Many small businesses which are looking for start-up or growth capital fall between the cracks with respect to accessing that capital. They lack the necessary track record or collateral to meet traditional bank underwriting standards to obtain loans, and they are too small or simply not in the right field to attract angel investors. Many of these businesses should be considering “crowdfunding” as an alternative to traditional sources of capital.
Crowdfunding is, in the broadest sense, a community finance vehicle. It is a way for businesses to access the capital they need by directly soliciting community support for the business. This support may come in the form of cash donations, possibly for an attached perquisite or reward given by the business to the donor, or in the form of purchases of securities (either equity or debt) issued by the business to investors.
Crowdfunding Basics; The Intrastate Exemption
Donation/Rewards based crowdfunding has been legal in the U.S. and growing in popularity for several years. National portals like Kickstarter and Indiegogo (among others) provide entrepreneurs with the ability to access funding for their campaigns through the offer of rewards for different donation levels. If a business can run a successful donation/rewards crowdfunding campaign, it gains the benefit of access to the necessary capital, without having to give up any equity in the business or take on future debt servicing obligations
Securities based crowdfunding for small and emerging businesses has been essentially impossible (certainly cost prohibitive) in the U.S. since 1933, until very recently. In April 2012, Congress passed the JOBS Act which provides a registration exemption for securities based crowdfunding on a national level. Once the SEC has completed its rule making process, businesses will be able to raise up to $1 million through the use of securities based crowdfunding campaigns, provided that a number of conditions are satisfied.
In certain States, however, securities based crowdfunding is already legal. In Georgia and Kansas, intrastate crowdfunding is permitted by businesses based in those States for sales to residents of those States. In Georgia, businesses can raise up to $1 million in a securities based crowdfunding raise through the use of the Invest Georgia Exemption (the “IGE”) with many fewer compliance conditions than those contained in the JOBS Act. Best of all, it can be done today; no waiting on the SEC!
Running a successful crowdfunding campaign (either rewards to securities based) is not easy. It takes preparation and perspiration in the form of business plan production, marketing, brand management, social and traditional media exposure, video production, community outreach and more. If done correctly, however, a good crowdfunding campaign can yield great results for small and emerging businesses.
The real benefits of a successful crowdfunding raise go beyond the initial capital infusion. A successful crowdfunding campaign may have attracted dozens of new investors, hundreds of new donors, and thousands of new “likes” to the business. These points of contact represent a new customer base that make that business much more likely to succeed as a going concern. In addition, investors and donors have been given an opportunity to keep their dollars local, and provide a boost of support to entrepreneurs in their communities.
Crowdfunding won’t be right for all types of businesses. In addition, many businesses may find access to capital cheaper and more efficient through traditional means. However, for those businesses that fall through the cracks of traditional access to capital, and who have a business plan that can garner community support, crowdfunding might be just the right match to help that business flourish.
Jeff Bekiares is the Co-Founder and COO of SparkMarket, a Georgia based crowdfunding platform, and a securities lawyer with over 6 years of experience.