Originally Published at Entrepreneur.com on May 12, 2016
Image credit: Thomas Barwick | Getty Images
On May 16, 2016 the long awaited (four years, five months and six days after the law was signed by the president, but who’s counting) JOBS Act equity crowdfunding law goes into effect allowing startups and small businesses to raise new capital up to $1,000,000 online through an equity crowdfunding portal. Entrepreneurs can now legally raise money from “the crowd” by giving everyday people a chance to own a part of their business. For the crowd, the chance to invest a small amount of money online in a new or growing young company, opens a new world of opportunity that was never available before.
I am frequently asked in my law practice: “Is my company a good fit for crowdfunding?” While nearly any U.S. or Canadian based company can use this groundbreaking law, there are businesses that are a near-perfect fit. Before we get to those, there are a few basics and statistics to ponder.
For the past several years, rewards-based crowdfunding sites like Kickstarter have prospered allowing an entrepreneur to raise money by giving away a reward, but no equity or ownership in their company. This is a great way to raise some money for new products that can be pre-sold and for art, music and film projects. If you can raise money without giving away part of your company -- do it.
But rewards-based crowdfunding has severe limitations that equity crowdfunding does not have. The number of people who are willing to “donate” money to a company in exchange for a “reward” (but no equity and a subsequent share of the company’s profits) is limited. The latest statistics available on Kickstarter reveal that 84 percent of the successful campaigns on their site raise less then $20,000. A staggering 97 percent of successful campaigns on Kickstarter raise less then $100,000.
Good luck opening a new business with $19,999.99.
The number of people willing to invest in a company, and possibly own a small part of a profitable business, is much larger. In 2015, 48 percent of Americans have invested money in stocks already. That’s a pool of more than 150,000,000 potential investors, far outnumbering the 10.8 million who have donated to a Kickstarter campaign since their launch in 2009.
The most important factor to consider in successful crowdfunding campaigns, both rewards and equity-based, is the ability to market the campaign and reach “the crowd” of potential supporters or investors. Small businesses such as these below have a unique opportunity to reach a local crowd through geo-targeted marketing in an economic manner, and also have the ability to get local media coverage to assist in their equity crowdfunding campaign. This combination of factors makes these small businesses a great fit for the new equity crowdfunding laws.
1. Restaurants.
Millions of people dream of opening a restaurant, but very few can afford to do it. According to a recent survey, the median cost to open a restaurant is $275,000, and if owning the building is figured into the amount, the median cost rises to $425,000. The ability to raise up to $1 million with the new equity crowdfunding law allows a restaurateur to satisfy the cravings of local foodies by giving them the opportunity to invest a small amount and fulfill their dream of restaurant ownership. Better yet, these hundreds of small investors will become brand ambassadors who bring their friends and family to eat at “their restaurant.”
2. Small office or retail buildings.
While not as sexy as owning a restaurant, owning part of a local office or retail building is an easy sell to a small investor. Who doesn’t drive by a building or strip center, see all the cars parked outside, and think that someone is making a good living owning that property and renting it out to others? A great example of this recently closed using the equity crowdfunding law’s bigger and better looking cousin: the Regulation A+ the Mini IPO, which works very similarly but allows a company to raise up to $50 million for a local business. Using this similar law, a Portland, Oregon company raised $750,000 from the local crowd to build a funky office building. How did they market this? Their website proudly offered investors the chance to “own a piece of your neighborhood” and get an 8 percent return on the investment.
3. Franchises.
If you own a successful franchise, and need the funds to expand to a second or third location, why not sell a part of your expansion to the customers who already patronize your business, and those in the community who know your name and recognize your success? Equity crowdfunding creates an opportunity to expand and scale your business (and, like with the restaurant above, have hundreds of investors advertising your business to everyone they know -- for free) that cash flow concerns may otherwise prevent.
4. Local investment real estate.
Real estate crowdfunding is a huge industry already. In 2015, a reported $483 million was invested (mostly by rich “accredited investors”) through real estate crowdfunding. Now, this investment opportunity is available to everyone. People inherently understand the value in buying a house, or investing in land. In addition to office buildings, investments like owning a vacation rental property or purchasing a house to renovate and flip for a profit, are now within the reach of everyone thanks to the new equity crowdfunding laws.