Due to the recent release of the proposed regulations and clarity on the total amounts that are permitted under the equity crowdfunding or crowdinvesting exemption ($1.0 MM per year), there has been much conjecture and speculation that equity crowdfunding will only be viable for early stage companies and startups. However, there are many reasons that equity crowdfunding could be tremendously valuable for both brick and mortar companies as well as more mature companies that may have cash flow but require further liquidity.
Myth: Equity crowdfunding will only work for early stage companies. When a company wants to raise larger amounts of capital for growth, they will stick to using institutional capital.
Reality: Here are 3 reasons why equity crowdfunding can be beneficial for mature companies.
(1) Equity crowdfunding is a misnomer
Equity crowdfunding has become a popular phrase to describe this newfound method of capital formation. However, it’s a bit misleading in that it does not cover the universe of securities that a potential business could offer – two popular options being convertible notes and interest-bearing loans. With the focus on the venture capital market and the outsized returns that typical equity investments require from a company, we have forgotten that small businesses can also use crowdfunding to raise money for loans to potentially expand their businesses or increase their working capital so that they can meet sufficient demand.
(2) All investments do not require blockbuster returns
When talking about equity crowdfunding, the automatic assumption is that investors will need to command returns that successful VCs do in order for the industry to be successful. The equity crowdfunding methodology of smaller investments pooled across many investors changes the landscape and the economic paradigm that is required to make investments successful. Not every investment, particularly if it’s not an equity investment in an early stage tech startup, will require very high returns to compensate investors. Particular types of investments such as working capital for a local business will be a much lower risk-return relationship.
(3) More mature companies can use it too
Equity crowdfunding is not only for startups and early stage companies. More mature companies that require additional liquidity can utilize this capital raising methodology to augment their other capital raises and/or raise cash to buy equipment or to expand a business, such as private placements. Even if a startup has cash flow, equity crowdfunding will not be a capital raising option of last resort, but rather a way to engage with the community and potential consumers as a marketing exercise.
There are so many interesting ways that equity crowdfunding can be utilized and it will be very exciting to see how we can use it to really facilitate innovation and the growth of entrepreneurship!
By Sang Lee