Want to Crowdfund? What Companies and CFOs Need to Know

When you hear the word “crowdfunding” or “crowdsourcing,” you might think of start-up businesses and unknown artists trying to raise money through sites like Kickstarter. In reality, however, many brands are turning to the public to break down large projects and overcome financial hardships. Even companies that use venture capital have strategized to take advantage of non-accredited investors!

Just a decade ago, the idea of crowdfunding would have been scoffed at as a business model. So what changed? The financial collapse of 2008 changed many economic functions, triggering tighter credit at the banks. With regulations such as Basel II hamstring bank lending, companies and CFOs seeking higher-end corporate capital will have to look elsewhere for alternative sources of lending, including crowdfunding.

Crowdfunding and the Law

Once the Securities and Exchange Commission settles the rules and regulations for the Jumpstart Our Business Act, businesses throughout the country will be able to take advantage of equity-based crowdfunding up to $1 million from non-accredited investors. However, taking funds from non-accredited investors takes careful planning and consideration.

Taking advantage of non-accredited investors through Title III means that companies and CFOs will have to consider how they approach venture capital funding down the line. While raising money from 1,000 people would certainly be exciting, most venture capitalists are cautious investing into a business that was crowdsourced because they now have to manage hundreds of smaller investors.

To overcome this concern, companies and CFOs can plan ahead by structuring their securities to allow venture capitalists to get multiple times their money back when the company performs a Series A. How? Simply allow them to buy crowdfunded investors at certain multiples. This incentive provides a nice return that will appeal to wary venture capitalists.

However, crowdfunding doesn’t always have to be used during the beginning stages of company growth. An established company seeking to convince investors to close a transaction could use crowdfunding as a tool to attract extra funding and make the deal more appealing. Furthermore, a company wanting to invest in technology could consider using crowdfunding to raise the equity it needs to avoid funding the entire acquisition alone.

Regardless of how companies and CFOs take advantage of crowdfunding, the biggest consideration to remember is how to bridge the partnership between venture capitalists and crowdfunding.