So raising capital is tantamount to success. It’s never just been about grit and a good idea. Connections, networking, and getting in front of the right people are all key to getting your idea off the ground.

And after you’ve made these connections and gotten in front of the right people — then what? Does the funding go to the best idea or the strongest founder with the most solid plan?

Statistically speaking, that’s not always the case.

In 2021, female founders got 2% of all venture capital (VC) dollars — which was the lowest percentage since 2016. And since 2011, the highest that statistic has ever been was 2.7%.

And not only are female founders getting just the tiniest sliver of the VC pie, but the check sizes are also smaller (by about 20%) when compared to similar valuations of male-led startups.

Source: Pitchbook

VC firms are making improvements year-over-year, and if we look at startups with a sole female founder AND a co-founder that is female, the share of funding jumps up to 17.6% in 2021. This is much better, but still lagging other industries on inclusion and equity metrics.

Let’s take a look at minorities and POC founders: according to a Crunchbase study, in 2020 Black and Latinx founders only represented 2.6% of all VC funding ($2.3Bn).

So overall, the record for VC funding doesn’t look that impressive for POC or female founders — as neither have ever gotten more than a 2.7% share of the total funding pie. And while there are many VC firms that are specifically focused on bridging this gap, as an industry, VC firms are still lagging behind banking, lending, and other financial markets — by a mile.

Source: Crunchbase

Many capital markets experts extol that the market is efficient, meaning if a company is a “good one,” capital will find it. Conversely, if a company struggles to raise capital, it must be because the company is a “bad one.” Maybe that would be the case in a contained fishbowl. Yet the data and our Office’s experiences have shown again and again that who you are — your personal network, location, education, and demographic group — often is the first hurdle to clear before investors ever learn what you are building and, critically, whether they will invest. [Source: SEC Office of the ASCBF Annual Report, 2021]

Opening the Pre-IPO Markets

Now a material change that has improved these trends is the advent of Equity Crowdfunding (ECF) primarily via Reg CF and Reg A+.

ECF basically sells your pre-IPO deal to the crowd (the public). The JOBS Act provided exemptions to the ‘accredited investor’ requirement in 2015, and this change has enabled founders that didn’t qualify for VC money to find a new source of capital. Non-accredited investors are your customers, your fans, and the general public.

So, if you’ve built a following and are mid-growth and need to raise capital — you don’t have to give away control and equity to a VC firm. Conversely, if you don’t even get a meeting with a VC firm — you still have an incredible tool at your disposal to raise funds with the crowd.

And this new phenomenon has had a material impact on female and minority founders.

According to KingsCrowd data, looking at Reg A & Reg CF deals since 2020 — here is the comparison:

Startups with female founders represent between 10% and 15% of all Equity Crowdfunded deals since July 2020.

And startups with POC founders represent between 10% and 28% of all Equity Crowdfunded deals since July 2020.

Going from 2.7% to 28% is a material improvement in access to capital for founders of color. Crowdfunding your investors is truly democratizing access to capital for founders who previously could not get access to raising capital by going the traditional VC route.

And Equity Crowdfunding is just really getting off of the ground. The first full year it was available was 2017, since then it’s grown from $49.2M total raised to over $507M in 2021.

Impact Investing

But there’s more.

Not only is crowdfunding raising capital for founders that were under-represented via traditional funding options — it’s also creating a really interesting new phenomenon of “Impact Investing”.

The data shows us that the public (i.e.: the crowd) is more likely to invest in a great idea — regardless of the founder’s sex or ethnicity — but the crowd also chooses investments based on their social impact for good.

VC firms want returns and term sheets while the public wants to invest in companies that make the world a better place.

Social impact companies represent about 30% of the funding raised via Investor Crowdfunding for the first half of 2022.

This trend is largely a generational one — as the Boomers retire and make less investment decisions (and more liquidation ones), Gen X and Millennials are representing a large and socially/environmentally conscious generation, and impact investing is expected to reach the mainstream.

A 2021 study conducted by Fidelity Charitable reports:

• 61% of millennials are active impact investors vs. 23% of baby boomers

• 62% of millennials say impact investing has a higher potential to create long-term change vs. 28% of baby boomers

• 66% of millennials believe in the financial viability of impact investing vs. 23% of baby boomers

In the first six months of 2022, more than 25% of ECF deals closed were considered to be socially impactful startups.

By contrast, only 8% of VC funding went to impact startups.

Both inclusion and impact investing trends cannot be over-emphasized when it comes to the material change that ECF is making in the capital markets space. Where VC firms are protecting their own interests and their investments (as they should), Crowdfunded deals are protecting access to capital for anyone overlooked by traditional firms WHILE skewing to innovation that improves the human condition.

