What Is Equity Crowdfunding

Speaker 1 (00:00:02) - Good day, fellow dealmakers. We got seven minutes on the clock to understand crowdfunding with Mr. Jeffrey Fuzzy Wenzel. Welcome to the show, man.

Speaker 2 (00:00:11) - Hey Josh, thank you so much I appreciate it. So yeah. So, yeah, it was great. Great to connect. Yeah.

Speaker 1 (00:00:15) - All right. So help us understand crowdfunding the different types and maybe some stigmas about crowdfunding for the startups out there.

Speaker 2 (00:00:21) - Yeah we'll get right into it. So really there's kind of three major verticals and crowd funding you have your GoFundMe is of the world. Think about like somebody wants their medical bills paid or something bad happen, and you put up a page and friends and family kind of donate to that. It's just a complete donation. Here's a hundred bucks. Go do that thing I have. There's no strings attached. Second, vertical vertical that you can get in is what we think about like Kickstarter or Indiegogo. We we refer to these as reward based crowdfunding. Typically those are going to be I'm pre-ordering a widget. you know, I've got a brand new, AirPod case thing and I want to preorder that.

Speaker 2 (00:00:57) - I'm going to put up a campaign page, try to get people to come in and put $100 in. But the expectation there is, is I'm going to get the thing six months from now. A year from now. The third vertical is equity crowdfunding, and this is where I play mostly. equity crowdfunding is, I'm going to go after my crowd and see if they want to buy shares into my company. you know, and there may be a perk hidden in there, you know, a t shirt or a hat, but really, it's. You have a valuation, you're selling out X amount of shares, and I am going to invest into that company $100, $500, $1,000. So it really does open the playing field, for almost anybody to come in and invest. So those are the three biggest verticals that you have in the crowdfunding space as of right now. Yeah.

Speaker 1 (00:01:42) - Got it. So within equity crowdfunding, there's a few different tiers within equity crowdfunding. Kind of walk us through the different you know, I'm sure everybody's heard Reg a rag D Reg this rag that help us explain.

Speaker 1 (00:01:54) - Yeah.

Speaker 2 (00:01:54) - So I mostly play with what we describe as Reg CF. So this is raising from, you know, $1,000 up to $5 million. And there's going to be that's, that's the biggest exemption that most people are working with. then you're going to have Reg D's, probably the most common that has been around the longest. And that's going to be grandma can give you a check technically. Or I could get a check to meet Josh. And that's going to go through that Reg D portion or a 506. d at that point, or you can look at a reg A and now that's where you're going to be trying to raise a lot more money. You're trying to raise somewhere 25 million. 50 million. I think the ceiling right now, they just moved it up to about 75 million. So again, that's going to be for a much more established company. You're going to be looking at probably doing more of a reg. But for most startups, Reg CF and a Reg D are probably your first two options, to get that first round of funding in.

Speaker 1 (00:02:41) - Yeah. Now I've been interviewing venture capitalists and angel investors and such there. You know, there's been a lot of controversy around or maybe conversations around, you know, hey, we're not going to invest in this or we will invest in this because of crowdfunding. Like what? What should a startup consider? From the viewpoint of the investor later on.

Speaker 2 (00:03:04) - Yeah, 100%. Yeah. So a big, conversation is always keeping your cap table clean. Just how many lead items is on that cap table? A lot of times VCs when, when, when they're coming on board, they don't want to see your cap table with 5000 investors on it all giving you 100 bucks. Right. That's going to probably be like a whoa, whoa, whoa. What am I getting into, right? Or how do I unwind this cap table to even invest in it? there's also some stigma very similar to what happened in the early days of Kickstarter, where people were like, you never put your Kickstarter out and show people your thing.

Speaker 2 (00:03:33) - You you make it and then you sell it, right? So there was always a lot of conversations around what if somebody steals it? A lot of those stigmas are starting to be shed because now we're looking at it and I help out at a VC firm here in Michigan is actually go prove it a little bit like actually go get some data behind you, go risk other people's money and then come to me with a win. So because of that, I now when I'm working with a startup, I'm mostly focusing on how can we make sure that if we're going to do crowdfunding, it is a win, not, hey, we want to raise $5 million. We only raised $200,000, and now it looks like a failure and it looks like a failure to a VC, it looks like a failure to almost everybody, as opposed to having realistic goals and saying, hey, we want to raise $250,000 right now. We're pre-seed, we're very early. We don't have a lot of data. and then take that win to the VC and go look at.

Speaker 2 (00:04:19) - We are now on the flip side of that, you want to make sure your cap table is still clean. So that's going to be maybe you do more of a safe or an SPV or something along those lines where you don't, you know, a crowdfunding campaign is only one line item on your line item on your cap table. So a VC would come in and go, oh, okay, this cap, this line item equal $500,000 or $400,000, not the end of the world at that at that stage. So yeah, I think you're going to see more and more VCs wanting this because it is proving out so much data. Do you have your marketing message put together? Does your can your CEO get on camera and talk? Right? You learn all of these things way before you get that bigger check. And now all of a sudden you're like, oh, we made a bad investment. This is like, this company can't get their messaging out there. So I think you're going to see more and more people go to crowdfunding before VCs really get to the table with bigger checks.

Speaker 1 (00:05:09) - Yeah. Really interesting. So when when it comes to keeping the cap table clean, you know, there's a few things. This one, you don't want to see 15,000 investors at, you know, 25 bucks, 100 bucks or something like that. That's a lot of work. And there's a lot of people to to deal with. What is a way that you can work through that. So someone who's going to, you know, go raise money from their, you know, friends, family and maybe alumni. What's what's a way to do that?

Speaker 2 (00:05:35) - Yeah. So the simplest way right now is probably to structure an SPV, which is referred to as a special purpose vehicle. And what that means is that you would have a lead investor who represents a group of investors, whether that's two investors or a million investors. That lead investor represents everybody. And now there's different rules around how you can solicit and all that sort of stuff and who that lead investor needs to be. But that typically becomes kind of the most cleanest way after that.

Speaker 2 (00:05:58) - You know, there are transfer agents out there that deal with this, right? So every start engine campaign is going to have a bunch of line items on your cap table. I'm finding more and more that the bigger thing is can you keep that cap table clean, meaning you actually know what's on it. You know where the shares are. You can access those investors if you need to do something. That to me is actually more important than the volume of of people. That's when it becomes a mess. When you don't have the email addresses, you don't know how to contact them. You don't even know what they really bought into or what valuation. That's when you've got it got a real big mess on your hands.

Speaker 1 (00:06:29) - Yeah. Very cool. So for for people out there, whether investor or startup, looking to learn more about crowdfunding and maybe connect with you and do a deal, what's the best way for them to do.

Speaker 2 (00:06:37) - So yeah, easiest thing is if you literally Google Fuzzy Wenzel. I'm on TikTok, LinkedIn, Instagram, I'm everywhere that will get you into our website.

Speaker 2 (00:06:45) - pre-IPO hype.com. And from there you can listen to my podcast as well. You can listen to our read our blogs. We've got more and more content all around education. You can also jump into our community and become a and just learn all about this sort of stuff. This is this is what I do day in and day out.

Speaker 1 (00:07:00) - Cool guys. I hope you guys are enjoying the seven minute chats about deals. If you have a deal that you'd like to talk about, head on over to the deal scout.com. As always, reach out to our guests. Hey, thanks for being on the show and find a way to do a deal with them. Till then, we'll talk to you all on the next episode.