How Entrepreneurs Raise Investment Capital

Raising capital is what keeps entrepreneurs up at night, and historically is what keeps many dreams from becoming reality. Without sufficient revenues from sales, the available options include borrowing from banks or friends and family members, seeking investment from Venture Capital companies and accredited investors, and equity crowdfunding.



The last of these choices is often the most attractive, as it eliminates the disadvantages of investors seeking control, timely payback and unrealistic ROI expectations. It replaces those downsides with the ability to leverage the attributes of their idea, their own marketing skills and enthusiasm, and the power of investors acting as brand ambassadors.

Equity crowdfunding is a funding process that was made possible by the passage of the JOBS (Jumpstart Our Business Startups) Act in 2012. Created to provide greater flexibility for entrepreneurs, it eased securities regulations and provided exemptions from registration requirements. Most importantly, it allowed business owners to offer shares of their companies to the public, with few limitations. Specialized platforms similar to those previously formed to entice donor-based crowdfunding quickly appeared, facilitating the process and allowing entrepreneurs to turn customers into investors, and vice versa. The ability to invest at the ground level and have a share in a company’s future holds as much promise for the public as it does for the company seeking funding.

One of the most appealing aspects of equity crowdfunding is that there are no limits on the number of people to whom entrepreneurs can promote their business. Web-based crowdfunding platforms are the tip of the iceberg when it comes to the ways they can broadcast their company’s benefits. Companies can sing their own praises to potential investors via advertisements, information provided at conferences, social media and their own website, truly allowing the market to determine the success of their offering. This represents a significant departure from the restrictions placed on traditional private funding methods, which explicitly prohibit solicitation or advertising. With equity crowdfunding, aggressive, proactive communication is not only permissible, but likely to be extremely effective and successful.

Crowdfunding’s easing of restrictions does not provide private companies with carte blanche in their approach to raising capital. There are still controls in place for the protection of investors. Offerings need to be registered with the SEC, and companies seeking significant funding under Regulation A+ are required to prepare appropriate disclosures to both the agency and to investors. Still, once these requirements have been met, entrepreneurs are able to maintain full control of pricing, number of shares offered, and how much they hope to raise — and even if they fall short of their goal, they can still raise significant funding.



Regulation Crowdfunding: Companies that are incorporated in the United States and whose primary place of business is either the United States or Canada are able to raise up to 1.07 million dollars in a 12-month period.



Regulation A+ Crowdfunding: Companies that are incorporated in the United States or Canada and whose primary place of business is either the United States or Canada are able to raise up to $50 million from both accredited investors and the general public.

While venture capital and accredited investors offer their own advantages, they also come with significant downsides, including the potential for some loss of control of your company and the pressure of meeting higher expectations. By contrast, crowdfunding investors are not as interested in being partners in business operations as in profitability.

Equity crowdfunding provides a powerful way to raise funds from a broad pool of smaller-dollar investors eager for the opportunity to get in on the ground floor of a promising startup while still maintaining their own liquidity. It provides the opportunity to court those who are already interested in and engaged with a particular niche or industry. Crowdfunding investors are willing to pay for their share of a company’s potential success and to take steps to reach out to their own networks and evangelize, encouraging additional investors and customers. And crowdfunding platforms, which have their own interest in advancing the causes of companies using their service, are in and of themselves effective methods of increasing visibility and reaching a larger audience than the entrepreneur could on their own, albeit for a fee.

Entrepreneurs with their eyes to the future should be mindful of where equity crowdfunding can carry them in the future. A relatively modest but successful Regulation Crowdfunding that raises funds within initial limits can shift its goals and documentation over to a larger Regulation A raise, which can be used to take a company public.