Imagine for a moment that you just opened your dream business — an Italian restaurant. Customers savor the flavors and textures of their favorite dishes. They smell the delicious aromas wafting from the kitchen. The dimly lit decor creates the perfect ambience. Yet you are lacking a key ingredient — financial capital to keep the doors open long enough to secure a sustainable customer base.
Now, think about the possibility of giving your customers the opportunity to make small financial investments in the restaurant. In other words, let the buy local movement evolve into an invest local movement. Equity crowdfunding is one way to make it possible.
Equity crowdfunding differs from traditional crowdfunding where you receive some type of non-cash reward for your investment. Equity crowdfunding lets you actually invest in the business itself and receive cash payments if the company succeeds. For additional background, read posts from fellow TDS bloggers Laura Schmitz and Jody Glynn Patrick which explain the concept basics and investor requirements.
Let me be clear that equity crowdfunding is not a viable option for all types of businesses. It may work best for the food and beverage industry, seasonal businesses and real estate. For example, in the United Kingdom a craft beer company, Brewdog, raised $4 million pounds from 12,000 shareholders in three funding rounds. One of the rounds raised $1 million pounds in just 24 hours.
The federal Securities and Exchange Commission(SEC) has issued draft rules and is accepting public comment through early February. Final approval of the rules is expected in 2014. In addition, the states of Wisconsin, Georgia and Kansas have adopted equity crowdfunding legislation which open additional possibilities.
The draft SEC rules require businesses to make their offerings through a portal. A funding portal is a listing service only. No escrow or transfer of shares is allowed. A broker/dealer portal such as Craftfund.com has full capabilities and can solicit, transfer shares and escrow transactions.
Due to the portal restriction, companies will be prohibited from directly soliciting equity crowdfunding offers. Businesses may generically announce the sale of securities, but must direct potential investors to the portal for details and actual transactions.
Businesses should thoroughly research the risks and rewards of equity crowdfunding before launching an offer. Here are some things to do or know or know before you jump head first into the crowdfunding pool.
- What’s your potential liability?
- Test your equity valuation with friends and family before making your pitch public.
- Understand how equity crowdfunding may impact the ability to secure more traditional financing in the future.
- Carefully track where your offers are made, the financial and legal status of your investors and how much money you’ve raised.
- Have an exit plan. Will early investors be made whole via a sale of the company or will newer investors buy out their interests?
Equity crowdfunding may create a sustainable, financial pathway for both startups and existing companies. I’d love to hear your thoughts and questions about this new opportunity. Please comment below or contact me via Twitter or G+.