No one saw it coming. Sam Bankman Fried was celebrated as a boy-genius entrepreneur who could virtually do no wrong – even more so, thanks to his pledge to give away all his money. But that image, along with the accounts of thousands of investors, came crashing down in November amid allegations of massive fraud.

So how can there be any good when thousands of people lose their money? The answer, in my view: the SEC and FINRA finally have the political capital to fix the broken crypto marketplace.

What’s changed?

For most of its existence, FTX was largely free of regulation. In their view, cryptocurrencies could be issued and traded as commodities – which are very different than securities. Following this rationale, the firm justified in the US and abroad that it should only have to comply with the relatively light commodity trading rules. But that all has since changed.

Prior to the firm’s collapse, the SEC declared the company’s token, FTT, a security. The ramifications were dramatic. The issuance and trading of this taken now had to abide by the securities rules put in place by the SEC and supervised by FINRA. The simple fact that FTX was not a broker-dealer and did not properly issue FTT meant that they violed a very large number of these rules.

Assuming FTX was a FINRA-regulated entity, here are a few examples of the rules it appeared to violate (trust me, there are a lot):

• FINRA Rule 5130 prohibits firms and individuals from participating in any manner in the offer, sale, or distribution of an unregistered security.
• FINRA Rule 4512 requires broker-dealers to adopt written policies and procedures regarding the safeguarding of customer assets, including cash and securities, that are in the broker-dealer’s possession or control.
• FINRA rule 2111 requires broker-dealers to have reasonable grounds for believing that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the customer’s investment profile.

Where do we go from here?

Frankly, this list doesn’t even scratch the surface of the rules FTX likely  failed to follow or outright ignored. Likely, the firm will be sanctioned by the SEC. Add to that the criminal allegations the Justice Department is pursuing – and I believe this could be a singular event to morph the unbridled world of crypto currencies into a regulated world of securities. Big Bang events like this are often tumultuous and painful. But I think the regulation it helps create can bring meaningful protections for investors in the future.

The post Crypto’s Big Bang? Why the FTX Collapse Is a Good Thing appeared first on StartEngine.

Despite all the benefits and even though it’s been around for close to a decade, many entrepreneurs I speak to still believe equity crowdfunding is only viable at the seed stage. Not true. Through Regulation Crowdfunding and Regulation A+, you can raise the full stack of capital – from your Seed Round to Series C and beyond – with the crowd.

Here’s how.

Let’s start with Regulation Crowdfunding. This is a very simple way to raise up to $5 million from the general public. At its most basic level, all you need to do is file a form C with the SEC and display an investment page on a funding portal, like StartEngine.

Though the process is simple, running a successful campaign still requires hard work. And the amount of time needed to get the offering off the ground is comparable to what you’d put into raising seed funding from traditional angels or VCs. The difference? You don’t pitch one person at a time. Instead, you’ll put together a marketing program (we can help you here) to reach friends, family, customers, fans, and the public at large.

Early momentum can make or break a raise. Read strategies to hit your first 100 investors.

For those that reach the $5 million threshold, the logical next step is to file a Regulation A+ offering. This exemption allows you to raise up to $75 million in a year – or $25 million more than the average Series C round – again, all through the public and with the benefits I mentioned above.

Raising under Reg. A+ does require more legal work and the costs and time to launch can be greater (typically anywhere from 60 to 120 days). The good news though is the audit requirements are the same under both exemptions – the only addition here is you’ll write a comprehensive offering memorandum.

A funding solution for good times and bad.

If the 2022 financial crisis has taught us founders anything, it’s this: raise capital – even when you don’t think you need it. The scores of now defunct, would-be unicorns show that it’s hard to predict the future. So how to protect yourself against uncertainty? Stay well capitalized and always be raising.
Of course, securing funds is difficult when times are hard. And VCs today are handing out half as many checks as they did just a year ago. So am I shocked that applications to raise capital on StartEngine have spiked close to 30% in the last quarter alone? Not at all. As we’ve just seen, equity crowdfunding has the flexibility to support businesses of all sizes.

The post From Reg. CF to Reg. A+ – How You Can Raise the Full Stack of Capital through the Crowd appeared first on StartEngine.

Diversification. If you look at any professionally managed fund, they invest in at least 10 companies – sometimes 15 or more. And Sequoia is no different. To be clear, the firm did suffer a major loss, but the fund overall still looks quite good for its limited partners. This is the power of diversification.

It’s hard to pick winners, and it’s especially hard to pick just one winner. I’m sure before November all of FTX’s investors thought they had a home run. Wouldn’t you have thought the same, with all the hype? Well, for many investors this mistake was fatal. Not so for those who had a proper diversification strategy.