As a capital markets professional for 20 years, now it finally seems to be the time when anyone with a good idea or who truly wants to make an impact in the world can get access to capital with a community ready to stand behind them and their journey.

Join me in November as I deliver a keynote address at the 2022 Equity Crowdfunding Week conference to learn more or follow me on Twitter @Rkacaba.

However, is this a bad thing?

Course Correction

Valuations needed a course correction, most would agree. And this dip in the market is similar to the dip we saw in 2020 with overall pandemic worry making the markets volatile and investors hesitant.

While this might be a disaster for most industries (I’m looking at you crypto), this could actually result in an incredible moment for the equity crowdfunding space.

While US venture funding is projected to drop 13% in Q2’22, and traditional deals are expected to decline by 22%, many are expecting an uptick in Equity Crowdfunding deals to fill that gap.

Hesitancy in the VC deals could actually pave the way for Equity Crowdfunding alternates.

2020 was one of the biggest years for equity crowdfunding to date and drastically helped spur growth within the industry. For Reg CF raises, $214.9 million was raised in 2020, despite only $300m being raised in the three years prior — cumulative. This shows an obvious willingness to invest during a market downturn.

Most average investors don’t really have a line of sight on how to invest in startups. The JOBs Act passed in 2012, and most capital market insiders understood the value. But it wasn’t until 2015 (with Title IV) that now the markets are truly opened up — and truly anyone could be an investor.

Equity crowdfunding offers individuals the opportunity to invest in a company that is in an early growth stage. This opportunity was previously hard to come by if a person did not have a personal connection with the company — now it’s democratized.

Investor Sentiment Can Lead You Astray

Historically, during market dips investors turn decidedly bearish. And investor sentiment can be a contrarian indicator — the more bearish people are, the more likely the risks are in plain view and returns could be good going forward.

Implications we are Seeing from Investing in Early Stage/Startups

There are risks with all types of investments and oftentimes people forget how many IPOs that were led or priced by investment banks lead to retail losses in their first year. As equity crowdfunding has been around for a number of years, some critical differences between equity crowdfunding and traditional stock market investing we are seeing are as follows:

• Investors don’t have to watch the markets or worry about the day-to-day prices and losses of their portfolios. Since investors effectively can’t sell — no monitoring is required. In contrast, the immediacy of day trading in the stock market without caps is faster moving, and higher risk in many ways
• Investors are finding companies and categories they are passionate about, that speak to their soul
• It’s a change in investors’ lifestyle — both, the availability of financial information and the opportunities to get in early
• Early. They can get in early. There are different risks, but different benefits as well. The portfolio of opportunities out there is new and different. Online art, online Defi, and private, longer-hold, earlier stage, investments

You Can Raise in a Downturn

The capital markets have ups and downs and it’s best to take a long-term view on trends, versus getting wrapped up in a current point-of-view or commentary.

Decisions should be made not based on gut feelings, the latest doom tweet, or press coverage — but on facts. The truth is that you CAN raise capital in a downturn, as we saw in 2020. So if you are looking to raise capital don’t let the market dip doomsday scenario sway you into thinking it’s never been done.

**Disclaimer: The foregoing is market commentary only. Any market participant should do their own research and make informed decisions with their own advisors to make sure their capital raise is the best deal for them.

Not every company will successfully raise capital by crowdfunding. Sure, the press picks up the huge wins and gets everyone excited, but the big and flashy examples tend to be outliers. As a leader in the space since 2018, our technology platform has powered companies to go direct to the market to raise capital. And here’s what I’ve learned:

You need an exciting, relatable, jaw-dropping product

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Winning investors’ hearts and minds is a process that is both emotional and quantitative. Companies whose products resonate with everyday people and clearly communicate their distinction and value will stand out leading to a more successful offering. Remember, you’re no longer standing out from the rest of the “marketplace”, you’re up against the rest of the internet. The opportunity is larger, but the bar for success is higher.

You have a strong existing brand or a strong founder, investor or customer base

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Issuers with an existing following or fanbase are the perfect candidates for Reg A+ and/or Reg CF offerings. This is because their community represents untapped capital and the ability to reinforce their most loyal followers with “superfan” status as investors. Issuers can save expensive marketplace brokerage commissions for distribution if they tap into their own closed community; thereby minimizing the impact that other brands will have on their conversion funnel.

For more sophisticated issuers, the greatest challenge in raising capital via retail or the crowd is not the awareness of their offering, but turning interested people into actual investors. By eliminating the need for a marketplace where your deal competes with many other offerings, you’ll gain insights into digital marketing performance, and your closed-loop is perfect for re-marketing efforts to convert more investors.

You are looking to raise a significant amount of capital

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If you are looking to raise up to $2M, the costs involved in marketing a successful equity crowdfunding campaign will certainly give you pause. Understand that you have other options to consider. Choose how you raise wisely, to maximize your ROI on the process.

