Whatever your business plan is, money will be essential to growth – and capital raising seeks to achieve just that.

It is the process of sourcing the funding a firm needs to provide it with the capital it needs either to get itself up and running or, if established, to fund its growth or expansion.

Financial capital provides the scope to build on your ideas, and scale up to get ahead of your competition.

So what are your options?

Equity Capital – Traditionally, one of the most popular options to raise capital is to sell shares in your company. Effectively, giving a slice of your business in exchange for the money to fuel its growth.

These are typically sold as common shares or preferred shares.

Both have advantages over the other.

Common shares normally grant voting rights – giving stockholders the chance to influence a company’s direction of travel.

Preferred shares, on the other hand, exchange voting rights for prioritized claim over income.

They will normally come with guaranteed dividend payments – above common shareholders – and, if the worse were to happen to the company and it fell into liquidation, they will be near the front of the queue when it comes to laying claim to its assets.

Prior to 2012, equity capital raises were only available to accredited investors; however, this was changed with the passing of the JOBS Act. The goal of the JOBS Act legislation was to stimulate job creation and economic growth by allowing private companies to raise money from the public through three exemptions, Regulation CF, Regulation A+ and Regulation D.

Regulation D: Reg D came into effect in 2013, simply put, it allowed companies to advertise investment opportunities to everyone. This was the beginning of what we now call crowdfunding – providing the opportunity of buying a slice of a private company, so one not publicly traded, in exchange for an investment.  Generally, these investments are restricted to accredited investors, with some exceptions, but can be advertised to the general public.

Regulation CF: Reg CF aims to help small businesses to raise money online mainly through retail but also accredited investors. Originally there was a $1 million limit on the amount that could be offered in one year, but in 2021 this number was amended to raise the limit to $5 million.

Regulation A+: Reg A+ came into effect in 2015. It placed set limits on how much capital could be raised annually and allowed businesses to raise up to $75 million through accredited and non-accredited investors.

The benefit of all three is the opening up of the investor pool in which firms seek the equity they require to grow while remaining private.  Additionally, these offerings may not be required to be reviewed and approved by any or all of 50 states where the offering will occur.  The applicable SEC filings and/or review pre-empts any state reviews, although notice filings and fees may still be required.

Overall, the main advantage of raising equity capital is that the company is not required to repay the shareholder’s investment directly. Rather the cost refers to the amount of ROI (Return On Investment) shareholders expect to be paid in dividends, according to market performance.

The obvious disadvantage of using equity capital is that every shareholder, common or preferred, will own a piece of the business. Regardless of how small this piece may be, it causes ownership of the business to be diluted. Additionally, the company owners become beholden to these shareholders and must ensure the company is profitable so that dividends can be paid out or risk losing shareholder confidence.

 

IMPORTANT NOTICE

Investors should recognize and accept the risks associated with investing.

Certain investments may require you to keep your holding for periods of many years with limited or no ability to resell unless there is a strongly regulated secondary market.

You may also have limited access to periodic reporting, see your holdings decrease and increase in value, or even lose your entire investment.

Investors should decide for themselves whether to make any investment, basing this on their own independent evaluation after consulting with financial, tax and investment advisors.

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