What’s true for Sequoia, is true for the rest of us.

Startup investors should take note and, in my view, own at least 10 early-stage companies in their portfolio.* Why? These businesses have a high-risk profile. They may fold overnight OR make investors a huge multiple on their money. So the right strategy is to place a lot of bets.

Alternative assets are more than just early-stage startups. They can also include investments in comic books, trading cards, wine, and real estate. That means, as an investor, you can diversify across entire asset classes. A good place to start, I think, is 5% of your portfolio in early-stage companies, 5% in collectibles, 5% in real estate, and the remaining 85% in traditional highly liquid mutual funds, ETFs, and bonds.

With equity crowdfunding, you have every reason to own a diverse portfolio. Why? The entry fee is usually quite low – around $250 for most offerings. So if the goal is 10 early-stage investments, that means you can begin building a properly diversified startup portfolio for around $2,500. Turns out, boosting your odds of success is easier than you think.

*This does not constitute investment advice and bears no relationship to any specific issuers.

The post What Does a Diverse Startup Portfolio Look Like? appeared first on StartEngine.

The only problem: not once does the email mention regulators or any kind of government oversight. Why? Because as it stands today, there isn’t any.

As investors, how can we trust Coinbase – or just about any other crypto exchange – with our money? Without regulation, they aren’t subject to monthly net capital reports or annual audits. Do we trust that they’ll simply do the right thing – even when they’re only accountable to themselves? We saw the dangers of that kind of blind trust with FTX. Odds are, until the world of crypto becomes regulated, we’ll see it again too.

Luckily, most of the financial industry – including equity crowdfunding firms, like StartEngine – is highly regulated. Putting money in a checking account can feel boring compared to speculating on a new token. But you sleep well at night because the checking account is insured up to $250,000 by the FDIC.

Any financial instrument needs regulation because money is fungible, intangible and can be made and lost, sometimes with alarming speed. So investors need some assurances that a third party holding their assets is handling them responsibly. 

Take StartEngine for example. We’re subject to hundreds of rules and constant review by regulators. Much like traditional banks, our accounts are insured up to $250,000 for cash and up to $500,000 for securities too. This is what’s necessary to build trust with investors.

So what’s next for the world of crypto? Congress will attempt to write some form of law regarding the issuance, storage, and transfer of crypto. Once passed, the SEC will eventually implement the new regulation – though this could likely take three to five years. And finally, FINRA will supervise the sector by adding an extensive list of rules for broker dealers and financial institutions. It’s a long process, yes, but ultimately it will be worth it.

In the meantime, investors beware. We all want higher returns. But when you invest in a space that’s completely unregulated – the risks go up exponentially.

The post Take a Lesson from Crypto: Regulation Matters appeared first on StartEngine.

Well, to start, the acquisition validates something I’ve said for a long time: always be raising. By staying well-capitalized, we’re secure enough to pursue market opportunities at a time when many in finance are likely struggling to remain afloat. And by bringing a fellow equity crowdfunding giant under our umbrella, we’re poised to become one of the largest platforms in the space.

About SeedInvest:

SeedInvest is a genuine pioneer in equity crowdfunding. SeedInvest’s founder and CEO Ryan Feit was one of the signatories on the petition that kicked off online raises. They were also the first platform to apply the JOBS Act to Regulation D offerings – way ahead of the advent of Regulation A+ or even StartEngine itself.

Nowadays, they have an impressive roster of more than 250 successful funding rounds under their belt, many of which have topped 8 figures. Case in point: NowRX has fundraised over $40 million on SeedInvest to date. The platform’s investor base is among the best in the industry too. They have an investor community of over 700,000 users, who’ve collectively raised over $470 million in SeedInvest’s 10-year run.

Now, we’re preparing to inherit SeedInvest’s trailblazing legacy as we consolidate their community with our own.

What the acquisition means for StartEngine:

Since our own launch in 2015, StartEngine has focused on growing our business with an eye toward remaining well-capitalized. And we’ve achieved some amazing results. Just take a look at the last two weeks. In that time, we’ve surpassed $650 million raised on our platform and grown our investor community to over 1 million users.* All that, even as markets have weathered near-unprecedented volatility. Now we’re going on offense.

By acquiring SeedInvest, StartEngine will vastly increase the number of potential investment opportunities we can host on our platform, including some of the industry’s top fundraising companies. We will also drastically boost the size of our own investor community, while maintaining the high-quality investor profile that startups on our platform have come to expect. 

