What is Investment Crowdfunding?

Investment crowding is a funding vehicle to raise capital from community, customers, professional investors, and other supporters of businesses. Similarly to an investor working directly with a founder to invest, investment crowdfunding elevates that relationship by using the power of technology for investors to transparently view different business online in one location and determine what businesses they want to invest in based on a compelling business case. Investment crowdfunding offers the flexibility to democratize investing by using any securities exemption strategy (accredited or non-accredited investors) to facilitate the raise process in a way that is efficient and effective for both founders and the investors.

How does investment crowdfunding work? Is similar to Kickstarter and Indiegogo? Is it a nonprofit that gives grants to companies?

It’s not, but it is similar to Kickstarter because it provides an online platform for people to choose to put money in businesses. However unlike with Kickstarter where a person would get just a reward, perk or gift for contributing to an early stage B2C company campaign, investment crowdfunding allows both B2B and B2C companies to seek investors for their company.  In a Rev Share, the company is paying investors off top line revenue.  In an equity offering your community of investors have stake in your company.

Investment crowdfunding is not a nonprofit that provides grants or donations.

What are the benefits of investment crowdfunding? Friendly founder terms, a larger community of financially invested agents to help a founder’s startup grow, and more.  Founders find vision aligned capital. They can create equity and/or debt offerings, and work with advisors to determine the terms of the offering.

Incolo readiness offerings and partnership with multiple leading national and regional investment platforms helps guide founders while leaving them in control.

What does it take to launch an investment raise on platform?

Whether a founder is raising privately or publicly, foundationally, it’s about compelling business positioning. 

Funding follows

• a compelling story with solid traction points for the stage of the startup
• good outreach tactics and using a CRM to help manage investor flow, and
• positioning the startup’s sound operational focus for how investors can help the company grow

 

Reg CF “testing-the-waters” rules rolled out on March 15, 2021 and have made it much easier to see who may invest and support the business beyond the investment.

How much capital has been raised through investment crowdfunding?

Over $1B as of May 2021

• The $1B includes Reg CF, Reg A+, and Reg D 506(c)
• (As of April 2020) Over $368M has been raised from mostly non-accredited investors leveraging Regulation Crowdfunding (Ref CF) since 2016.
• From 2016-2018: $107.9M raised
• $121.3M raised in 2019, a 62% increase over 2018 ($75.8M)

Does Incolo only support investment crowdfunding North Carolina investors and startups?

No. While most of our founders are based in North Carolina, we also support startups with major impact on North Carolina or those with potential to grow through our partner channels.  Founders can seek investors across the country. We believe having a regional focus enhances the capital raising experience so community can come together to support businesses they know, love and trust. 

What is an accredited investor?

An accredited investor is usually defined as a person who has $1M in net assets (not including their primary residence), or a gross income for each of the last two financial years of at least $200K, or $300K if married and reasonably expects to continue to have that income. Details can be found here.  There are other definitions based on knowledge that were rolled out in late 2020.

New laws in 2016 for Reg CF supports investment being open to non-accredited investors in addition to accredited investors.  On March 15, 2021 these expanded to allow businesses to raise up to $5M from anyone. Example of Reg CF raises, Backstage, BatteryXchange, The Albemarle Hotel

What types of raises are available? Is it for accredited only?

It is for both accredited and non-accredited investors. Businesses can perform a private ‘traditional’ raise to ‘strategic’ or a known group of accredited investors.  This is done very effectively through online syndicates.  Businesses can also perform a public raise allowing anyone to participate.  Businesses can even perform a side-by-side (aka “Concurrent”) offering where a founder can strategically group accredited and non-accredited investors into separate exemptions, allowing founders to potentially raise more funding. 

A variety of traditional and new offering exemptions can be used by a business.

Traditional

• 504 – Private Accredited and Non-Accredited
• 506(b) – Private Accredited

New

506(c) – Public Accredited

• Regulation Crowdfunding (aka Reg CF) – Public for anyone to participate
• NC PACES – NC Businesses only and public for any NC resident to participate
• Reg A+ aka Online Public Offering (OPO) – Public for anyone to participate

 

Is investment crowdfunding only for certain stage startups or certain industries? Can it be used along with other capital options?

Investment crowdfunding is a complementary funding vehicle. It can be used for new and established businesses. A variety of companies in a variety of industries (including B2B and B2C) have used investment crowdfunding to achieve their raise goals. It can also be a strategic approach in parallel or serially with other capital options depending on your business model and capital goals.

What is the typical investment crowdfunding raise amount? Any limits?

Based on results across the industry, typical raises are $100K minimum, $250K on average and can go into the millions based on the exemption chosen.

Exemption fundraising limits are as follows

• 504 – usually up to $10M per year
• 506(b) – no cap
• 506(c) – no cap
• Reg CF – up to $5M per year
• NC PACES – up to $2M per year
• Reg A+ – up to $75M

Equity or Debt Offering Types can be used.

When can I let potential investors know my Reg CF campaign is going to launch?

