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There is no shortage of headlines about how the latest tech startup managed to raise millions of dollars in venture capital. But what if you own a bakery, restaurant, or small home-remodeling business that doesn’t catch of the eye of VCs? Small and midsize businesses (SMBs) still need money for equipment or to expand operations, just like their bigger or more fast-growth counterparts. Bank loans and credit cards can’t be the only options.
Fortunately, they’re not. SMBs can now look to the crowd for cash infusions. Equity crowdfunding--otherwise known as Title III of the JOBS Act, which was signed into law in 2016--allows entrepreneurs to raise up to $1 million from the general public by selling ownership shares in their companies. The law essentially democratizes access to startup investment opportunities and, at the same time, greatly expands the pool of money that entrepreneurs can tap into to grow their businesses.
While crowdfunding has been around for years, equity crowdfunding is different. Unlike backers who give money to a business via a Kickstarter or Indiegogo crowdfunding campaign and receive a reward like a t-shirt or beer mug in return, online equity crowdfunding investors get shares in the company they’re supporting. This fundraising method doesn’t necessarily replace venture capital or angel investors, but rather lets ordinary folks have a shot at buying into the next Airbnb or Lyft, or supporting a local business that needs investors to survive.
This form of crowdfunding does have some stipulations. A small business needs to be U.S.-based to start an equity crowdfunding campaign. Companies also need to have an online presence and be available through a crowdfunding portal that has been cleared by the Securities and Exchange Commission (SEC). A list of vetted crowdfunding portals is available here.
Why consider equity crowdfunding for your company’s capital needs? Reasons include:
Accelerating growth. Eventually, every small business reaches a point when it can no longer operate from cash flow alone. Buying new equipment or expanding into a bigger facility often requires more cash than the business can comfortably spend. Equity crowdfunding is an alternative to bank loans or other debt financing that enables a business owner to raise needed money quickly from outside investors.
Reward early customers. When you started your business, those early clients and customers proved your concept was a valid one. Equity crowdfunding allows you to give these original believers a chance to share in the financial success of your firm in exchange for an investment. However, there is a level of financial disclosure that you’ll need to make with these new investors in exchange for their money.
“Equity crowdfunding is a great opportunity for your customers to be along for the ride,” explains David Mandelbrot, CEO of crowdfunding platform Indiegogo. A little over 18 months ago, the company launched its own equity crowdfunding platform called First Democracy and, so far, he says 50 companies have started campaigns on the site. “Before raising money this way, be sure you’re comfortable with sharing your financials,” Mandelbrot says. “These new investors will want to know what’s going on with the business and are going to ask for this information.”
Create brand ambassadors. By inviting loyal customers to participate in an equity crowdfunding campaign, a small business not only raises needed capital, but also galvanizes its user base. Customers who own shares in a company are more likely to recommend that business to others and to frequent it more often. And that kind of brand loyalty is especially important for early-stage companies.
Startup capital. Equity crowdfunding is also an efficient way to raise money from the community where the business is going to operate, says Mandelbrot. “If a restaurant or brewery wants to open a second location, it’s going to need capital to do that,” he says. Raising money from investors in the local community not only provides the business with the funding it needs, but also gets the local community behind the success of that business and helps to create more jobs.
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