The agreement is a boon for StartEngine’s cap table as well. Why? Well, under the terms of the offer, SeedInvest’s current parent company and one of the largest crypto platforms in the world, Circle, will become a minority shareholder of StartEngine. And as any founder will tell you, having the right backers can make all the difference.

When I first started conversations with SeedInvest about the acquisition, I knew that StartEngine’s strategy was on the verge of paying off. We need to wait for the regulators to finish their work and approve the transaction (par for the course in this industry). In the meantime, I’m so thankful to Ryan and James and the SeedInvest team for all they’ve already accomplished – and excited to take the torch, grow together, and help entrepreneurs and investors realize their dreams.

Happy investing.

Howard Marks

StartEngine Co-Founder and CEO

Completion of the acquisition is subject to closing conditions and regulatory approval.  See additional information here.

* Total raised includes StartEngine’s own raises and includes investments that have been closed on, investments that are received but not yet closed on, and investments that have been committed but not yet received. Number of users is determined by counting investor profiles with unique email addresses.

The post Seizing the Opportunity: StartEngine Is Acquiring SeedInvest appeared first on StartEngine.

So let me take you back into our brief history of how we grew from an idea into the largest equity crowdfunding platform by revenue in 2021, to a one-million-strong investor community in 2022.

The Past

Before equity crowdfunding, ordinary investors could buy shares of publicly traded companies, mutual funds, and ETFs. But their rich neighbor could buy things like Uber before its IPO. Why? Well, the rich neighbor had something called accreditation. Basically, certain albeit risky assets, like startups, were only available to the ultra-wealthy.

This all changed with the advent of the JOBS Act, which was voted into law in 2012 and mostly implemented by 2016. So what exactly did the JOBS Act change? Now everyone can own shares of startups and privately held companies. That means everyday people can decide for themselves if they want to take on the risk – and massive potential upside – of startup investing.

Enter StartEngine

We started with a bang in 2015. Our first offering raised close to $17 million under Regulation A+ (the first rule enacted under the JOBS Act allowing equity crowdfunding). A little less than a year later in May 2016, we launched our first offers under Regulation Crowdfunding, which offered a lower barrier to entry for startups but with lower funding limits.

It felt like StartEngine was getting ready to hit the big time, as we also launched our OWN funding round on equity crowdfunding – around here, we like to say that we eat our own dog food. And by January 2018, an investor purchased the one-millionth share of our OWN raise.

We never looked back. Fast-forward to October 2019, and we passed $100 million raised for startups on our platform. Two years later, we’ve increased that number by more than 6x to $650 million invested on StartEngine as of this October.

So, how to explain such rapid growth?

As I said, equity crowdfunding is still in its infancy. But in my experience, when something works, it works right away. And if all these statistics demonstrate one thing – it’s that this form of capital raise is not going away. In fact, it’s thriving.

Yes, it’s still hard for me to believe what we’ve accomplished. And while no one knows for sure, I suspect it will take a lot less than seven years to reach our next million users.

The post There Are Now 1 Million Users On StartEngine – Here’s How We Got There appeared first on StartEngine.

Traditionally, to get capital you would find a VC, institutional investor, or go raise money through angels and accredited investors. It’s a time consuming process that can take hundreds of hours and sometimes leave you out to dry with nothing. Or, maybe you do get a term sheet – and hopefully the terms are favorable – but when the timing is bad that term sheet can be pulled right out from underneath you.

By contrast, equity crowdfunding has changed this narrative in a big way. How? Well, you can raise up to $5M per year under Reg. CF or up to $75M per year under Reg. A+. You stay in control – for instance, by issuing non-voting common shares. And you manage the entire fundraising process one investor at a time – after all, it’s often easier to get lots of small and medium checks than one giant check. 

Despite all of equity crowdfunding’s upsides, though, Reg. A+ in particular has not necessarily been successful for many entrepreneurs. Why? It all comes down to choices. Say you decide to raise $10M using a Reg. A+. Now you have two options: hire a broker-dealer platform to organize and run your offering; or, go the DIY route. Let’s unpack both and see which might be best for you.

Option 1: Hire a broker-dealer platform, like StartEngine

The more standard, and in my view fruitful, choice is to hire a broker-dealer platform, such as StartEngine, SeedInvest or Republic, to name a few. These platforms offer a full range of services for companies raising under Reg. A+. So what do you get? Here’s what’s typically part of the full-service offering:

• Structuring of the deal and the type of securities to be offered
• Sourcing the escrow service, transfer agent, legal team, and CPAs
• Ensuring SEC compliance, reviewing past filings, and making updates if needed
• Preparing a marketing and launch plan for the offering – this can sometimes include a test-the-waters campaign to build interest as well

Broker-dealer platforms often also come with regulatory advantages – notably, they can generally offer in all 50 states and manage state filings as well as any state-specific requirements. (It’s important to note, though, that every broker-dealer may be different).

