I have heard a consistent criticism of JOBS Act compliant equity crowdfunding. The argument is that for most businesses, the ability to merely raise one million dollars over the course of 12 months is insufficient for a business to meet its growth goals. There could be nothing further from the truth.
There are two targets for crowdfunding. The first is the one that is promoted by people far and wide. That belief is that crowdfunding is for startup companies. In my opinion, crowdfunding is, generally speaking, the worst way that a startup company can raise money. I’m sure that will be the subject of a future blog or two. There are so many things that come from the mentorship a startup receives when money comes from an angel investor or venture capital firm, and the increases in awareness and presales of products are not sufficient to overcome this advantage.
However, the other target for the crowdfunded business model is the small business. You know, the one that has somewhere between 5 to 50 employees. It does between one million to ten million dollars in revenue a year. And it needs additional capital in order to support business growth. The hundreds of thousands in profit a year is more than sufficient to satisfy the needs of Crowdfunded investors to receive a return on their investment.
The idea that there aren’t that many of these types of companies is absolutely absurd. In fact, most of the new jobs in this country are created by exactly this type of company. According to the Small Business Administration, already half the American private sector workforce works for these companies, and they are now creating 65% of all new jobs. There are a host of people who run these businesses, and they would be delighted to learn that there will soon be a new way to them to raise capital.
It would be a large mistake to discount the people who run these types of businesses. They are the ones that are going to truly improve the American economy. And crowdfunding is a great opportunity for them.
Jonathan Frutkin is an attorney at The Frutkin Law Firm, PLC in Phoenix, AZ. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which will be published in May, 2013.