I’ve seen the debate raging on both Investorshub, Linkedin and Twitter: should a company perform a reverse merger or vie for the equity crowdfunding route? It’s an interesting question which does not, unfortunately, have a overarching answer for each firm that may be weighing the pros and cons of each–and there are pros and cons of both. I would like to discuss a bit about the pros and cons of equity crowdfunding as well as some of the pros and cons of going public via a reverse merger. Each company considering one option over another should weigh out each scenario carefully asking whether the pros outweigh the cons. The eventual decision should be weighed against the backdrop of your individual company situation as well as the growth opportunities you’ll have with each scenario. I also want to paint a picture of what the world will look like with Title III equity crowdfunding–as it will change the decision and outcome for many a firm.
Pros of Equity Crowdfunding
Cons of Equity Crowdfunding
We’ve rightly outlined the pros and cons of taking a private company public by a reverse merger before, but let me just outline some of the basics again.
Pros of Reverse Mergers
Cons of Reverse Mergers
I really like what John Taylor of the National Venture Capital Association said relating to crowdfunding:
If an entrepreneur walked into a venture capital firm with a great idea, or even a working prototype, but pointed out that they had 300 shareholders, that would probably be the kiss of death. You need to plan on day one if your company is going to be big enough to need angel or venture capital investment.
I’ve discussed before the conundrum equity crowdfunding presents. In some ways, equity crowdfunding is either an “us vs. them” scenario where you either decide you’re company is right and ready for venture capital funding or that equity crowdfunding is the best fit. Once you head down and are successful with one path, the other bridge is likely not one you’ll be able to pass again.
Life After an Equity Crowdfund Campaign
I spoke with one of the principals at Equitynet a few weeks back and he informed me that the companies on their platform typically only receive five or ten investors in each deal–not the 300+ that true equity crowdfunding is promising. The struggle with crowdfunded companies will be numerous, almost meeting the demands of going public. We expect Title III to wholly increase the demand for companies that need go public in a cost effective way, thus leading to more demand for reverse mergers and public shells.
There are a number of directions a company can go when it comes to using both crowdfunding and reverse merger techniques. The market for the two types of offerings are not mutually exclusive and both can work in tandem to solve the financing and securities needs of mid and microcap companies. I personally foresee many more things occurring on crowdfunding portals that will impact the public markets including PIPE (private investments in public equity) transactions. The JOBS Act’s complete implementation is the elephant in the room for small business finance. It is also important to note that equity crowdfunding and reverse mergers are not mutually exclusive events in business finance. In fact, they represent a greater opportunity to fill in the much needed gaps. In my mind, the two will eventually work together and in tandem swimmingly.
How do you see crowdfunding and reverse mergers working together?