Month: September 2013

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.

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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.

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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.

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