Jul 07, 2020
Post written by Krishan Arora

As an early-stage business, there are very few things that are more important than capital. The competitive landscape will change, market conditions will fluctuate, customer behavior will vary and your team will transform. Such volatility is to be expected in any early-stage business, but one thing that cannot withstand long-term volatility is the amount of capital you have to run your early-stage business.

For the most part, if you have the capital to make it through continued product development, team changes and market pivots — all backed with a dedication to succeed — you will at least still have the chance to grow and scale.

Now the question arises: How do you acquire capital as a startup?

You primarily only have four major options:

1. Friends and family funding
2. Venture capital or angel funding
3. Getting a loan from a bank
4. Investing your own savings

For the vast majority of early-stage entrepreneurs, these four options may not be achievable because:

1. Raising tens or hundreds of thousands of dollars from friends and family is not feasible.
2. Venture capitalists or angel investors will not invest, given a lack of serious traction.
3. The entrepreneur does not have assets to put down as collateral against a bank loan.
4. Most early-stage entrepreneurs don't have piles of cash in savings to invest in their own businesses.

So what other options are there? One major option that has been growing rapidly for the past 2-3 years is equity crowdfunding. You may or may not have heard about equity crowdfunding, but I truly believe that this industry is going to completely disintermediate and disrupt the early-stage investing industry for good.

What is it? In short, equity crowdfunding makes it possible for U.S.-based businesses to raise funds from unaccredited investors.

In recent years, equity crowdfunding has been affected by two key developments:

1. Before the Title III reform of the JOBS Act was passed and implemented in 2016-2017, fundraising directly from unaccredited investors was not permitted by the United States financial regulatory authorities.

2. Since the successful implementation of the Title III reform of the JOBS Act, equity crowdfunding has become a massive fundraising industry that has raised hundreds of millions of dollars for startups around the nation.

In general, there are three types of equity crowdfunding campaigns that can be executed by a given company: Reg CF (or Regulation Crowdfunding), Reg A and Reg D. For the purpose of this article, we will be exclusively focusing on Reg CF Equity Crowdfunding.

This avenue of fundraising is a complete game-changer for early-stage businesses that have a community built around them. Reg CF equity crowdfunding campaigns allow businesses to raise a maximum of $1,070,000 from unaccredited investors.

This means your friends, family and anyone in your network can invest as little as a few hundred dollars directly into your startup. Now magnify this micro-investment across hundreds, or potentially thousands, of people and you can quickly amass a sizable funding round that can be obtained much more efficiently than other form of traditional fundraising.


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