Why Equity Crowdfunding Matters to Small Business
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America is consistently ranked as one of the top entrepreneurial countries in the world, and the average person on the street probably believes that a good company can always find financing to grow and expand. We know that more than 90 percent of small business owners still believe that banks are a first stop for business financing, despite more than a 30-year history of banks decreasing the amount of their loans going to small businesses.
With SharkTank and the media’s fascination with Silicon Valley’s Unicorns -- companies whose valuations are a billion-dollar plus -- it is easy to think that investment dollars are plentiful. It is true that 2014 and 2015 saw dramatic increases in the amount of money flowing to rapidly scaling startups through venture capital firms. Unfortunately, for the average entrepreneur, the odds of their child getting into Harvard are significantly higher than the odds they will ever receive a venture capital investment.
The good news is that a series of recent laws and regulations have opened the door to three new vehicles for raising investment dollars for small businesses through equity crowdfunding. These new forms of investment crowdfunding may well transform the nature of small business capital raising in the United States, by enabling individual investors to take equity stakes in new companies.
Small businesses that have a loyal customer base or large following can investigate the newly passed Regulation Crowdfunding which went into effect on May 16, 2016. This new form of equity crowdfunding -- which is the result of the new Title III of the JOBS Act -- allows companies to raise up to $1,000,000 each year, from investors for their businesses, using crowdfunding platforms. You agree to sell stock in your business, and can offer those shares to anyone. However, there are limits on what individuals can invest based on their income. The transactions are done through Web-based platforms -- which will both help keep you compliant with all of the laws and rules, and will also take a commission on the sale of the stock.
This form of capital raising is especially attractive to “main street” businesses -- which may have a great history and engaged customers, but find that banks aren’t willing, or able to lend to them. This model exists in many other countries, and we see local food-based businesses, bars and pubs, art and creative studios and other product based companies taking advantage of these models and raising on average about $700,000.
In September of 2015, Title IV on the JOBS Act went into effect modifying regulation A of the Securities Act. That mouthful of legalese has a very important meaning -- growing companies can now go public in a small offering and raise up to $50,000,000 dollars through a streamlined, low-cost alternative to a full public offering.
Companies can also “test the waters” using the new provisions of Regulation A -- meaning that you can let the world know you are thinking of raising investment dollars. This form of public announcement has been illegal since the 1930s, but with the transparency and openness that Web platforms provide, it is now legal to solicit expressions of interest from potential investors.
Many minority and women business owners know that professional investors -- whether Angel networks or Venture Capital firms -- are highly unlikely to invest in their business. Equity crowdfunding appears to behave in exactly the opposite way. Data from top university researchers shows that there are a large number of women investors who are actively looking to support women and minority business owners through targeted investments through crowdfunding. Women are actually more likely than men to succeed in crowdfunding. Why? Crowdfunding success requires leveraging relationships and social media links to drive interest and awareness in your firm. Most users of social media are women and it appears that a perfect storm of social innovation is brewing where amazing women-owned small businesses are being backed by investors due to this linkage of technology, social media and disruptions in financing laws.
Equity crowdfunding can supply needed capital for equipment, growth capital or for strategic hires. In many cases, it becomes the onramp to other more traditional models of financing. Some savvy small business owners have learned to leverage small early stage investments through crowdfunding to increase their bargaining power and get more money from venture capitalists later.
Whether a tool to provide small funds to launch a startup, or as an alternative to the high costs of IPOs, these new rules expand the financing options available to startups and small businesses across the USA.