6 Myths Of Equity Crowdfunding

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Forbes | Ryan Caldbeck | Mar 19, 2015

equity crowdfunding in the USOnline equity fundraising platforms — also known as equity crowdfunding platforms — are becoming increasingly popular, and growing in size. As a result, they are attracting more and more attention from anxious investment bankers, which in turn has led to rhetoric suggesting wise investors stay clear. As the founder and CEO of CircleUp , a platform for equity investing in early-stage, high-growth-potential consumer companies, I routinely hear variations of the following arguments:

  1. “You’ll get too many investors in your cap table.”
  2. “People will see all your company’s proprietary information.”
  3. “People will see you are raising.”
  4. “It’s bad for your brand to be seeking funding online.”
  5. “Only companies that can’t raise offline raise online.”
  6. “I already have connections to investors, so you don’t need to use an online platform!” (Said every small investment bank ever.)

Let’s unpack each.

1) “You’ll get too many investors in your cap table.”

I agree that having 75+ investors is not good for a young company. What an investment banker won’t tell you is this: top equity funding platforms put the entrepreneur in control. Entrepreneurs on CircleUp, for example, decide both the minimum dollar amount per investor and the total number of investors in each round.

I’ve seen our entrepreneurs close online rounds with just one investor; while others have wanted more investors to gain a larger network of passionate brand advocates to help grow their brand.

View:  Dispelling myths from 'popular delusions of crowdfunding'

2) “People will see your company’s proprietary information.”

Most online platforms have private deal rooms which allow entrepreneurs to determine and approve which investors get access to sensitive information. And before they do so, entrepreneurs are given tools to assess a prospective investor’s background, as well as the option to open a conversation with them before providing access to business financials and other sensitive information.

Contrast the control you have in this model with a small investment bank creating a pitch book with all the business’s data and financial models that is then sent out to a hundred investment firms – with no assurances of raising capital.

That decision—to flood the market with your Private Placement Memorandum (“PPM”) – is a common one with small, and candidly desperate, investment banks. They care much less about your long term health, and much more about their own short-term revenue. Consequently, your company’s PPM lands in the inboxes of hundreds, if not thousands, of investors. Most of whom are irrelevant; all of whom now have access to your company’s sensitive financial and operational information. I’ve seen this one too many times. (Read about just one example here.)

There is no scenario in which there is zero risk of releasing sensitive business information. And that applies to any form of investment—serious investors demand to see all pertinent information. But to suggest this risk is greater online than with conventional financing is wrong.

3) “People will see you are raising.”

What do Airbnb, Snapchat and Photobucket have in common? They’ve been in the news recently because they are raising capital. Similarly, Uber disclosed intentions last fall (and several times since) to raise more than $1 billion. These are public discussions — and I candidly don’t understand why that hurts the company.

It is common to see news reports about tech companies seeking capital. Strong, fast-growing companies with promising futures aren’t afraid to let the world know they are raising capital.  On the contrary: it’s often seen as a sign of strength.

That said, leading online funding platforms allow businesses to guard information about a capital raise. (As mentioned above, the entrepreneur maintains complete control, deciding who can view confidential information and when.)

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country.  NCFA Canada provides education, research, leadership, support and networking opportunities to over 950+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada.  Learn more About Us or visit www.ncfacanada.org.

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