Startup Legal Talks (19)
At work, I often hear some entrepreneurs say "we are going to crowdfund" when they talk about their company's financing method. Hearing this, I really want to ask, do you really know what "crowdfunding" is?
First of all, like "fund", "crowdfunding" is a term that has a very small connotation and a very large extension, with both narrow and broad concepts, and it is extremely easy to be misunderstood and misused in both narrow and broad concepts.
1. The Four Concepts of Crowdfunding
Let's look at the four common types of crowdfunding.
1. Payback Crowdfunding. This is the most common type of crowdfunding in the daily lives of ordinary people. To put it plainly, it is a product pre-sale. In other words, a manufacturer wants to produce a certain product, but due to the pressure of cost, they need to raise a batch of money from consumers who are interested in the product before starting production.
2. Debt-based crowdfunding. This is where a company borrows a lot of money from others to finance a project and then pays back the principal and interest when the project is completed.
3. Donation-based crowdfunding. This is actually a charitable donation, who has cancer, leukemia, let people donate, is purely public welfare behavior, not investment.
4. Equity-based crowdfunding. This is the focus of our presentation today, which means that the company sells its shares to the public to obtain financing.
2. Equity Crowdfunding in the United States
In fact, in 2012, the Jumpstart Our Business Startups Act (JOBS Act) lifted the ban on private companies raising money publicly, opening the door to equity crowdfunding for all. That means it's really only been in the last 10 years that equity crowdfunding in the U.S. has come to the common people.
Equity crowdfunding may sound very exciting, but there are many restrictions.
1. Company financing limit: Companies can raise up to $5m within 12 months through equity crowdfunding, which is actually equivalent to the seed round of a private placement.
2. Restrictions on investors: Crowdfunding can accept investments from Accredited Investors and Non-Accredited Investors, which sounds good, but there are restrictions. If you are an Accredited Investor, there is no limit to the amount you can invest, but if you are a Non-Accredited Investor, there are only income or net worth limits.
If annual income or net worth is less than $124,000, then a maximum of $2,500 or 5% of annual income or net worth (whichever is greater) may be invested in any 12-month period. 2.
If both annual income and net worth equal or exceed $124,000, then up to 10% of annual income or net worth, whichever is greater, may be invested in any 12-month period, but not more than $124,000.
The following table provides a few examples:
3. Channel Restrictions: Crowdfunding must be conducted through designated SEC-approved platforms.
You may often hear about these platforms, such as Kickstarter and Indiegogo, but they are actually reward-based crowdfunding, which means they are the type of product pre-sales.
1. Kickstarter
2. Indiegogo
3. Patreon
4. Crowdfunder
5. GoFundMe
6. Fundable
7. Crowdcube
8. Mightycause
9. SeedInvest
10. StartEngine
The following are the platforms that can really do equity crowdfunding.
1. StartEngine
2. SeedInvest
3. AngelList
4. Republic
5. MicroVentures
6. WeFunder
7. Dealmaker
8. Securitize
Actually, as you can see from these restrictions, crowdfunding is about raising money from ordinary people and not expecting to raise a lot of money. So the companies that start with crowdfunding are often not very well known, for example, Coolest Cooler (which sells portable coolers), Pebble Time (which sells smartwatches), Star Citizen (a video game), and you will find that the ones that raise money through crowdfunding are often those in the daily use consumer goods companies.
3. The difference between Regulation CF, Regulation A and IPO
Crowdfunding is called Regulation CF under the U.S. Securities Act (where CF means crowdfunding), and you may have a question about what the difference is between Regulation CF, Regulation A and IPO. These are public ways to raise funds from the community.
First look at Regulation A, the U.S. securities law under Regulation A and a name called mini IPO (mini IPO), from the name can be seen in fact it is very close to the listing. However, the reason why it is called mini IPO is that Regulation A is limited in amount. The other is $75m, which has no restrictions for qualified investors (accredited investor), but has restrictions for non-qualified investors (non-accredited investor) based on income and net worth.
Compared to Regulation CF and Regulation A, the requirements for public offering IPO are much higher, while Regulation CF and Regulation A set the maximum limit, IPO sets the minimum limit, such as
1. the total revenue for the last 3 years must exceed $10m, of which the revenue for each of the last two years must be $2m or more.
2. the market capitalization of the company must be at least $200m
3. the share issue price is at least $4 per share
It can be seen that IPO is a much higher requirement than Regulation CF and Regulation A.
After such a variety of dimensions of explanation, I think we must have a clear concept of crowdfunding, then reflect on your business is really suitable for crowdfunding?
