The search for business financing can be endlessly frustrating. The banks don't want to lend to you because they say your company is too risky. Venture capitalists say you're not fundable, and angel investors...well, they can be hard to find as the name implies.
Is crowdfunding the answer? Kickstarter and Indiegogo can work well—especially if you can offer great rewards and you are really good at online marketing. But there's another way to raise money from the crowd.
It's called equity crowdfunding.
Now you can sell shares of your business to just about anyone. And no, it's not just for tech companies.
What is Equity Crowdfunding?
Equity Crowdfunding lets a business owner offer a private share placement to the crowd, essentially trading equity in their company for some money, a la Shark Tank and Dragon's Den. It's actually been around for a while, but until recently you could only sell shares of your business to accredited investors—fairly wealthy individuals who met specific net worth and income criteria.
Now, your cousin, your golfing buddy, or almost any member of the public can buy shares as a non-accredited investor, provided you set your business up properly (more on that below).
The latest exemptions became legal in Canada in January 2016, and will be legal in the United States as of May 2016.
Under the new rules, you can set up an offer on a registered equity crowdfunding platform similar to Kickstarter and raise money to finance your business—but instead of offering a reward, like a product or a gift, you're offering real, legal shares in your company. If you raise all the money you're asking for, you could end up with a whole bunch of shareholders who are excited about your business and may even help you promote and build it, too!
Navigating the equity crowdfunding landscape can be pretty confusing. Your company has to receive a securities exemption, which is basically an exemption to the standard rules for how companies can raise private funds. There are exemptions for non-accredited investors (basically the general public), and other exemptions for accredited investors (people who meet specific wealth criteria).
The costs and processes differ for each type of exemption, and the laws are different in different countries. I recommend consulting a lawyer for the specifics, but here's a general overview of how the process works so you can decide if equity crowdfunding makes sense for your business.
Is Equity Crowdfunding Right for Your Business?
First of all, equity crowdfunding isn't just for tech companies. As long as you're willing to give up some percentage of ownership in your business, your bakery, your fashion brand, and even your construction company qualify to raise money this way. If you've got a product or service that tells a great story that regular consumers can get behind, understand, and endorse, then you've already got part of the formula.
But before you pursue equity crowdfunding, it's important to know that it's not free. Although it can also have incredible benefits for your business, mounting a campaign does cost money.
Some of the costs may include:
- Legal and compliance fees
- Fees charged by the equity crowdfunding platform (could be flat or a percentage)
- Consulting and business plan fees
- Marketing and advertising for your campaign
That's why it's still important for you as the business owner to be able to finance some of your funding needs yourself—no matter what type of financing you seek. The saying "you have to spend money to make money" holds true here, too.
But the nice thing is, once you and your lawyer have structured your share offering and you've chosen a platform, you could go from underfunded to fully financed in a matter of weeks.
While the structure of your offer, including the equity percentage and the type of securities you will sell, is a bit complicated and best done with the help of your lawyer, the process of actually creating a campaign is fairly straightforward.
Right now, however, you must use a qualified and regulated equity crowdfunding platform or portal to host your campaign. There aren't any "DIY" options that you can host on your own web site (at least not yet).
In Canada, FrontFundr is one portal that lets companies raise funds from non-accredited investors that meet exemption requirements. In the USA, SeedInvest is a good option with a strong due diligence process, but there are many other portals offering similar services.
What are the Risks of Equity Crowdfunding?
The main risk of equity crowdfunding is the possibility that you will spend a fair bit of money on legal and compliance fees and then not be able to raise enough money in your campaign. If that's the case, the money gets returned to investors and you still need financing. Still, getting your business organized legally and financially is always money well spent, partly because it sets you up better for future financing rounds.
You also want to consider how you will manage having many investors in your business. If you raise funds using a crowdfunding exemption that allows non-accredited investments, you could have dozens of shareholders, so it's important to develop a clear communication strategy for staying in touch with them and empowering them to continue to support your brand even though it could be years before they see any financial returns, if they ever see them at all.
You should also choose your crowdfunding portal carefully. Some portals offer a lot more support and mentoring than others. Some do not use any type of application processes, opening the door for some sketchy companies that you might not want to be on the same platform next to. So consider more than just the platform fees when you're choosing which portal will host your campaign.
What You Can Do Next
Before you drop a lot of money on legal fees, there are a few checks you can do to determine if your company is ready for an equity crowdfunding campaign. In other words: is your start-up fundable?
If your business is little more than a concept on the back of a napkin, it might not be the right time. But if you can check off at least half of the items on the list below, then equity crowdfunding could be worth pursuing, especially if you're looking to raise about $200,000 or more.
If you think you're fundable but you don't have a business plan, then the next step is to write one. Here are a few hints for doing that.
Transparency is Key
Equity crowdfunding is, by its very nature, extremely transparent. The crowd gets to know everything about your business and comment on it. That means you have to be comfortable sharing really specific details about how your company operates.
You also need to be in tip top shape financially and legally so you can demonstrate to your potential investors that you have a strong company that operates ethically and has a clear business plan. As a bonus, being organized in this way will have plenty of other benefits for your business; it may protect you from legal hassles in the future and could open doors for other types of financing as well.
So, if you feel like you keep walking into closed doors in your search for business funding, you might find the equity crowdfunding door wide open.
About The Author
Jessica Oman works hard to help you get the money to start or grow your business, by writing business plans and pitch decks that make lenders and investors pay attention. Grab her Ultimate Guide to Equity Crowdfunding here and start learning how you could access capital in a whole new way.