It’s a good time for small and emerging businesses to think about what the landscape for capital raising will look for the rest of 2015. The traditional channels will likely be unchanged: bank loans (if you can get them), angel investors (if you are a tech company based in San Francisco), or venture capital (if you invented a perpetual motion machine). For the remainder of the 99% of small and medium sized enterprises that don’t check one of the boxes above, what other options might emerge in 2015?
Equity (or, more broadly, securities) based crowdfunding will likely emerge in 2015 as a go-to choice for small and emerging businesses to raise capital. Unlike traditional “rewards” or “donation” based crowdfunding, equity crowdfunding is structured for businesses to sell interests (securities) in the enterprise itself to the crowd at large through a mini-public offering. At the end of a successful offering, the business has raised the capital it needs to start-up or expand, and the public now owns an interest in the fortunes (or failures) of that business going forward. Although equity crowdfunding already exists in the United States, it has been underused, and undervalued (for an example of an intrastate crowdfunding exemption, see Georgia’s here: Invest Georgia Exemption). We expect 2015 to be a breakout year as awareness and marketplace acceptance expands more rapidly.
Why do we see this happening in 2015? Well, for many businesses (start-up or growth stage), equity crowdfunding may be their only source of access to capital. This includes a massive amount of SMEs in the United States who are either too young, or too industry or geographically challenged to attract capital from other sources, but who nevertheless have a great idea and a loyal customer or affinity base.
Furthermore, the regulatory trend is toward expansion and permissiveness of crowdfunding. In 2012, it was only permitted in two States (Georgia and Kansas). In early 2015, the list of States which have enacted (or have considered) intrastate crowdfunding exemptions will be upwards of 15 (including, now, Texas), and is growing geometrically (see NASAA’s excellent resource center here: Intrastate Crowdfunding Resources. That means that businesses in these States can use equity crowdfunding now, they do not have to wait on federal rules under the JOBS Act from the SEC that are now years late. Eventually, when the SEC does release final rules under the JOBS Act, national equity crowdfunding will be legal and available as well. This trend will continue ahead.
The benefits to SMEs wishing to conduct an equity crowdfunding are numerous, and include the following:
- Access to capital that might be otherwise unavailable.
- The Company drives the terms of the capital raise.
- Engagement of customer/affinity base on a going forward basis.
- Low or zero cost to rewards fulfillment following completion of the campaign.
SMEs wishing to conduct an equity crowdfunding should, of course, consider the limitations of such a campaign as well, including the following:
- Currently, only legal in certain States, and not on a national/interstate basis (yet).
- Low maximum raise thresholds (generally $1M).
- Requires legal compliance structuring (unlike rewards/donation based crowdfunding).
- Backers will own a security in the company following completion of the campaign.
Equity crowdfunding—like other methods of capital raising—can be challenging and time consuming. However, for those SME’s with a natural customer or affinity group that they can tap into for support, equity crowdfunding will likely be the cheapest and easiest source of capital that they can access, and will offer the collateral benefits associated with completing a successful crowdfund.
Unlike a simple rewards based crowdfund (like on Kickstarter or Indiegogo), equity crowdfunding involves the offering and sales of securities. Accordingly, any business that is considering conducting an equity crowdfunding campaign should consult a qualified securities attorney to make sure that the necessary compliance boxes are checked in advance. Finally, all the hallmarks of a great crowdfunding campaign should be assembled (video, copy, images, disclosure documents, etc.), and a strategic plan for execution should be formed. After that, it’s up to the crowd!
If you are interested in more detail related to your situation it is best to speak with an attorney.
Source: Smartup Legal