The following is a reprint of a story that ran in Forbes this morning. You can find the original here.
By: Geri Stengel
Community-focused investing has funded local small businesses and startups across the US. Since 2016, half a billion dollars has been raised from investment crowdfunding, generating $2 billion in economic activity and supporting 100,000 jobs.
According to Regulation Crowdfunding by Congressional District: A Report Card by Crowdfund Capital Advisors, Congress can encourage this more by creating the Main Street Recovery Co-Investment Fund. The United Kingdom has already done this to great success. It worked so well that Fund was re-upped twice, including to support small businesses impacted by the coronavirus pandemic.
A critical lesson from the 2007-2009 financial crisis was that access to capital for small businesses matters. Small businesses were hit harder than large companies by the Great Recession. During and for a period after the financial crisis (2009-2013), big banks reduced lending to small businesses by 20%. Still, they increased loans to larger companies by 4%. During the Covid-19 crisis, access to financing for small businesses is more critical than ever before.
A new category of financing—crowdfunding—was created to meet some of this need. This article is focused on investment crowdfunding and its three forms enacted by the JOBS Act, which allow businesses to raise money via online platforms:
- Regulation Crowdfunding (Reg CF) enables companies to raise about $1 million per year from both average and wealthy (accredited) investors.
- Rule 506 of Regulation D enables issuers to raise money from wealthy investors.
- Regulation A+ (Reg A+) enables issuers to raise up to $50 million from both average and wealthy investors provided that the offering is qualified by the SEC.
Due to the Covid-19 Crisis, the SEC has announced an update of some Reg CF rules, including lifting the cap on how much a company can raise from $1 million to $5 million. Separately, it has recommended making this permanent along with other rules.
Even in 2012, Congress agreed on little, but getting capital to small businesses and startups was something they did. A bipartisan, overwhelming majority passed the JOBS Act. It was intended to encourage funding of small businesses by easing many of the country’s securities regulations. It took four years to phase-in the laws for all three forms of investment.
Sherwood Neiss and his partner, Jason Best, of Crowdfund Capital Advisors, are leading the charge for Reg CF. Neiss is a co-founder of FlavorRX, which offers flavored medicine that kids are more likely to take. “Our phone rang off the hook from mothers and fathers asking to invest in the company,” said Neiss. If you weren’t rich, there was no way, as an average Jane or Joe, to invest in a private company. He sold the company in 2007.
When small businesses struggled to get financing during and after the Great Recession, Neiss asked himself, “What if there was a way to turn customers into investors?” This would require changes to SEC investor laws. Naive to the way laws are made in DC, Neiss and Best sought the help of Karen Kerrigan, president and CEO of the Small Business and Entrepreneurship Council. It advances policies and initiatives that encourage entrepreneurship and small business growth. Together, they walked the halls of Congress, pushing the idea that you could raise money from the masses to invest in local businesses, particularly those owned by minorities and women entrepreneurs.
Some were concerned about fraud and dissed this new form of financing. Even so, on May 16, 2016, Reg CF was the last of the three forms of investment crowdfunding to be enacted. To date, there has been NO FRAUD, proving naysayers wrong. You can fool investors one by one, but it’s hard to pull the wool over thousands of investors’ eyes, commented Neiss. It also turns out that the crowd picks winners as well as, if not better than, the professionals—venture capitalists.
Using these new forms of investment crowdfunding, 3,100 stock offerings from 2,600 plus companies from over 850 jurisdictions across the country have been made. Anecdotal evidence finds minority- and women-led ventures have success raising money through Reg CF. I’ve written about a few female founders who have raised Reg CF funding, including Liza Velarde of Delee, Max Tuchman of Caribu, Amber McDonald of Indemnis, and Desiree Vargas Wrigley of Pearachute. “There is a disconnect between what’s happening in our local communities and what is getting DC’s attention,” said Neiss.
During the pandemic, Reg CF has grown. “[In July and August,] there were over 40,000 investors investing each month in local businesses,” said Neiss. The vast majority of the dollars—80%—comes from wealthy investors. “There’s massive interest from investors in supporting these businesses.” For example, this past August, $25 million was raised—nearly three times the amount raised six months ago, before the crisis. Top industries include a couple of the hardest hit by the coronavirus—restaurants and personal services.
Interestingly, 95% of women-led congressional districts had investment crowdfunding offerings and 93% of minority-led districts. Having role models in leadership positions, not just as entrepreneurs, is particularly important for women and minorities, commented Kerrigan. “It’s very empowering.”
“The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods,” said Jerome Powell, chairman of the Federal Reserve in The Wall Street Journal. With the Main Street Recovery Co-Investment Fund, the federal government would match 100% of debt and equity investments raised from communities by small and high-growth businesses via SEC-regulated crowdfunding platforms. Matching funds are capped at $250,000 per business. A $20 billion fund would impact over 100,000 small businesses and startups.
Community investors have a vested interest in the business’s success and are the users and marketers for these businesses. Loans or equity investments are paid back first to community investors, followed by the government. Data on these companies’ 100 performance metrics are captured and updated daily and reported to the SEC, Bloomberg, and other entities. The database can be provided to Congress, the Treasury, and the SEC to provide transparency and oversight.
Investment crowdfunding is showing the way to a broader, more inclusive recovery. It could do more. The Main Street Recovery Co-Investment Fund not only provides additional capital to worthy companies based on the investment dollars of customers, but it would spur further interest and investments from others who don’t know about investment crowdfunding.
How will you show your support for the creation of the Main Street Fund?
Sherwood Neiss, is a Principal at Crowdfund Capital Advisors and a Partner at Crowd Capital Ventures. He is an expert at building successful businesses. As a 3-time INC500 winner whose former company won E&Y’s Entrepreneur of the Year, Sherwood understands the keys to entrepreneurial success from concept to company to sale.
Sydney Armani has more than twenty-five years’ experience in Silicon Valley, active in the community as an entrepreneur as well as an investor.
It is important to show the wide range of industries that are represented. There are over 430 industries represented by issuers using Regulation Crowdfunding. The chart to the right looks at the top 15. It shows is that there is broad appeal by both issuers in a variety of industries and investors interested in backing these enterprises. The two things we expect to change over the next year, given the SEC changes, is more real estate offerings and more medium sized issuers entering the market. The $1 million cap limited many developers/issuers from leveraging money from Reg CF investors, increasing the cap to $5 million means more small/medium sized developers/issuers and more investors will be leveraging Reg CF for funds and diversified investment opportunities. It also means that firms with Revenues between $10M and $50M will find Reg CF more appealing as a mechanism for raising funds. It will be a cheaper alternative than hiring an investment bank and a faster method as the time to raise funds averages around 90 days.
As you can see the number of offerings also increased after a brief downturn in February and March. July saw the highest number of offerings at 128 since Regulation Crowdfunding began and October saw the second highest number of offerings at 115. With the changes made by the SEC, this means that issuers that need to raise in excess of $1 million but less than $5 million will be turning online for funding.
(chart right), we see the following year over year results. While the number of offerings between 2018 and 2019 was down year over year for the majority of the year, despite COVID, the number of offerings is up from 2019 to 2020, with June and July seeing the highest percent increase. We expect that the number of issuers leveraging Regulation Crowdfunding will easily double in this next year alone.