The most important aspect of a platform is the quality of their investor community. In my experience, average investor acquisition costs hover right around $2,000. So the number of repeat investors a broker-dealer platform brings can make a huge difference in the success of your offering. Additionally, as investors place their orders, the platform will check each one against Treasury regulation requirements (aka your customer and anti money-laundering checks).

Some of the largest raises to date have been conducted with broker-dealer platforms. And the comfort of knowing all regulations are met, as well as the boost to momentum from a dedicated investor community, are huge advantages. For these services, a company will often pay around 3.5%, plus some equity compensation. Sometimes investors pay fees as well, though in the case of StartEngine, escrow fees are included.

Option 2: Do It Yourself

Though it’s called a DIY offering, in practice it’s often in name only. Generally, a company will look for a white-label platform that can help with presenting the offering and the mechanics for accepting investments as a service. This saves the need to write all of the website and back-end code to receive investments into an escrow account. Most businesses will also hire a low-cost broker-dealer to handle the clearing of investments, such as KYC/AML, on their behalf.

The costs for these off-the-shelf solutions vary. In my experience, though, the white-label gets around $10 per investor, and the accommodating broker-dealer gets about 1% plus $50k in fixed fees. Don’t forget – escrow may be another 1.5% depending on the vendors and banks selected. So all in, your costs can be up to 4.5% or more depending on the size of your raise. However, the main disadvantage is the hefty cost to acquire new investors. Remember the $2,000 average? That means unless you already have a highly engaged community, advertising will likely not work on its own.

The right solution? A combination of the two.

I’ve found that broker-dealer platforms, like StartEngine, can typically offer 50% of the investors a company needs; the other half is acquired through the business’s own efforts. So, why not start with a platform, like ours, to get to your goal? Then, down the road hire a separate white-label and broker-dealer to build on the raise. Now, some may argue that it’s best to simply engage your own community via a white-label first, then switch to a platform (in other words, turn the process around). But you have to remember the key is momentum. At StartEngine, we’ve learned that investors look for early signs of a hot raise – so if you get a slow start, you could be dead in the water.

Raising capital is hard. Equity crowdfunding can make it a lot easier, but only if you pick the right partner. My advice? Do your homework, and go with a high-reputation team to mitigate the risks of a low-performing offer.

The post White Label or Platform – Which Is Right for Your Reg. A+? appeared first on StartEngine.

Raising capital is hard – particularly if your business isn’t in a trendy category or you didn’t attend the Ivy League. And traditional methods can involve hundreds of hours spent and cross-country flights for an uncertain outcome. Maybe you do get the meeting, and everyone sounds interested – only you find out later that you’re not the right fit, or too early into your startup venture, or any other manner of issue outside your control.

So what are your alternatives? Some try to bootstrap their business; but for many startups, raising capital is the difference between life and death. Another popular route is to raise funds from friends and family. After all, they know and trust you. But how far are you willing to put their money at risk? And what happens if you need to raise even more?

Enter equity crowdfunding. This new funding method is shaking up the old model and, in my view, may come to replace it. It started in 2016, when the SEC launched Regulation Crowdfunding (Reg. CF), allowing non-accredited retail investors – aka the crowd – to buy equity in early-stage businesses. Under the new rule, entrepreneurs looking for say $5M can now take control of the fundraising process by appealing to a mass-market of investors.

A key advantage of equity crowdfunding: you don’t necessarily need existing investors to attract new ones. That means you are the right fit (not always the case with VCs). All you need to do is launch a campaign on a funding platform, like StartEngine. From there, it’s just a question of how much time and energy you’re willing to put into crafting a compelling offering and carving out a well-defined audience. You’re the catalyst for the raise. That means, if you bring in one investor or one hundred, it’s based on your efforts alone – not the arbitrary decision of an institutional backer or the success or failure of past funding rounds.

A great way to start is by pitching your built-in community. These can be early adopters and, yes, family and friends too (though remember, you’re not depending on them for all your funding). You can also place ads on Facebook and other social media or pitch the press to write articles. And as you build momentum and buzz around your campaign, it can start to snowball. Again – it comes down to the time and energy you invest. The more you put in, the more you’ll take out.

The icing on the cake? You stay in control of your company. No giving away board seats or special voting rights. On equity crowdfunding, you set the terms, which means you can issue exclusively non-voting common shares.

