Title III Equity Crowdfunding on InfraShares
Title III allows entrepreneurs to raise up to $5 million in capital from the crowd. For the first time since 1932, startups can leverage their community of early adopters and users to drive growth by inviting them to invest. Title III is similar to Kickstarter but instead of rewards, investors receive equity.
What is Regulation CF?
Title III of the JOBS Act outlines Reg CF, a type of offering allowing private companies to raise up to $5 million from all Americans.
Like a Kickstarter campaign, Reg CF allows companies to raise funds online from their early adopters and the crowd. Instead of providing investors a reward such as a t-shirt or a card, investors receive shares, typically equity, in the startups they back.
How is Reg CF Different from a Reg D Offering?
The key difference between Reg CF and Reg D is that companies raising under Reg D can only accept investments from accredited investors while those conducting a Reg CF offering are able to accept funds from both accredited and non-accredited investors.
How is Reg CF Different from Reg A?
Reg A is most appropriate for Growth Stage companies raising between $5 million and $75 million. Companies conducting a Reg CF offering can raise up to $5 million from the crowd, do not need to obtain SEC approval before launching their campaign, and do not pay the fees associated with Reg A.
Why Would I Do a Reg CF Offering?
Raise Capital to Drive Your Company’s Growth
For many entrepreneurs, there comes a time when outside capital is needed to accelerate growth. Historically, options for entrepreneurs have been limited. Companies not in traditional VC hubs like Silicon Valley or New York and those outside the narrow investment theses of venture capital firms were limited to bank loans or debt financing. Reg CF gives founders an alternative by allowing them to raise outside capital in exchange for equity.
Reward Early Adopters
Founders rely on early adopters to launch their startups. By pursuing a Reg CF offering, a company is inviting its users to share in the success those users help create. Offering customers a financial stake rewards early adopters for the role they play in a company’s growth.
Galvanize Your User Base
By inviting its early adopters to participate in a Reg CF offering, a company can help turn users into brand evangelists. Customers who own stock in a business are more likely to recommend that company
to others and increase the amount they spend with that company. Reg CF gives startups a way to build deep brand loyalty with their customers, a key driver of growth for early stage companies.
Efficient Process for Raising Capital
Conducting a Reg CF offering allows companies to tap into an eager and engaged source of capital — their users and early adopters. By bringing these investors online, startups can potentially secure funding quickly and efficiently.
Who is Reg CF Right For?
Companies Looking to Raise Up to $5 Million from the Crowd
Companies raising under Title III can raise up to $5 million from the crowd. Because of this, Reg CF is appropriate for companies looking to raise Seed capital or streamline their early Angel or Friends and Family Rounds by facilitating them online.
Companies Looking to Incorporate Crowdfunding as Part of a Larger Round
Reg CF can also be used alongside a larger round led by traditional investors, such as a VC firm. Companies can allocate up to $1 million to the crowd and the rest to institutional investors.
Companies with Engaged User Bases
An enthusiastic user base will be more likely to invest in a company, drive initial investment momentum, and be able to help a company quickly fill its round.
The Reg CF Process
Choosing a Funding Portal
Under Title III, companies must use an intermediary, either a broker dealer or crowdfunding portal, to facilitate a fundraise. Experienced portals with a deep understanding of the regulations surrounding Reg CF can help ensure that their campaigns are compliant with SEC rules.
Filing Your Form C
Companies raising under Title III do not need to get SEC approval to initiate their raise. They do, however, need to file a Form C. This includes basic information about the company, its employees, and the terms of the raise.
Preparing Your Financial Statements
Companies raising under Title III will need to prepare financial statements for potential investors to review.
· Companies raising $100,000 or less will need to provide financial statements certified by the principal executive officer, accompanied by information from the company’s tax returns.
· Companies raising $107,000 – $535,000 will need to provide financial statements reviewed by a CPA.
· Companies raising $535,000 – $1.07M will need to provide financial statements audited by a CPA unless the company has never sold securities under Regulation CF. In this case, the company will only need to provide statements reviewed by a CPA.
· Companies raising $$1.07M – $5M will need to provide financial statements audited by a CPA.
Creating Your Profile, Marketing Your Raise
A company’s investment profile will be an important marketing tool during the raise. The company will need to populate it with their offering circular (Form-C), company information, a video introducing the company, financials, and the terms of the raise. Experienced funding portals will be aware of what can and can’t be said on a profile to stay compliant with SEC regulations.
Live Campaign
Once a company’s profile is made public, a company can begin to accept reservations for investment. Customers, early adopters, and the crowd will be able to invest online into companies they are passionate about. During a campaign, companies should employ a three-tiered strategy to have a successful raise:
· Target the company’s customers and the InfraShares investor network to build initial momentum and excitement
· Target early-adopters, the company’s extended network, and affinity groups
· Target the public through robust press, advertising, and digital campaigns
Following a 21-day waiting period, companies can begin to close on their investments.
Ongoing Disclosure
Upon the successful closure of your campaign, you will be required to provide ongoing updates to your investors in the form of an annual report. This will include similar information to that which you will have provided to your investors during your Reg CF campaign. This is crucial to keep your investors informed and engaged with your company.
In summary, what are the benefits of Title III?
· More investors means more supporters. A Reg CF campaign gives a company the ability to turn its users into brand evangelists with a vested interest in the future of that company.
· Reg CF can be an efficient way to quickly raise capital from the crowd or streamline a Friends and Family or Angel Round.
· Reporting requirements give founders and investors a more open, transparent, and structured dialogue to report and get feedback. With the help of the right advisors and tools, founders can easily manage shareholder communication while focusing on building their companies.
What are the potential downsides of Title III?
· Legal and accounting fees can potentially be higher than under a traditional raise from accredited investors.
· Annual reporting requirements.
· Reviewed financials for companies raising $100K+ (audits are not required for first-time Reg CF issuers raising under $1.07M).
Other Questions about Reg CF
What if my Reg CF campaign fails?
While an unsuccessful Reg CF campaign could prove detrimental to a company’s perception, there are several steps companies can take to minimize this risk. Companies should consider whether there is significant offline interest in their raise, consider how much they should realistically target for their raise, and whether their business would resonate with the general public.
What will traditional venture investors think of my Reg CF campaign?
Existing investors may be initially skeptical of Reg CF simply because it is new and non-traditional. It is important to remember the following:
· Reg CF can allow a company’s most ardent supporters to invest alongside venture capitalists if structured correctly.
· Reg CF is about more than just fundraising. It is an opportunity for a company to make a marketing splash and create an army of brand ambassadors.
Will I be able to comply with the ongoing disclosure requirements?
Companies which have raised via Reg CF must file information with the SEC and post it on their websites on an annual basis. This annual report includes information similar to a company’s initial Reg CF filing, key information that a company will want to share with its investors to foster a dynamic and healthy relationship. Companies are not required to report CPA reviewed or audited financials on an annual basis.