In recent years, crowdfunding has dramatically impacted the startup market, and its influence does not appear to be slowing down. According to Grandview Research, the global crowdfunding market size was valued at $1.67 billion in 2022 and is expected to expand at a compound annual growth rate (CAGR) of 16.7% from 2023 to 2030. Equity crowdfunding has become a mainstream tool for startups to introduce their company name, mission, vision, and other core concepts of their innovative business directly to ready and targeted investors without going public.
According to JP Morgan, investors are still facing real uncertainty as we enter 2023. Increasing market volatility and the prospect of a U.S. recession have created an environment in which investors seek downside protection in private deals more so than before.
Investor demand aside, numerous reasons exist why companies are staying private longer creating burdensome, heavy lifts for early-stage companies struggling with the necessary organizational resources. Those include:
When raising capital, firms have several options, including Reg A+, Reg CF, and Reg D. Each of these regulations offers different advantages and disadvantages, depending on the needs and goals of the company.
Reg A+ is a type of securities offering that allows companies to raise up to $75 million from the general public, which includes retail investors. Frequently called the "mini-IPO," Reg A+ is a streamlined version of the traditional IPO whose regulatory requirements are more appropriately tailored to early-stage companies. As a result, the mini-IPO process is less costly and offers a quicker time to market when compared to a traditional IPO. Reg A+ issuers must receive qualification from the SEC as either a Tier 1 or Tier 2 issuer before raising capital. Tier 1 issuers are permitted to raise up $20 million dollars in a twelve (12) month period, while Tier 2 issuers are permitted to raise up to $75 million dollars in a twelve (12) period.
A Regulation Crowdfunding (CF) offering allows companies to raise capital from the general public, including retail investors. Reg CF permits issuers to raise up to $5 million per year, and Reg CF offerings are typically conducted using an online platform. Reg CF offerings may be done through a registered broker-dealer or through a registered funding portal, which is a type of regulated intermediary unique to the crowdfunding space. Moreover, Reg CF offerings have traditionally been natively digital, which has appealed to different types of IPOs.
Reg CF has been used as an alternative to obtaining funding from traditional VC firms. Since passage of the JOBS Act, Reg CF offerings has both allowed issuers to access capital without relinquishing controlling interests of the company to a single investor, or group of investors, as well as allowed mainstream investors to have access to direct investments in early-stage companies.
Reg D is a security offering exemption that allows companies to raise capital from primarily accredited investors, such as wealthy individuals and institutional investors. Reg D offerings are not required to be registered with the SEC and are typically conducted through private placements. Because of this, the Reg D framework is often used by companies seeking to raise money quickly to fund their operations and expand the network of potential investors outside the tight circle of family, friends, and close acquaintances. If specific criteria are met, Reg D allows companies to solicit and advertise private offerings to the general public.
Reg D offerings can take a variety of forms, with the most common being conducted through Reg D 506b and 506c. These exemptions allow issuers to raise capital efficiently and with minimal cost, if they follow certain rules around how they raise capital. The vast majority of private market offerings are conducted under one of these rules above, the main difference being 506c offerings allow for general solicitation. This allows issuers to take a more “crowdfunding” approach as they can now market their offerings online, through platforms, and via various broker dealer or RIA channels.
The choice between Reg A+, CF, or D depends on the company's specific needs, goals, and the amount of funding they are seeking. By understanding the potential benefits and drawbacks each option offers, firms can make an informed decision on the best way to secure the capital they need to grow and thrive.
With Templum, companies can efficiently raise capital for any issuance. This process begins with understanding which regulation type is appropriate for each group. Once this is decided, Templum has the workflows and technology to support the entire asset lifecycle, from origination through closing, helping at every step along the way.