Something very exciting and special is happening in the world of capital fund raising for emerging market and startup companies. Recently, new SEC rules will allow “Crowdfunding” sites to increase the maximum amount of capital that can be raised by companies from the general public.
Crowdfunding is a confusing term for some. To be more precise, Crowdfunding would be more accurately referred to as “Crowd-Investing”. When speaking of “Crowdfunding”, some people mistake it for the activity of sites like GoFundMe or Kickstarter, and thus think it means donating money to a cause and perhaps for a token reward. In reality, Crowdfunding sites like Wefunder and StartEngine open the doors for regular folk to invest in the emerging market and startup community that used to be the exclusive domain of venture capital firms and institutional investors.
Thus John and Jane Q Public can login to one of the Crowdfunding sites, browse the companies opening their doors to investment, and invest $100, $1000, or more in a company that may be high risk, but also may be high reward. The world of reaping potential 10x, 100x, or more returns on investment is at everyone’s finger tips just as it has been for venture capitalists (VCs) with their million dollar plus investments. Only, in this case, at a level at which the individual investor feels comfortable. It’s an opportunity to “get in early” on a company that may track toward a massive acquisition or IPO.
There are two primary paths to Crowdfunding for companies. The first is leveraging “Regulation CF” which currently allows companies to raise up to $1.07M from the general public. Regulation CF funding has SEC filing requirements for companies via a “Form C”. However, the requirements are something most companies can easily fill out, have an independent CPA review financials, and maybe a lawyer help with risk disclosures, in 2 weeks to 2 months time. Crowdfunding portals make it even easier to file the Form C and tap into the crowd as well. The other path, is a “Regulation A” round which currently allows companies to raise up to $50M from the general public. However, the filing requirements are a little more involved. It may take 1 to 4 months to complete the work required to file for a Regulation A raise and most certainly requires help from lawyers. [Note that Regulation A is also sometimes referred to as Regulation A+]
In the January to February 2021 timeframe, new SEC rules will take effect which up the limits that are allowed to be raised. With Regulation CF filings, companies will be able to raise up to $5M. And with Regulation A filings, companies will be able to raise up to $75M. This is a game changer because these limits become more in line with what many startup and hi tech companies seek to raise in more traditional venture capital rounds. Thus, with this route of funding, more companies will be able to raise the kind of capital they need to grow their company to the point of being fully self sustained by revenue and further growth.
The vast majority of venture capital is deployed to companies located within spitting distance of the major venture capital centers like Silicon Valley, New York, and Boston. Being from a Company located well outside of these zones (Charlottesville, Virginia), and having talked to hundreds of VCs, there is a common and natural hesitancy for VCs to want to invest outside of their region of operation. Jumping on a plane and traveling through airports hours on end once a month for board meetings is not always desirable. Furthermore, VCs also naturally understand best the environment in which they are located and affiliated. They understand and know the talent pool, other sources of capital in the area, and resources that exist in their region of operation best. When a Company in Charlottesville, Virginia or elsewhere in Anytown USA pops onto their RADAR, these questions swirl about and add further risk in their mind to the deal.
With Crowdfunding, by nature of its more distributed nature, more potential investors exist who have familiarity with a company’s region. Furthermore, many crowdfunding investors simply don’t care as much about location since they’re not going to have board seats at the company and be traveling on planes for meetings. Thus, with the increase in the limits of Crowdfunding investment to the tune of $5M and $75M for Regulation CF and Regulation A respectively, it feels like there is a movement afoot that will lead to a dramatic increase in the number of companies seeking investment via this route.
What’s more, there has been a recent uptick in hi tech companies going through the traditional IPO process by way of “SPACs”, or Special Purpose Acquisition Companies. These are shell corporations formed to be publicly traded that merge or acquire the company with the real meat on its bones offering some product or service of value. SPACs allow such meaty companies a faster path to going public. There’s an increasing spate of hi tech companies pursuing this route with the potential for huge returns on investment as a result.
If you combine Crowdfunding with SPACs, it seems there is a real disruptive process in the air for capital fundraising taking place. Whereas many startup and hi tech companies traditionally need to be located in locations with a high cost of living just to raise capital and then undergo a lengthy process to going public, the increased limits for Regulation CF and Regulation A, combined with the rise in popularity of SPACs revolutionizes capital fundraising.
Capital fundraising becomes more democratized via Crowdfunding, lowers barriers, and increases the velocity of capital fundraising by companies no matter where they are located. Furthermore, the velocity for going public is also increased by SPACs. Crowdfunding alone seems likely to lead to a boom in innovation and hi tech company growth across the land. Crowdfunding plus SPACs seem destined to provide a powerful one two punch for companies looking to knock it out of the park and become a publicly traded company along side others on the major stock exchanges.
This isn’t a theoretical realization. Having raised capital thus far through traditional VC routes for a hi tech autonomous vehicle company located just outside Charlottesville, Virginia, far removed from Silicon Valley, I’ve experienced first hand the complications. It’s already difficult to raise venture capital. It’s even more difficult to build a company around autonomous vehicle technology vs say building a company around more commoditized infrastructure like Web site and mobile App platforms. Add to the mix doing this from outside of a region that’s one of the few VC hotbeds, and the pace of capital fundraising can come slowly.
The promise of increased pace of capital fundraising that Crowdfunding via Regulation CF and Regulation A offers combined with the promise of going public faster offered by SPAC formation is reducing the friction and removing barriers that have more recently been ahead of companies like ours. Beyond our previous and current traditional venture capital fundraising efforts, we’ve started down the concurrent path of raising more funds via Crowdfunding. In future articles, I will provide further details on this new era of capital fundraising based on industry developments and direct experience. In the meantime, keep an eye out for the broader industrial boom that seems to be on the horizon.
Paul Perrone Founder/CEO – Perrone Robotics
References: Crowdfunding: www.crowdfundinsider.com/2020/11/168682-the-sec-updates-reg-cf-reg-a-and-more-boosts-reg-cf-to-5-million-reg-a-increased-to-75-million/ SPACs: www.nytimes.com/2020/12/19/business/dealbook/deals-mergers-acquisitions-2020.html Author Contact: www.perronerobotics.com
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.