Raising $3M-$25M from a retail audience involves a high degree of complexity, ruthless precision, and powerful automation — all of which will cost money. Issuers looking to source funding rounds of this size from the crowd need full access to the marketing data mentioned above, as well as the ability to control payment processing via secure methods. Using technology like DealMaker to power your raise is like using Shopify to power your eCommerce. Our technology can help make a very complicated process run seamlessly.

Our sophisticated technology was a landmark characteristic of several recent premier raises. In 2021, 10 issuers used DealMaker to raise $20M+.

Founders: Consider All Options

At its core, the JOBS Act which has fuelled the fire on Equity Crowdfunding has always been about taking meaningful and modern measures to benefit entrepreneurs while providing investment opportunities to everyday investors. Its intent was to put control back into the hands of the individuals and businesses that power the heart of the American economy.

Ultimately, I recommend that you make sure your capital raise deal is the best deal FOR YOU. That includes considering a deal that is outside of the traditional VC route.

**Disclaimer: The foregoing is market commentary only. Any market participant should do their own research and make informed decisions with their own advisors to make sure their capital raise is the best deal for them.

It’s hard to believe it, but just 15 years ago investing was a rigid journey with gatekeepers the likes of massive financial institutions, law firms, and financial brokers, who were the only ones with access.

You needed a broker or a firm. That broker needed a minimum investment. A minimum capital investment was often kept at a level not achievable by most. In other circumstances, you needed to be an accredited investor yourself — otherwise, the market was closed off.

So much has changed. And in my opinion, it’s fundamentally for the better.

The financial markets have transformed with innovation-backing government support and new legislation that is forward-looking via Reg A+, Reg CF and other unique exemptions that have lifted the above restrictions and controls. Now there are more ways for everyone to invest directly, digitally, and internationally in companies at all stages.

Technology has opened access

First, the legislation changed — much needed. Now, technology is bringing this access to the world. Access now resembles a much more open market, and FinTech innovators are bringing a consumer approach to anold-school model. The term has been coined “Democratization of the Market” and it rings true. Now your local plumber might have a more powerful portfolio than your company’s CEO, thanks to key regulation changes and innovation in the space.

The rise in investing technology has immediately empowered more people to invest in more fund types. Access to the ability to create wealth, (of course, not without risk), is now in the hands of the consumer. The global pandemic also poured gasoline on that fire because moving all aspects of life into the digital realm is now the expectation and bare minimum for today’s commerce.

Access Could See a Redistribution of Wealth

These two trends combined have lowered the barrier to entry significantly, and so now the new focus is on education to expand consumer investing into the pre-IPO space. Instead of investing in public companies and funds, consumers can consider investing in start-ups and ideas that they are passionate about and believe in. We could all get in early on the next Shopify or Tesla.

Not only does this improve access to founders and CEOs of companies that previously were underfunded and underserved, but this also allows the general public to invest pre-IPO — which was only available to Wall Street insiders previously.

As improved access to minority-run startups has increased, innovative ways to raise capital are playing a role in the redistribution of investment opportunities and wealth globally.

No longer do you need ‘connections’ within the hallowed halls of Wall Street to invest in early-stage companies. It truly is an exciting time.

Early Stage = Big Risk/Reward

Much like crypto, there are a lot of unknowns around non-traditional or disruptive models within the financial markets, and Equity Crowdfunding is no different. Although there are huge potential rewards to investing in early-stage companies, there are many risks as well. Many startups fail — so education is critical if you want to explore pre-IPO investing.

An innovative model that is one of my favorites is the Green Bay Packers model. Since 1923, the Green Bay Packers have been owned by their fans. Their fans are also their shareholders — which not only creates an incredibly powerful loyal fan base, but it’s an empowered fan base with vested interests in the longevity of the franchise. It shows how brands can create a harmony with the market they serve AND their shareholders.

Closing the Gaps

We still have a long way to go, and I’m reminded of the gap that minorities, POC, and women face in both raising capital and access to investment opportunities. In an interview with Jilea Hemmings on actionable ways to close the VC gender gap, we talked about how retail raises or ‘Equity Crowdfunding’ has improved access to funding for female and minority founders.

Studies have shown that capital markets are not a level playing field for founders — they are wrought with bias. Statistics show that only 2.6% of VC funding reaches minority or female founders. In stark contrast, retail capital raising (also called Equity Crowdfunding) has significantly moved the needle to bring financing to female and minority founders up to 34% — while still climbing. DealMaker’s platform is tearing down barriers to entry for the underfunded while permitting consumers access to new investment opportunities previously available only behind the gilded gates of Wall Street.

These are exciting times, and the capital markets, FinTech, VC firms, and regulatory bodies alike have an opportunity to optimize access in new and meaningful ways.

