As crowdfunding grows more and more common, companies have started to have more options when it comes to raising capital through the internet. While there are more options, the most common ones are public and private fundraising. It is important to have a good understanding of the differences between these two, because they have different set ups and different benefits. When you are trying to set up the crowdfunding for your company, you need to be able to decide which is the best option for you. To help you figure it out, we’ve created a guide laying out the differences between public and private fundraising so that you can make the most informed decision.
Let’s start with public fundraising because there is a bit more to specify about it. With private fundraising there is only one kind of fundraising. But with public fundraising, there are two main categories that they can be split into. So, let’s define those two categories and the regulations that go along with them.
High net-worth crowdfunding falls under two different exemptions. One is the Reg S exemption, which allows non-American investors to invest in American offerings, or non-American companies to gain American investors. The other exemption is Reg D 506(c). This one allows you to raise as much money as you would like from up to 2,000 high net-worth investors.
One of the main aspects of general public crowd funding is that it allows for companies to receive funds from non-accredited investors. It also uses two different regulations for exemptions, much like high net-worth. The first is Reg A+. This in itself can be broken up into two tiers. The first tier allows for offerings of up to $20 million over the course of a year. The second tier is similar, but instead of $20 million it’s $75 million over the course of year.
The second kind of regulation is Reg CF. This form of crowdfunding has recently had some changes from the Securities and Exchange Commission (SEC). Reg CF used to only allow companies to raise a limit of $1,070,000 over the course of year through crowdfunding. However, in March 2020 the SEC changed that cap to $5 million. Though this regulation didn’t go into effect until early January 2021.
One major appeal of public fundraising for many companies is that they are allowed to advertise with this form of crowdfunding. They can do it in any way that want, through email, social media, or with physical advertisements. There is no need for any prior, substantive relationship between the company and potential investors. This allows the company to reach more potential investors who may not have been aware of them beforehand.
With public fundraising, most of the information about what you are raising funds for and the deals they may receive are available for all to view. People are not required to have an account on our site to see what deals you may be offering.
Now let’s move on to private fundraising. This form of crowdfunding has much fewer subcategories, so it is a bit easier to deal with.
With private fundraising there are only one kind of regulation exemption. This is Reg D 506(b). It is actually very similar to Reg D 506(c), which is probably not surprising. There is one main difference between them. Both Reg D 506(b) and Reg D 506(c) allow you to raise as much money as you can from (again) up to 2,000 high net-worth investors. But Reg D 506(b) also allows you to raise as many funds as you can from up to 35 unaccredited investors, though they do need to fit some specific requirements.
Another important difference between public and private fundraising lies in advertising. While public fundraising allows you to advertise as much as you want to whomever you want, companies doing private fundraising can’t openly advertise. You can approach investors whom you already have a pre-existing and substantive relationship with. But you can’t advertise through social media, email, or any other way.
The final major difference between private and public fundraising is what potential investors can see when looking into what you may offer. As mentioned above, public fundraising allows anyone to see what deals you may be offering. Private fundraising doesn’t allow you to do that. The information on what you are raising funds for and the deals you are offering are hidden from the public.
Which is right for me?
Now we’re on to the harder part of all of this, deciding which kind of crowdfunding you would like to do. There are, of course, pros and cons to each. So, the only way to pick the right one is to think over the options and decide which is going to benefit you most.
Public crowdfunding allows you to tell more people about the fact that you are raising funds and what deals you have to offer them. You can advertise as much as you want, and potential investors can see what deals they may be getting if they invest with your company. However, it is much more likely that you will have a cap on how much you can raise over a year. While that cap has been raised recently, it still limits you to a certain extent.
With private fundraising you have to be, as the name suggests, much less public about your fundraising. You can’t advertise and the information about your crowdfunding is not as available to people. But there is no limit on how much money you can raise, as long as your investors fit particular criteria.
So, which one is the right one for you? We can’t tell you for sure right now. But if you are not certain which is right for you after reading this, reach out to us. We here at CrowdEngine are experts on all things crowdfunding and will be happy to help guide you on what kind of fundraising best suits your company.