By Gerri Detweiler
Treefort Music Festival, a music and folk arts festival in Boise, Idaho, was scheduled to open for its ninth annual event two weeks after the Covid-19 crisis hit hard. He was forced to postpone, first until September 2020 and then until 2021. That could have meant the death of the iconic community event. But Treefort still plans to move forward next year, in part thanks to a crowdfunding campaign that has grossed over $ 200,000 to date.
Unlike the more well-known versions of crowdfunding, either reward-based or donation-based, Treefort uses “equity” or “investment” crowdfunding through the platform. Wefunder to secure the financing of investments.
Investors in Treefort can buy preferred shares without dividends or voting rights. According to Questions and answers for investors section of Treefort’s campaign page, “Until the pandemic hit, we were approaching our best year yet and were ready to take the next step in profitability to allow us to have more cash margin for the rainy day fund, better pay our team living wages, and extend the business model.
“We really liked people taking ownership,” says Eric Gilbert, co-founder and director of the festival. “We have always had a level of transparency with our community. This allowed us to increase transparency and involve the community more.
3 reasons to consider regulatory crowdfunding
Crowdfunding has been a bright spot in an otherwise difficult landscape of fundraising and small business lending dominated in recent times by government loan programs such as the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans ( EIDL).
Even before the coronavirus crisis, many small businesses have failed due to lack of access to capital and / or low cash flow. “Covid has made accessing capital incredibly difficult,” says Sherwood Neiss, co-founder of Crowdfund Capital Advisors, and maintains that crowdfunding could be one of the best ways to get capital into the hands of small businesses that have it. need.
There are several types of crowdfunding. While rewards-based crowdfunding (think Kickstarter) and donation-based crowdfunding (think GoFundMe) often receive the most attention, regulatory crowdfunding is not as well known or understood by small business owners.
Crowdfunding Regulation allows eligible companies to offer and sell securities through intermediaries registered with the SEC (a broker or funding portal). Currently, businesses can raise a maximum total amount of $ 1,070,000 through crowdfunding offers over a 12-month period. “Regulations Crowdfunding allows startups and small businesses to raise capital by selling securities in their companies to the community,” explains Abe Chu, co-founder and CMO of NextSeed. “These securities could take the form of stocks, debt, convertible notes and other types.”
Regulation Crowdfunding is on the rise. For example, July 2020, a historically low month for crowdfunding, “recorded the highest number of deals in a single month, the highest number of engagements, as well as the highest number of investors,” according to data from Crowdfund Capital Advisors. And “80% of (this) capital comes from friends, family, customers and subscribers. “
1. Clients become lawyers
One of the biggest benefits of regulatory crowdfunding is the relationship founders build with their supporters.
Winner of MasterChef Season 3, Chef Christine Ha has opened her first full catering space Xin chao with her husband John Suh and chef Tony J. Nguyen. Their campaign on NextSeed raised its targeted $ 107,000 from 93 investors within the first two hours. The money raised comes in the form of a loan that they have started to repay, despite the difficult environment for restaurants.
“We had to rethink what consumers are looking for these days,” says Ha. The restaurant has a large patio, which helps, and offers more affordable bar bites. “We had to continue to adapt and evolve, but our long-term vision is still the same. ”
When asked about her experience with crowdfunding, Ha repeatedly emphasizes that funders want to see the business succeed. “I think the most intrinsic value is having a team of people who invest in your business to really want to help you grow that business and help you get the word out,” she says.
Gilbert de Treefort agrees. “These will be the owners of our business,” he says. “I think it brings a higher level of engagement. They will be more inclined to care deeply about it in the future.
2. It’s surprisingly diverse
As these examples have shown, regulatory crowdfunding is not just about unique retail products or sophisticated biotech companies. A wide variety of businesses also fundraise this way.
Crowdfund Capital Advisors research found that the top industry groups in 2019 were ‘entertainment, application software, consumer packaged goods, restaurants, alcoholic beverages, real estate, biotechnology, computer hardware, education, services utilities, personal services, advertising and marketing services, automobiles, consulting and banking. ”
This is a wide range of businesses, many of which would likely not get angel funding or venture capital. They might also have difficulty obtaining traditional business financing without solid incomes, strong credit scores, and without having been in business for at least two years.
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3. It can be profitable
Raising funds through a regulatory crowdfunding campaign ends up costing, on average, around 5.3% of the amount raised, says Neiss. Costs can include campaign video, company disclosures, marketing costs, as well as legal and accounting fees. Once successful, a platform will take an average of 6% success fees.
Plus, investors will expect some sort of return. Some campaigns offer equity; others make loans or offer convertible notes. The Xin Chao Campaign offered investors an annualized gross interest rate of 17% payable monthly over four years.
Still, it can be cheaper than other types of fundraising, and you won’t give up as much control as with angel funding or capital risk. “If you had to make a comparable offer via Regulation A, you could easily spend $ 100,000 for the same expense, ”says Neiss. “[Regulation Crowdfunding] reduced to the size of the offer. Other types of fundraising have much higher fixed costs.
With regulatory crowdfunding, “Main Street businesses are raising around $ 100,000,” Neiss adds, and “the average amount overall is around $ 250,000.”
Can the United States Fund the Next Stimulus?
End of August 2020, Yelp Reports A total of 163,735 U.S. businesses on Yelp have closed since the start of the pandemic (as of March 1, 2020), and 60% of those are permanent closures. That’s almost 100,000 businesses on Yelp alone that have closed and have no plans to reopen. More companies will likely join their ranks if there is not another round of stimulus packages.
Several years ago, Neiss walked the halls of Congress advocating for regulatory crowdfunding, which has become legal although the Employment Act in 2012. Today, he is one of the driving forces behind the project Main Street Recovery Co-Investment Fund, which would provide the government with a model to match 100% of funds (up to $ 250,000) raised from communities through these platforms. This approach would replicate a successful program in the UK and engage local communities in supporting the businesses they believe in.
“What happens on Wall Street is not the same as Main Street,” Neiss warns. “Community businesses are facing the worst economic crisis in decades and are closing their doors. The stimulus packages the government created for Main Street are failing. The money they allocated is still there. This program would allow the government to immediately deploy capital to businesses that need it to survive using policies and regulations that already exist, technology platforms ready to evolve, and real-time data feedback that will allow government to see how. the program is work. “
As a nationally recognized credit expert, Gerri Detweiler has been helping individuals leverage credit to their advantage for over twenty years. She is currently responsible for market education at Navigation, which provides small business owners with free tools, including personal tools and business credit ratings– and help them find the best business credit cards and best business loans. She has written five books, including her most recent, Finance your own business: get started on the finance fast lane and has been interviewed in over 3,000 news interviews. See all articles from Gerri Detweiler.
This article was originally published on All Business.
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