should i use crowdfunding

Title III of the JOBS Act (“Regulation CF”) allows companies to sell securities through crowdfunding platforms and allows for any individual (regardless of accreditation status) to invest in private companies through these platforms.

If a company chooses to sell equity under Regulation CF it must file information with the SEC disclosing its activities and financials (details below), and the company will take on continuing disclosure obligations. All Regulation CF-compliant sales must be facilitated by a funding platform, which customarily takes a fee of the funds raised.

Below are some of the pros and cons of selling securities through a crowdfunding platform to consider when deciding whether to use this method to raise capital for a business.

PROS

Regulation CF’s flexibility can open additional potential sources of capital from retail investors, offering greater potential flexibility in the funding process.
The ability under Regulation CF to advertise and target groups such as users or customers means companies can potentially benefit from tapping their diverse networks.
Companies may be able to raise money more quickly than if they were to seek priced round equity funding, potentially allowing them to move faster to market than before (but often not as quickly as raising money on convertible notes or safes from traditional venture investors).
Companies can choose the types of securities to sell. Early Regulation CF offerings involved convertible securities that only paid out when a company had an exit or IPO. Some companies sell safes convertible into the next equity round or non-voting common stock.
CONS
Few traditional “Silicon Valley”-style startups use crowdfunding and there are clear negative connotations in the marketplace for companies that have engaged in these types of offerings. Unwinding or mitigating Regulation CF offerings in future fundraising and M&A transactions may cost thousands or even tens of thousands of dollars in additional legal costs.
Due to the legal and compliance protocols companies must follow, seeking funding from a wide variety of individual investors could be burdensome and eat up valuable internal resources.
Traditional venture capital investors are sophisticated and are fully aware that their investments are speculative in nature—offering high rewards because of the high risks. The investors brought in under Regulation CF may have little experience in the investment process and could have expectations that reflect that. They may have invested funds that they cannot necessarily afford to lose and may not have the long liquidity horizon that traditional investors are willing to bear.
Companies raising under Regulation CF may be at a greater risk of negative publicity if investors are disappointed with the results or the lack of liquidity for their securities. Management may be on the receiving end of angry letters, emails, texts, tweets and blog posts. The sheer number of Regulation CF investors means that the possibility of negative publicity is greater. Early-stage startups will not have investor relations teams and resources able to deal with these distracting issues.
Statistics from the SEC from 2020 show that the average dollar amount raised in a Regulation CF offering is about $250K.
While the funding platforms have taken some steps to lessen these burdens, having a significant number of (largely unknown) stockholders is likely to complicate certain corporate approvals in the future. Having Regulation CF investors on your cap table may make it more difficult to attract traditional venture investment down the road and may also make companies unattractive to private companies looking to do stock-for-stock M&A deals.
Before taking in any money under Regulation CF, companies must make a public filing on the SEC’s Form C on Edgar (the SEC’s publicly available, electronic filing system). A large amount of company information, including financial statements (audited in some cases), use of proceeds information, information about the company officers and directors, information about large stockholders and more are disclosed in these filings. All of this information disclosed in the SEC filings would also be available to competitors and the investors themselves.
After completing a Regulation CF offering, companies are required to provide an annual report on Form C-AR no later than 120 days after the end of its fiscal year disclosing information similar to the original Form C and including updated financial statements. In many cases companies may be able to discontinue this annual filing after the first year.

Should I use crowdfunding?

Related FAQs