The Cost of Raising Millions Through Equity Crowdfunding

0
1509

Regulation A+ has been released, allowing companies to raise capital from non-accredited investors. Private company investments are only allowed to do so, but it is the first national-level form of equity crowdfunding that is available to the general public. Companies can raise $50 million in this manner, but there’s going to be a cost to it.

Limitations Could Set Companies Back

It can already cost $50k or more to run a successful crowdfunding campaign. Now imagine running an equity crowdfunding campaign on Tier 2 funding that can go up to $50 million. Investors in Tier 2 are only allowed to invest 10% of their income or net worth or each offering. This restriction isn’t in place on Tier 1 offerings, but Tier 1 also requires state law compliance.

The bottom line? Expect to pay double to reach investment levels on either tier, especially considering the added compliance and legal costs. A minimum of $100k is likely to happen with a Regulation A+ offering. It could even be more.

Imagine needing to comply with the Tier 1 state laws in all 50 states. That could easily be six figures all on its own. Now add in the time that it takes to deal with 50 different securities regulators. It just doesn’t make sense. If a local company wants to crowdfund equity within a single state, then Tier 1 makes sense. Otherwise Tier 2 is the way to go.

Two Years of Audited Financials Is Required

Speak with the average CPA and you’ll get a quote of around $25,000 for just one year of audited financial records. Since two years is required for a Tier 2 equity crowdfunding effort, that’s $50k right away before the filing even begins. Freelancers might be able to do this for startups at 10% of that cost, but it is still a cost.

That investment is still cheaper than the original testing models for private companies. Instead of identifying demographics, looking at products, and conducting endless interviews, an equity crowdfunding campaign can be initiated and promoted. The capital raised will either prove or disprove the concept being tested.

As with any change, there are certain risks that both parties are going to need to take on in order for this to work. With equity crowdfunding available to the general public, however, it looks like it could become a lot easier to start a business in the United States in 2015 and beyond from a financial standpoint.