What Types of Offerings Does StartEngine Allow?
With the rapid growth of the equity crowdfunding industry and the explosion of ICO’s into the capital raising scene, many companies want to know what their options are when it comes to raising capital.
Because we are an SEC-regulated crowdfunding platform, we are restricted to certain offering types. Beyond those restrictions, we also strive to offer the best possible campaigns for both our companies and investors.
In order to achieve this goal, and clarify the offering types we allow, we have put together a list of structures we permit, along with the requirements for each below. Please note that StartEngine has standard investment templates for each offering type below and does not accept customized investment documents.
In general, the offerings we allow fall into two categories: (1) Traditional Securities, and (2) Token Related Offerings
For traditional securities offerings, we accept the following types:
- Equity: This is our most common offering type, typically consisting of either stock for corporations or membership units for LLC’s.
- NOTE: Any class of equity you would like to offer must be authorized in your corporate documents (articles of incorporation or operating agreement)
- NOTE: Any class of security a corporation is offering must be authorized in articles of incorporation that have already been filed with the state.
- NOTE: Some LLC structures are not conducive to equity crowdfunding. In this case, you may want to consider converting into a C-Corp.
- Convertible Notes: This is our second most common offering type. This is a debt offering, that has the opportunity to turn into equity if the company meets certain criteria set in their terms.
- NOTE: Convertible Note offerings must identify the class of security they will convert into. This must either be a class of security already authorized in the company's corporate documents or if not, all terms must be specifically defined so that the investors know all rights and preferences they will have when the notes convert.
- NOTE: The StartEngine note template generally requires an interest rate, valuation cap, discount rate, and a term of 2 years or less. If they reach the maturity date without converting, the principal and interest are due back to investors.
- Debt (Promissory Note): This is a debt offering that is typically structured to pay interest to investors throughout the course of the loan, plus repay any accrued, unpaid interest and principal back to investors at the maturity date.
- Revenue Share: This is a revenue sharing offering that is typically structured to pay back investors a certain multiple on their investment (i.e. 1.5x, 2x, etc.) out of the company’s gross revenue after a certain period of time.
- Revenue Participation Rights: This is similar to a revenue sharing offering but is specialized for use with individual entertainment properties such as a movie or play. These typically, repay investors 100% of net revenue up to a certain multiple of their investment (i.e. 1.2x) and then split revenue in excess of that amount with 50% going to investors, and 50% going to the company (and any other participants the company has negotiated with).
Token Related Offerings
NOTE: All Token Related Offerings Require the company to work with a lawyer, regardless of the offering maximum.
NOTE: All companies conducting Token Related Offerings must have the core team members located in the United States.
- Equity Tokens (no additional perk tokens): This is similar to our standard equity offering, with the distinction that the equity is to be distributed to investors in Token form. Think of this as a share of common stock on the blockchain.
- NOTE: Any equity token a company offers must be explicitly authorized in the company’s corporate documents (articles of incorporation or operating agreement), including the name of the token and all rights and preferences.
- Common Equity Token: This structure is comparable to a standard common stock offering, to be issued via blockchain instead of book entry. Dilution follows the same method as standard common stock, and investors realize gains in the same way.
- Preferred Equity Tokens: This is a structure that can provide flexibility to companies outside of common equity. It can be structured to provide revenue sharing rights to investors through either dividends or distributions, and can have options on whether or not the shares convert into common equity based on certain triggers. Depending on how this class of equity is structured, it can allow companies to issue non-dilutive equity that pays a revenue share into perpetuity, and is liquidated at par with a preference over common.
- Real Agreement for Tokens and Equity (RATE): RATE offerings typically include some form of equity (i.e. stock or membership units) and an additional right to a token included in the Offering as an added perk.
- NOTE: All tokens included in a RATE must have the terms of the token clearly defined. They can’t be left undecided for future designation.
There are generally two different structures for RATE offerings:
- Standard Equity + Perk Token: This structure issues the equity through traditional security (i.e. book entry), which oftentimes can be done without needing to make any amendments to corporate documents.
- Equity Token + Perk Token: This structure issues the equity through an Equity Token (ie. common stock on the blockchain), and must adhere to the guidelines of Equity Tokens above.
- Convertible Debt Agreement for Tokens and Equity (DATE): DATE offerings are similar in concept to a RATE offering, except the equity component is replaced by a convertible note.
- NOTE: The convertible note must adhere to the guidelines of Convertible notes above, regardless of whether they convert into Standard Equity or an Equity Token (meaning either must be authorized in the corporate documents).
- NOTE: All tokens included in a DATE must have the terms of the token clearly defined. They can’t be left undecided for future designation.