**Disclaimer: The foregoing is market commentary only. Any market participant should do their own research and make informed decisions with their own advisors to make sure their capital raise is the best deal for them.

Regulation A (‘Reg A’ or ‘Reg A+’) was long an obscure, rarely used section of the Securities Act (1933). But in 2012, that changed dramatically. In 2012, the Obama administration as part of the JOBS Act (Jumpstart Our Small Business Act), amended Reg A (affectionately now called Reg A plus) to make it easier for startups to raise money from retail investors, i.e.: the public. By 2015, this change went into effect — and equity crowdfunding was born. With increased limits on how much a company can raise, the term “mini-IPO” is now often used to describe capital raised by going direct to consumers as investors with equity.

What is Equity Crowdfunding?

Equity Crowdfunding is the process of raising funds for a company’s specific purpose (growth, expansion, launch, etc.) from the general public. What does that mean for companies looking for funding? With today’s technology and the internet allowing for a global reach, crowdfunding has become incredibly efficient: it now enables companies looking to raise capital to reach a much wider audience than traditional VC firms. Through equity crowdfunding, emerging companies can pitch their businesses directly to prospective investors, allowing an exciting business to raise needed capital to get off the ground.

Companies That are Eligible for Reg A+

As one law firm explains, both public and private companies in the US and Canada are eligible under Reg A+ to raise equity capital. But certain businesses are prevented from doing so:

• So-called Special Purpose Acquisition Companies (otherwise known as blank check companies)
• Companies for whom Investment Company Act of 1940 registration is required (typically investment firms)
• Issuers disqualified due to criminal convictions or regulatory orders

The Importance of a Reg A+ Exemption

Traditionally, companies that wanted to sell shares to the public (and raise capital that way) needed to register those securities with the Securities and Exchange Commission. Otherwise, they must rely on an exemption. Being able to rely on a prescribed exemption can be incredibly important for a company, as it means they’re not subject to the same level of reporting requirements as registered firms. Indeed, in the case of Reg A+ offerings, the SEC notes: “…smaller companies in earlier stages of development may be able to use this rule to more cost-effectively raise money.” Taking the time to understand the various Reg A+ exemptions can ensure your directed capital raise falls within the guidelines.

Understanding Tier 1 and Tier 2

Companies pursuing a Reg A+ exemption from the SEC to raise capital must indicate whether they intend to sell shares under a Tier 1 or Tier 2 offering.

Tier 1 offering: Raise up to $20 million USD in any 12-month period. This figure may include up to $6 million USD in secondary sales by the issuer’s affiliates.

Tier 2 offering: Raise up to $75 million USD from equity investors over the course of any 12-month period. This total may include secondary sales to a maximum of $22.5 million USD in secondary sales from their affiliates.

Tier 2 Example

Miso Robotics Raise Powered by DealMaker

• Closed and onboarded 5,394 new investors‍
• Raised over $26.5 Million
• 52% of investor funds transacted through cardless digital payment
• Average investment order increased by 68% with access to real-time data for remarketing

Rules Regarding Reg A+

For a traditional, SEC-registered IPO, there is a strict prohibition (a “quiet period”) on communicating with investors prior to the offering. Crucially, this communication ban is not imposed on Reg A issuers. Unlike their larger counterparts, Reg A+ companies are permitted to “test the waters” by communicating with prospective investors prior to the offering itself. This gives them a chance to gauge the public’s interest in their equity securities. It is mandatory, though, to submit any promotional materials to the SEC along with the offering statement.

As mentioned, Reg A+ offerings are less onerous for companies than SEC registration. That said, there are still a number of requirements that prospective issuers must be aware of before selling shares to the public. For sales connected to Tier 1 offerings, a company must be compliant with all state-level qualifications and blue-sky requirements. Blue-sky rules aim to protect the public from fraud via “the supervision and regulation of offers and sales of securities”. Companies electing to rely on Tier 2 should note that:

i) They will be subject to ongoing reporting requirements after the offering has been completed and

ii) Tier 2 investors are limited in how much they can invest.

Companies pursuing either a Tier 1 or Tier 2 offering must use Form 1-A to file an offering statement with the SEC. Included in this statement is the offering circular, which is the primary disclosure document provided to prospective investors. Issuers must either

i) Provide the circular to potential investors or

ii) Provide instructions for how it can be accessed.

Before a company may actually sell shares to the public for money, its offering statement must be ‘qualified’ by the staff of the SEC.

In conclusion — if you are a founder (like me) of a startup and need to raise capital, there are other options than the traditional VC route.

**Disclaimer: The foregoing is market commentary only. Any market participant should do their own research and make informed decisions with their own advisors to make sure their capital raise is the best deal for them.