of their company. You could also align your customers and shareholders in a way that was never before possible because you gave your early adopters the chance to own equity in your company. That makes them very sticky and often less likely than VCs to look for an exit when things get hairy.
You didn't have to be a Shark to see that this thing could be revolutionary…there was just one problem:
It wasn't enough money for founders. Take a look at your average seed round, where it's not uncommon for businesses to raise as much as $2M+. In that environment, $1.07M just doesn't cut it. But that all changed last year when the SEC raised the limit on Reg. CF to $5M per round.
Just think about that for a moment. Now, not only is Reg. CF competitive with traditional funding sources in the seed round, it's competitive in Series A, too. AND as the founder, you still retain all the attributes that made it an attractive alternative in the first place. Don't forget either - larger companies can raise their Series B or C (up to $75M) through the crowd under Reg. A.
The timing here is key. Because of people like Howard Marks who had the foresight to start building a following way back in 2015, nowadays there's an enormous community of prospective investors who are already familiar with the asset class (950k+ on StartEngine alone). That's very good news for founders who can now unlock larger sums of capital than ever before.
Do I think that venture capital is going away? No. But when founders can tap into up to $5M, keep control of their company, and get the support of one of the staunchest groups of shareholders out there - it's a whole new ballgame.