Things are moving fast in the world of Regulation Crowdfunding.
Reg CF is making headlines and bringing in more investors and startups than ever.
The big secret is out—startups can raise up to $5 million in funding without jumping through hoops to strike a deal with an angel investor or venture capitalist. This Reg CF revelation will lure in loads of new companies looking to raise.
This presents an incredible opportunity for investors but also brings new challenges.
The truth is, loads of low-caliber startups will be clogging up your deal flow. There will be an increasing number of founders using Reg CF as nothing more than an easy source of cash. Some of these founders who will never succeed in business will manage to succeed at winning your valuable dollars.
The equity crowdfunding ecosystem is changing fast. Investors need to stay sharp and get prepared.
Growth In the Regulation Crowdfunding Space
A lot has changed since Regulation Crowdfunding hit the scene in 2016.
According to Crowdfund Capital Advisors, in just five years, an estimated 1.2 million investors have raised over $1 billion for private companies via Reg CF.
With the COVID-19 pandemic came an increase in retail investing. This was seen in public and private markets. According to data from Kingscrowd in its snapshot of the crowdfunding market, in early 2020, the number of Reg CF investors was growing by 45% month-over-month. This growth continued steadily throughout the rest of the year and into the beginning of 2021.
What’s more, equity crowdfunding is getting more airtime than ever. Big names like Forbes, Business Insider, and Reuters are picking up stories about crowdfunded startups and discussing the developments of this investment vehicle.
And most of you have heard by now that the SEC has changed the rules of Reg CF for the better. Startups can now use this vehicle to raise up to $5 million, up from $1.07 million. This shows that the SEC is open to improving equity crowdfunding as time goes on.
It’s great to see the Reg CF space making headlines and moving in the right direction.
However, the rapid growth of this young vehicle is complicating things for investors.
More startups doesn’t mean better startups.
With all this buzz around Reg CF, we are seeing an influx of startups looking to raise.
Founders now know they can circumvent the traditional angel investor and venture capitalist roadmap in favor of a Reg CF, an easier way to raise capital. This translates to more startups at the fingertips of non-accredited investors.
The problem is, more startups doesn’t mean better startups.
Tons of companies that have no business raising via Reg CF, or anywhere else for that matter, will be stocked on the shelves of the marketplace. They will be vying for your attention and your valuable funds.
What this means for you, is that as a Reg CF investor, your job just got a bit tougher. You need to up your game to succeed.
Moving forward, there will be more investing platforms and startups to choose from than ever before. Sifting through pages of pitches and deal terms can get overwhelming. Trust me, I know!.
Investors need to learn how to spot great investments and weed out the losers efficiently. This process like anything in life comes with time and getting those reps in.
So what should those 1.2M crowdfunding retail investors do to prepare?
Fly higher- Sometimes we need to pull back from just the one deal and take a look at the industry as a whole. Read the news about the space - which portals are growing, why are they growing? Are they getting capital and how much? Why? Sometimes the best way to see what’s happening is to start by looking at the portals themselves. And see what kind of buzz or not is around them.
Educate- Knowledge is power. The more you learn about the economics of deals, the structures and the lingo in the space the more confident you become. Compare deals and start to discover the parts and pieces you specialize in- if that’s terms, founder, industry, etc.
Gut- The more you look at deals and the space as a whole the quicker you will develop you Reg CF “Gut”. I’m not talking like to many ‘cold ones’ gut, but that enteral voice guiding you and letting you know if you should jump into a deal or not. Of course this comes after a detailed due diligence dive, but your ‘gut’ will help you make that final call to either jump in or pass.
It’s exciting times in the world of Equity Crowdfunding, but as with any new sector there will be a rush of new faces running to this space. Now it’s your job and mine to make sure we are ready for the wave that’s coming.
Till next time friends- happy hunting.