Why Equity Crowdfunding is NOT a Terrible Idea

Jeff Wald wrote a piece that was published in Entrepreneur earlier today. The article is called “Why Equity Crowdfunding is a Terrible Idea“. He argues that the process for raising capital is “time tested” and the current methods assist startup companies that help build our society. He also suggests that there is a great deal of value contributed to these startups by venture capitalists, and by implication, argues that the “crowd” is unable to add the same type of value. Jeff is no stranger to the crowdsourcing market. He runs workmarket.com, a web-based platform for managing labor resources including consultants and freelancers. And while workmarketyou can argue that the crowd is actually able to contribute a much greater amount of value to a startup then a venture capitalist, Jeff has a point. The current structure produces relative stability in the unstable world of startups.

But here is where Jeff (and many are wrong). Crowdfunding isn’t about raising money for startups at all. Let’s face it, if the average venture fund makes ten investments, they would be thrilled to death with one great success and two small winners. An amateur investor doesn’t want that sort of thrill ride; they want predictable returns and the feeling of “investment” that only comes from being an owner. And that’s why crowdfunding is such a huge opportunity for profitable, local companies that benefit from the unique marketing (and corresponding revenue boost) that comes with the crowd.

And it is also the same reason why crowdfunding is a huge opportunity for investors. Instead of being locked into owning the tiniest fraction of a huge multinational conglomerate, the investor gets to become part owners in a local business, and maybe even make an actual impact on the bottom line. They get to brag to their friends and family that they are owners of local businesses that are part of the fabric of their community. And best of all, they get dividend checks that can exceed the paltry returns afforded by some types of alternative investments.

So Jeff gets it half right. Crowdfunding is a lousy tool for startups. But for businesses looking to transform their customers into loyal owners? It doesn’t get any better.

Jonathan Frutkin Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.

What Exactly Does Cricca Do?

Today we released an “explainer” video to describe exactly what we do. It turns out that merely telling people that we are “crowdfunding consultants” wasn’t quite working. I get it. The problem is that no one really knows what you mean when using the word “crowdfunding”. Let’s face it – the concept is novel and it covers a lot of ground. It can refer to raising money for a good cause (like the victims of a disaster or a terrorist attack) or getting money to launch an art, music or film project (like the high-profile Veronica movie and the production of literally thousands of music albums). It can also refer to rewards based crowdfunding, where the contributor is essentially “pre-ordering” something in exchange for putting up money. And it also refers to debt or equity crowdfunding, an emerging area where crowdfunding participants are looking to receive a financial return on their investment.

OK – we are in the equity crowdfunding space. Meaning, we work with companies that are bringing in small investors with the hope of financial return. So that makes some sense to people, but requires a long explanation.

If the word “crowdfunding” is essentially meaningless, then the word “consultant” takes the cake. A consultant is literally anyone with advice on how to do something. The obvious follow-on question to the statement that we are consultants is – so what do you do exactly?

Fair enough. And for those of you who are interested in learning all about what we do in less than two minutes while watching a cartoon – we made it happen. Check out our new explainer video and see if it helps.

And let us know if you’re company may be interested in participating in one of the country’s first equity crowdfunding campaign. Although we are incredibly selective about who we choose to work with, we are always looking for the few great candidates that can leverage the greatest marketing opportunity ever – transforming customers into loyal owners.

An End to the Ban on General Solicitation

The rule of law has long been abandoned – especially when the rule is the Securities and Exchange Commission’s ban general solicitation for private placements. In English (and perhaps the problem is that seldom has there been even an attempt by the SEC and securities lawyers to put this in English), the ban means that a privately held company cannot ask people that don’t already have a “pre-existing business relationship” to invest in their company.

Now, of course, as a percentage of American businesses, the ones that are privately owned (rather than publicly traded) is quite close to 100%. And, frankly, the number of potential investors that these business owners have a pre-existing business relationship is also infinitesimally small. So is it any surprise that there is a complete dearth of investment in these businesses? Almost all of the capital used to grow businesses comes from banks and family members – with a large amount of that capital taking the form of Small Business Administration-backed loans.

However, a host of companies do in fact get investment through private placements with accredited investors – a geeky phrase meaning “raising money from rich people”. Now, of course, in my experience, clients seldom even realize that the ban on general solicitation is strict. They routinely ask friends and family to introduce them to third-parties that may want to invest. Interestingly, these same clients easily understand and internalize that investors must be accredited – put very basically, that the investors have income above $200,000 or assets worth more than $1,000,000.

So why ignore the rule about general solicitation? Because the ban makes no darn sense.

But both Congress and the SEC knew that there was an opportunity to fix a problem that had been created under the old regulatory scheme. The problem? Companies raising money were taking money from non-accredited investors. The “wink-wink” usually included a questionnaire where the investor attested (falsely sometimes) that they were accredited, insulating the company from any claim that the investment was improper.

So, the new rules are this:

1) Companies can “generally solicit” and attempt to raise money from anyone.

2) In exchange, the company really needs to investigate whether or not the investor is accredited. This means looking at tax returns or certifications from accountants and/or lawyers.

The new rule only applies to companies raising money from accredited investors, but it is a pre-cursor to the equity crowdfunded future where even non-accredited investors will be able to get into the action. Maybe now securities lawyers can provide accurate guidance that reflects the real world, where successfully raising money requires meeting new investors and marketing the opportunity to invest in a private company.

Sometimes it takes a few decades, but the law catches up to reality.

 

Jonathan Frutkin
Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.

