Crowdfunding is Now a Serious Way for Private Ventures to Raise Capital

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Crowdfund Insider | Jamie Finn | Mar 22, 2022

investing in ventures - Crowdfunding is Now a Serious Way for Private Ventures to Raise Capital Traditionally, only accredited investors, private equity firms, or major financial institutions have been able to invest in early-stage, high-growth companies before an initial public offering. While there are many VCs and angels out there, they hear many pitches, they have many options, their funding often makes up only part of what a start-up needs and can come with some significant strings attached.

But in March 2021, the U.S. Securities and Exchange Commission (SEC) changed a key regulation known as Regulation A, Tier 2, now enabling U.S. based companies to raise up to $75 million every 12 months from a wider range of investors, including retail investors. This was a major, under-reported addition to the startup founders’ toolkit.

See: On-chain capital is the future of startup funding

Blockchain and digital investor onboarding technology are now making it comparatively easy for founders to turn to retail investors in funding their still-privately held businesses, with shares issued in the form of tokens securely recorded on public blockchains such as Avalanche, Algorand, Ethereum, or permissioned chains if more privacy is needed. This can be a fundamentally better way to raise capital, and privately held companies and their customers are already taking notice.

Unlocking wealth creation

Gone are the days of Microsoft, Amazon, and Oracle, whose early IPOs were seen as opportunities for individual investors to share in unicorn-driven wealth. While an IPO used to be a sign that a company had “made it”, today it can just as easily be a sign of its decline. Creating a market for shares of private businesses before they go public can create both liquidity and eliminate the fall to earth that often follows an IPO.

Let’s explore why a Mini-IPO capital raise from individual investors can make sense for your business:

A Mini-IPO allows you to raise capital directly from your existing customers and fans, creating an opportunity to deepen, cement and increase the value of those relationships.
When your customers are also your shareholders, their interests become even more tightly aligned with yours.
Because a Mini-IPO is an almost entirely digital process, you can perform one much faster and less expensively than a traditional IPO, since tasks previously performed by transfer agents, lawyers and other middlemen during business hours can be performed automatically by smart contracts in milliseconds.
Issuing your shares on the blockchain also allows you to manage your shareholders digitally, with real-time investor cap tables, instantaneous reporting, and much tighter control over investor communications and rewards (more on that below).

See: US Investment Crowdfunding Exemptions Explained

A Mini-IPO is a sector-agnostic solution. Whether you’re an established tech start-up, a consumer products company, in hospitality or real estate, you can turn to your customers for your next capital raise rather than relying on angels and VCs.
This has other advantages, too: your customers are already invested in your business emotionally (as early adopters) and with their dollars. When they become shareholders, they are more likely to understand and stick with you through growing pains and can be involved in growing your business without the need to surrender control or board seats.
Finally, a Mini-IPO can increase the liquidity of your shares since secondary markets now exist to trade these digital asset securities. Since businesses are remaining private longer than ever, founders and early investors traditionally need to wait approximately 10 years before finding liquidity. By creating the ability for individuals to invest and trade in your private company, no longer are you unable to sell shares to willing buyers when you need to buy a new house, put a kid through school, launch another start-up, or have unforeseen life events.

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NCFA Jan 2018 resize - Crowdfunding is Now a Serious Way for Private Ventures to Raise Capital The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org