Reg CF – now you can advertise right away under a “testing-the-waters” (TTW) provision, but you do have to include some information to let people know you cannot collect money yet.  Post raise, there are some limitations on what you can communicate off platform.  Check out this article for more information.

 

What can I say after launch on Reg CF?

After the Form C has been filed, off platform you can share communication that:

• Don’t mention “terms of the offering”; and
• Just contains “tombstone” information.

 

“Terms” in this context are:

• The amount of securities offered,
• The nature of the securities (for example, debt or equity, common or preferred, and so forth),
• The price of the securities, and
• The closing date of the offering period.

 

Note: This is not intended to be legal advice or comprehensive in how to solicit your crowd of potential investors for all use cases.  Therefore, here are some securities attorneys you can choose to engage with if you don’t have your own.

Are there investor minimums to get started?

It depends on the business raising and the type of raise they are conducting.

Minimum investment sizes can be as low as $100 and are usually no higher than $1K for public rounds.

Minimum investment sizes for accredited investor offerings (Syndicated rounds, private rounds, public accredited-only rounds) usually start at $1K.

The minimum investment amount for investment crowdfunding offerings is usually much lower than traditional angel investor offerings. This allows new and seasoned investors to diversify their investments across more offerings to reduce risk.

How do I make money and when do I get my money back?

It depends on the offering. If a business offers a Revenue Share or Dividends, an investor could potentially see money being returned within 3 months.

If a business offers a convertible note, SAFE, or another equity instrument, returns don’t occur until there is some type of exit event (e.g. an Online Public Offering (OPO) or Initial Public Offering (IPO)). OPOs might occur within 3-4 years. IPOs typically take at least 7 years and may never occur.  Investing in startups is risky.  Never invest more than you are willing to loose.  

What type of returns can I expect?

Assuming the business being invested in is successful, then the return depends on the terms that they offered. Some examples might be:

• If it’s a Main Street business offering a Revenue Share loan, returns of 1.5x to 3x for the period of the loan are typical offerings.
• If it’s Stock with a dividend, an investor may see 6-12% annualized returns after profitability is achieved.
• If an investor invested in a high growth startup, returns might be 5X, 10X, 20X or in extreme cases 1,000X+ (e.g. every $1K invested in Uber in the 1st round was worth an estimated $1.5M on exit)

 

Rev Share Example: If a businesses offers a 1.5X Revenue Share, projected revenues may be based on taking 5 cents on every $1 in revenue over 5 years.  If revenues are lower than projected, it’s paid back slower.  If they are higher than projected, it’s paid back sooner. A person investing $100 would expect to be repaid $150 by the end of the 5 years.  Unlike a fixed % loan, businesses pay out less during seasonality of lower revenue.

Equity Example: An investor invests $100 in a potential high growth company at a $3M valuation cap on a convertible note (we’ll assume no interest or discount rate to keep this example simple).  The payout is based on upon an ‘exit’ event (usually 5-10 years from the time of the offering). The company exits in 7 years at a value of $60M.  Assuming no dilution post conversion, the $2,000 is returned to the investor, $60M / $3M * $100

Many other scenarios and results are possible. Always carefully review and understand the terms of the offering, as this greatly impacts the potential return.  In all cases, the business must be successful in order for it to see a return. If the business fails, which most do, an investor could loose part if not all of his/her investment. An investor should never invest more than he/she can afford to loose.

If raising more than $250K on a Reg CF, the primary difference is that the SEC requires that a company has independently reviewed financials.  If you don’t have someone to do this, Localstake has providers they’ve worked with who can perform this for as low as $1,200 (assuming the financials are in good working order already).   If a company has performed a Reg CF before AND wants to raise > $535K up to $1.07M audited financials are required. 

CrowdfundNC and Localstake are doing what we can to support all entrepreneurs during this time.  Localstake’s discounted fee COVID initiative prioritizes the capacity of the team towards companies who had existing revenue generating operations before COVID and have been substantially affected by the shutdowns.  The COVID assistance revenue share program is designed primarily for businesses who typically have around a full year of historical revenue, not available to startups. The business must provide historical financials for 2019, and 2018 if available. Localstake will also want to understand the overall impact that COVID has had on your business in 2020. There is no minimum revenue threshold, but your historical revenues will have a major impact on the amount of capital you are able to raise. Companies in any industry may apply, but this program is generally geared towards businesses in the retail and food and beverage spaces.

Increase the potential success of your raise with a dedicated marketing effort.  Some companies may find it beneficial to leverage paid social media marketing and other services.

For raises above $107K that leverage Reg CF (anyone can invest), the SEC requires independently reviewed financials.  If you don’t have someone to do this, Localstake has providers they’ve worked with who can perform this for as low as $X (assuming the financials are in good working order already).  If a company has performed a Reg CF before AND wants to raise > $535K up to $1.07M audited financials are required.  

Other offerings beside Reg CF, eg. Reg D 506(b) do not have this requirement but may have other requirements to get started, such as investor accreditation status.