A great and growing opportunity for mid-market companies
When people think about crowdfunding, websites like Kickstarter or IndieGogo probably come to mind, where money is pledged with the expectation of getting perks or rewards once a particular project comes to fruition. These ventures, of course, are not covered by traditional securities laws and regulations. But when companies think about equity crowdfunding—wait, that’s the problem: they’re not thinking about it. At least not enough.
The fact is, equity crowdfunding, a specific financing vehicle that currently allows accredited investors to purchase equity or debt in a company, has recently become a viable option for organizations looking to enhance their financing strategy. The US has implemented Title II of the JOBS Act, removing a long-held ban on general solicitation of private securities offerings (Canada is still setting the rules). This means that companies can mass market—through Internet offerings, radio ads, etc.—to accredited investors in ways they’ve never been able to offer those investors “private placements” in the past.
Equity crowdfunding is currently available to accredited investors in the US while a framework is being developed for Canada. Some organizations, however, are over-anxious, looking to the eventual panacea of reaching unaccredited investors online. Others are standing pat, waiting to see how the financing landscape shakes out while relying on traditional institutional investment strategies. Both of these camps are missing an opportunity. Between these lines, opportunity is ripe right now.
Raising money on the Internet—accessing multiple potential investors with one campaign—seems like an incredible opportunity for companies. On the investor side, it’s a great chance to participate in financings that most investors normally wouldn’t have access to. On the company side, it allows for the wide-scale presentation of the company, its management and its unique products/services most likely to attract funding. However, while most companies understand the mechanics of this process, its very newness—and the fact that it requires expertise from partners in multiple fields, such as online marketing and platform management—are proving an impediment to effective uptake.
The opportunity is there-what is holding your organization back?
While a number of challenges exist, organizations should consider three key issues around equity crowdfunding:
Approach it with the rigour of a regular financing initiative, starting with a due diligence package. Do not assume that your financing is assured just because more investors will potentially view your information. While the issuer’s financial commitment may ultimately be lower than with institutional investing, there is still plenty of work involved.
Overcoming investor risk
Obviously, the risk of supporting crowdfunded issuers is higher as it’s difficult to vet a company over the internet. As investors build risk methodologies in this area, issuers will in part be differentiated by their marketing approach—online in particular—as well as their offer.
Lack of applied knowledge and skills
Equity crowdfunding combines financial expertise with a mixture of off-line and online strategies. You need to acquire or bring in the right knowledge and experience in strategic partnerships; networking; regulatory compliance and best practices; social media; PR campaigns; due diligence; accreditations and verifications; web strategy and more.
Past success or future expectation shouldn’t limit current opportunity
When accredited investors have to choose between investment opportunities, the one that most excites them, tells the most effective story and presents deal specifics in the best context will win. In the end, it’s all about how effectively accredited investors are targeted. And with the growing ability to reach a global audience, equity crowdfunding should make an excellent addition to the financing strategies of tomorrow’s successful or mid-market organizations.