Like I said, raising capital is hard. But the future of your company doesn’t have to be in the hands of a select few or, as is the case too often, crushed by a lackluster round in the past. With the crowd, you can take control of your own raise.

The post Do Past Funding Rounds Matter For an Online Raise? appeared first on StartEngine.

Let’s step back a moment – why am I talking about 100 new investors in the first place? Call it our version of numerology, but at StartEngine we firmly believe that entrepreneurs who reach out and secure 100 first-time investors to the platform in the first 30 days of their raise should be rewarded. How? Through a dedicated email to our investor community. That means yours is the only company featured, and it can have a big impact on your raise.

So how to reach 100 new investors?

Let’s zoom out. In the US, roughly 30 million active investors are using online brokers like Robinhood, eTrade, and Schwab. That’s a big number, and if you compare it to the adult population from 30-70 years old, you’ll see that it actually represents around one in four people in the age range. In other words, if you know 400 people you should be able to get 100 investors. Say you’re a team of five – that means each of you probably only needs to talk to about 80 people. Easier than expected, right?

E-commerce conversion rates can also work in your favor here. Mailing 1,000 customers can secure up to 50 or more investors depending on their level of engagement with your company. Placing ads on Facebook and other social media can have a similar effect. And retargeting users who visit your offering page can help convert them at a lower cost than prospecting. Put together, all these activities can help yield 100 new investors.
The crowd is powerful. Take the meme stock frenzy of 2021 for instance. Small-time investors, largely on Reddit, drove many companies’ stock prices to levels no one thought possible. Well, if you can push to secure 100 new investors within 30 days after launch, you can do a lot to put the crowd to work for your raise.

The post 100 New Investors in 30 Days – Here’s How You Reach It appeared first on StartEngine.

Now, the question is: could SAFE agreements work for equity crowdfunding?

To understand SAFE, it’s helpful to see how its structure works for a company.

Let’s start with what it’s not: SAFE’s are neither debt nor equity, and they’re not on the balance sheet – instead they exist as a footnote on financial statements. Similarly, SAFE investors aren’t automatically on a company’s cap table when they invest, and they don’t become full-fledged investors until the SAFE converts. 

What does this mean? A key element of a SAFE agreement is the conversion to equity trigger. Basically, a SAFE functions as a warrant or right to equity in a company, which is triggered by some future event like a minimum amount raised. For instance, say a company which issued a SAFE goes on to raise $1M in preferred or common shares in a subsequent funding round – that round could trigger the SAFE investment to convert into equity as well.

Unlike standard convertible notes, a SAFE usually has no end date or interest. This feature can be attractive for companies because it spares them the obligation to repay the investment at an arbitrary date if they’re not yet ready. SAFEs also typically offer discounts on the share price for the next funding round, whatever that price may be. That means the terms and valuation don’t have to be determined at the time the agreement is signed. The discount obviously benefits investors, as does eliminating back-and-forth on terms and valuation because, again, the whole idea is to speed up the process.

What’s good for accredited investors may not be good for the general public.

As I see it, to fit in the world of equity crowdfunding, the original SAFE agreement needs to be modified to protect retail investors. The main change is to include the securities offered upon conversion – both the type of security issued and its terms – in the SAFE agreement itself. Though this doesn’t need to be specified on a regular SAFE, it should be in the case of equity crowdfunding to offer greater transparency for everyday investors.

In my view, the other term that needs to change is the end date. As is, SAFE agreements can sit on a company’s books for years without allowing investors to receive shares. This doesn’t make sense for the general public, whose time horizon is often shorter than institutional investors and who may want to trade their shares on a secondary platform (regulation crowdfunding allows secondary trading after one year). We believe the solution here to protect consumers is to have the SAFE convert after two years, unless of course, the conversion to equity is triggered by a qualified investment or significant equity crowdfunding raise beforehand. This would help ensure liquidity – very important for everyday investors – while still providing companies substantial leeway while they get off the ground.
As equity crowdfunding grows, I feel we need to give entrepreneurs choices as to which securities to offer prospective investors. This makes it easier for them to raise the full stack of capital through the crowd. A company that previously offered SAFE to its investors should be able to continue offering SAFE with equity crowdfunding. Commons shares, preferred equity, convertible notes, and SAFE agreements all help founders structure the right capital raise for their businesses. And with customizations to meet the needs of the general public, we can provide these options on equity crowdfunding too.

The post SAFE Agreements: What They Mean for Investors & How They Could Work for Equity Crowdfunding appeared first on StartEngine.