Release of Audio Book on Audible.com

We are happy to announce the release of the audio book version of Equity Crowdfunding: Transforming Customers into Loyal Owners. Because of the SEC will soon adopt long-awaited crowdfunding rules, both Main Street businesses and start-up companies will be able to legally offer ownership in exchange for crowdfunded investments. Instead of being limited to sending mere gifts or product samples, the crowd will soon be able to receive financial dividends from their investment.

The unabridged audio version of the book is available exclusively from Audible.com and from Amazon. The narration is done by book cover frontJohn LoPrete, a professional voice actor with numerous credits to his name. The four plus hours of the book introduces the listener to the exciting world of crowdfunding, discusses both crowdfunding strategies and introduces the law, while focusing on the true power of equity crowdfunding – as an opportunity to leverage the marketing power of new owners.

The book’s author, Jonathan Frutkin, is CEO of Cricca Funding, a crowdfunding consultancy that works with profitable local companies to take advantage of this new marketing strategy. Frutkin is also an attorney at The Frutkin Law Firm, PLC, one of the fastest growing firms in Arizona. He has spent his career helping business leaders grow their companies by taking advantage of emerging opportunities.

Destination: Atlanta

On October 1, we’re going to announce the opening of our first field office. It is located in Atlanta, Georgia. The reason for Atlanta is quite simple: Cricca is going to be working on implementing the strategies that we’ve written and spoken about for the past six months. As you know, we believe that the best opportunity for crowdfunding comes from local profitable consumer-facing businesses that see this as an opportunity to truly engage with their customers. While others think that crowdfunding is just about raising capital, we believe that it is about much more than that. Crowdfunding is the single most effective marketing strategy of all time.So why Atlanta? The answer is that two states The new Georgia Peachhave taken the lead on establishing intrastate crowdfunding exemptions – Kansas and Georgia. This means that you can already do intrastate crowdfunding in Georgia! In fact, you’ve been able to do it since late 2011. So why haven’t any successful campaigns happened yet?

The answer is simply that there is not enough awareness about crowdfunding yet – and the wrong sort of companies have attempted to raise money. As you can imagine, the companies that have been most attracted to crowdfunding are startup companies, often with no actual product and usually with no customers.

There is nascent equity crowdfunding infrastructure in Georgia. There are two great companies looking to establish themselves as the go-to crowdfunding portal in Georgia, SterlingFunder and Spark Market. We are excited about both the companies, and although we will only be partnering with one of them for our first pod of offerings, they both have great teams in place.

The challenge with raising money from crowdfunding, occurs when there is no crowd. A crowd is really the most essential portion of a crowdfunding campaign. So, why do we think were different? Well, put simply, we Downtown Atlantaonly work with profitable companies -businesses that have already been established. We only work with companies like restaurants, car washes, dry cleaners, landscaping companies, clothing boutiques and other businesses that you use every single day. These local successful companies have a built-in advantage – established customer bases. These customers will now have an opportunity to invest and become owners.

So if we are right, 2014 will see the emergence of some successful campaigns in Georgia. We look forward to being part of those campaigns. So if you are in Georgia, definitely drop us a line! We are interested and excited about learning about our new city. Our offices are located in Midtown Atlanta, and we are thrilled to be able to work with our Atlanta partners to cement Georgia as a leader in this exciting world of equity crowdfunding!

Jonathan Frutkin
Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.
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Minecraft gives Marketers Direction

Minecraft is an incredibly popular game with the younger set. And by younger, I mean kids under the age of 15. If you don’t have kids, you just need to know that basically, this game has taken over more than one family – mine included!

The object of the game is described in its Wikipedia page:

The creative and building aspects of Minecraft allow players to build constructions out of textured cubes in a 3D procedurally generated world. Other activities in the game include exploration, gathering resources, crafting, and combat. Gameplay in its commercial release has two principal modes: survival, which requires players to acquire resources and maintain their health and hunger; and creative, where players have an unlimited supply of resources, the ability to fly, and no health or hunger.

There is very little in common with most video games that adults are used to playing. Adult games are usually focused on points, passing levels, killing bad guys and defeating the game for the highest score possible. The graphic quality of Minecraft minecraft logois very poor compared to adult games, and for years the creation of the game was simply the work of one man. However, the game obviously does have something that is very attractive to these millions of young people around the world.

The game of Minecraft is much different: it is about building things and discovery. It is also about showing off the things that you’ve built and discovered to your friends. And that is the most important and notable difference that has driven the game into unprecedented popularity.

Rather than share something simple like project merely built from a Lego set, the game allows users to build entire cities upward and to dig underground too – hence the name Minecraft. After these complex worlds are constructed, other players can visit, and sometimes construct more on top of the world. This is pretty amazing-what it basically means is that people are playing a collaborative game, with friends and other people online. In fact there are millions of people playing the game.

There are very few adults who are interested at all in Minecraft. But some basic research reveals that millions of kids from around the world are actually playing the game obsessively. And that proves the point – collaborative building together, aka crowdsourcing, is a common activity for young people. Marketers need to understand that the world of on-line competition is slowly making way for the world of on-line collaboration. Setting a high score is no longer a brag – building a roller coaster in your virtual city can make you legendary. Kids get together, build shared worlds, and tell jokes that make no sense to their parents.

The pioneer spirit that drove America’s growth is being replaced by a new spirit of cooperation and community, especially amongst our youngest people. Watch your kids and you know why forward-thinking marketers are turning to the crowd.

Jonathan Frutkin
Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.

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