While well intentioned, a significant portion of the first round of PPP funds did not reach Main Street businesses. We need to expand a financing service already up and running in the US since 2016 that is 1) targeted at true small businesses;  2) fast – that can be rolled out in 60 days or less; and 3) harnesses communities in partnership with the government to reopen businesses that we all count on in our daily lives. How do we know it will work? The British government has run a similar program for the last 4 years with great success and no fraud.

The Federal Government can form a partnership with online investment platforms to leverage the power of Regulation Crowdfunding (Reg CF) to immediately launch a $62.5 billion dollar co-investment fund. Reg CF allows small businesses to raise money from any American as long as companies provide disclosures and leverage platforms that are registered with the Securities and Exchange Commission (SEC). This tool has been in the works for 4 years now and there has been no fraud. Most importantly, it supports small businesses in communities all across the United States in over 80 industries and supplies critically important jobs.

Why $62.5 Billion? Consider this:

1. According to data from companies that have leveraged Reg CF, the average small business employs around 7 individuals.
2. Between independent contractors and support vendors that provide critical products and services an additional 49 employees are supported (according to data from Paychex).
3. This is a total of 54 direct and indirect jobs created and supported by each small business.
4. If there are 27 million people that filed for unemployment, that’s 500,000 business affected (27 million unemployed / 54 jobs supported per business).
5. If we assume on average they need $250,000 cash to get back up and running, the crowd comes in with $125,000 and the government matches up to $125,000 that the crowd invested. That’s $62.5 billion from the local community ($125,000 * $500,000 businesses) and $62.5 billion from the government.
6. Together with the crowd that would be a $125 Billion dollar investment into local communities. These businesses would re-employ those individuals that lost their jobs. The money would reinvigorate these local economies.
7. The Crowd and government could be repaid in full, with interest, over an agreed upon period of time.

How would it work?
A co-investment debt fund could engage local customers/citizens to invest in local businesses they use and trust. These lenders would have a vested interest in the outcome of the business and hence would be frequent users and brand ambassadors for the business. By investing $1 from the fund for every $1 that came from the crowd, the cash infusion would double and the oversight would be greater than traditional debt investments from banks.

This type of program could be implemented fairly quickly. Since the technology and regulation is already in place and operating, it could be immediately launched. Since the platforms that exist are already registered with the Securities and Exchange Commission as well as FINRA these platforms are known entities. The regulation already requires that companies seeking funds have disclosures necessary to inform investors so investors aren’t making blind decisions. And the framework requires that companies exceed minimum funding targets that they set, so if a company fails to reach its minimum funding target, no money is transferred to them and the crowd doesn’t lose. A co-investment fund could start as a trial and then expand if successful, thus mitigating risk and also increase speed to market.

Strategy 
The Federal government would work with online investment platforms to co-lend to America’s small businesses and entrepreneurs. The loans could be up to $500,000 with the crowd able to fund up to $250,000 and the Federal Government to match the loans, dollar for dollar, up to $250,000. (A majority of the loans would be less than $500,000 … with the mean loan being around $250,000 with half coming from the local community).

In 2012, the JOBS Act was enacted on a bipartisan basis to create new sources of funding for small businesses and entrepreneurs. There are now over 50 online funding platforms that  enable entrepreneurs and small businesses to raise money from local investors, customers, and fans. These funding portals enable businesses to raise money via debt or equity (stock) instruments. The platforms are licensed and regulated by the SEC and FINRA. This provides infrastructure to activate this program immediately.

Investment Instruments Available
While there is no limit on the type of securities a company may issue under Reg CF, it is suggested that initially, bonds, debt and revenue-based financing vehicles would be the types of securities for this pilot program.

Repayment Process
This program would be similar in structure to the PPP program, but more targeted to small businesses.

• The maximum funding is to be determined by the Federal Government. If the pilot program is deemed successful, it can choose to expand the program over time.
• The Federal Government could choose to forgive part or all of their portion of the funding.
• Funds are repaid in full, first to private investors.
• The Federal Government is repaid after all private investors have been repaid.
• The Federal Government can choose to forgive part or all of the loans.  Examples would be to forgive 50% or 75% of the government’s portion of the loan, providing the private sector has been fully repaid on time.

Oversight
As with any type of financing, oversight is critical. The following key levers will provide oversight for the program:

1. Fund manager provides oversight on fund operations and works with the fund administrator to deliver periodic reporting to the appropriate government agency on fund performance and operations.
2. Fund managers engage with platforms to provide oversight.
3. Portals provide oversight on individual company diligence.
4. Community investors provide oversight on company performance.

We need bold action now.  This program can quickly deliver capital to the small businesses that puts millions of Americans back to work, and delivers services that everyone will depend on to start feeling some sense of normalcy back in our lives.

For details of a draft plan, contact us.