Tool Kit: Venture Entrepreneurs Should Consider Regulation Crowdfunding
- Written by CJ Connell
- Published in Opinion
- 0 comments
Regulation crowdfunding can help independent businesses access capital when they need it most
The Federal Reserve’s aggressive interest rate increases are making traditional loans too expensive for many independent businesses, impacting Main Streets and weighing on economic growth.
In this credit environment, venture entrepreneurs should consider an innovative and relatively new alternative to accessing growth capital: regulation crowdfunding. This approach allows a company to issue securities, stocks and bonds directly to the market. It generally offers lower costs and better terms than traditional broker dealers, angel investors or venture capital funds.
Created in Title III of the JOBS Act of 2012, regulation crowdfunding puts businesses in charge of the funding process, not bankers. It empowers entrepreneurs to offer securities, stocks or bonds to the public directly over the internet through specialized websites called portals. It provides access to capital for independent businesses and opens early-stage investment opportunities for ordinary investors. It’s perhaps the most significant change in business-financing regulations since 1933 and 1934, when the SEC and the “private equity” structure were created.
Unfortunately, this innovative financing option has been hampered by regulatory challenges, including strict limits on its use. But in the spring of 2021, the SEC released new rules boosting the maximum amount small businesses can raise to $5 million in a 12-month period, from $1.07 million, vastly expanding the potential for growth businesses.
Since the SEC’s update, regulation crowdfunding investments have more than doubled. Meanwhile, traditional venture funding struggles.
The SEC’s 2021 changes also ended limits on accredited investors and reduced limitations on nonaccredited investors. Now Americans who earn less than $107,000 per year can participate in these ventures by making annual crowdfunding investments of either $2,200 or 5% of their net worth, whichever is greater. This change increases investment opportunities for ordinary Americans looking for venture capital potential returns. (Disclaimer: Regulation crowdfunding investments are risky and should be limited to investment funds you are willing to lose.)
With well over a billion dollars raised by small businesses since its inception, regulation crowdfunding has many success stories. One notable example is the Bay Area Ranchers Co-op, created by a group of San Francisco Bay Area ranchers. At the end of 2019, Bay Area ranchers faced a major problem: The only local USDA meat- processing facility available decided to curtail its services, leaving many small ranchers facing an end to their meat-production operations. In response, a group of 16 ranchers banded together to create the BAR-C in hopes of building their own USDA meat-processing facility.
Under the guidance of their law firm, Cutting Edge Capital of Oakland, Calif., they used regulation crowdfunding to raise $302,000 of the $1.2 million needed to start their own meat-processing plant in Sonoma County, which opened earlier this year. Since then, the co-op has increased to 41 ranchers, benefiting the entire Bay Area with locally sourced, fresh and safe meat.
The small-business advocacy group Job Creators Network recently released a policy playbook to help jump-start the economy. One of the provisions calls for boosting access to capital options for small businesses. Such grassroots efforts to bolster access to capital for independent businesses can help make regulation crowdfunding mainstream and empower many more small businesses to replicate BAR-C’s success.
Regulation crowdfunding is at the top of the list of innovative new ways to deliver alternative funding options to entrepreneurs at this time when they need it most.
CJ Connell is a retired stockbroker at Morgan Stanley; now a farmer and the owner of High Desert Herb & Spice Co. in Oregon; the author of a forthcoming book on the investment crowdfunding revolution; and a partner of Job Creators Network Foundation.