Thursday, April 14, 2022

Crowdfunding the Entrepreneurial Spirit!

Author: Patricia Garrigner-Strickland

We had a bit of a snowy winter here in Kansas City and after every storm, I had at least one teenage boy ring my doorbell and ask to shovel off my driveway (for a price). On a recent trip to the grocery store, I encountered a group of Girl Scouts selling cookies (I bought three boxes of Thin Mints and ate an entire sleeve on my way home). A new client, a photographer and graphic designer, is looking to expand her business to include art shows and more event bookings. Another client is looking to develop an interactive video game based on martial arts instruction.

It’s out there everywhere – that entrepreneurial spirit that embraces hard work, new ideas, and taking action to get where you want to be. Sounds great, right? But while the teenage driveway clearers can launch their business with a couple of snow shovels, and tenacious Girl Scouts theirs with maybe a folding table and a little enthusiasm, successful entrepreneurs in the grown-up world need something else – capital. Wealthy relatives and Shark Tank appearances are a possibility, but start-up businesses can also consider crowdfunding to get off the ground.

In general, seeking investors in your company – that is, selling stock (as well as other types of equity, like LLC interests, or debt, like convertible notes) – requires that you either register the stock with the SEC, or sell under an exemption to the registration requirements. For start-ups (and everyone else for that matter), the registration process is expensive, time-consuming, and complex, and many of the available exemptions work best when you are trying to raise money from wealthy, sophisticated investors with whom you already have a relationship – a process likely out of reach for very early-stage, small companies. Alternatively, crowdfunding offers a way to raise money from a large pool of investors, often in small amounts, without the burden of registration or the requirement that you already know a bunch of rich investors.

The first crowdfunding rules, adopted by the SEC in 2015 as part of the JOBS Act, permitted companies to raise up to $1.07 million from the sale of securities to the general public. The securities could only be offered through SEC-approved “funding portals,” and an issuing company was required to file pre-sale offering documents with the SEC, as well as annual reports and financial statements providing updated information about the company’s business and finances. The original rules were generally viewed as a lot of work and expense to raise a pretty small amount of money. In addition, an issuer raising capital via crowdfunding might find itself with literally hundreds of stockholders on its cap table.

Despite some of the impracticalities of the rules, crowdfunding continued to grow in popularity and in 2020, the SEC adopted amendments (effective March 2021) which eased some of the burdens of raising capital in this manner. Key among these amendments was the increase in the amount of capital that can be raised to $5 million (that’s real money!), and the ability for a number of investors to combine their investments in a single “special purpose vehicle” that will in turn invest in the crowdfunding issuer. No more dealing with hundreds of investors! It’s not all free money, however – crowdfunding offerings must still be conducted through approved portals, which will typically charge a fee based on the amount raised. And you’ll still have to file initial offering documents and annual reports with the SEC.

The popularity and use of crowdfunding continues to rise. In 2020, crowdfunding campaigns raised approximately $239 million, which is projected to grow to $300 billion by 2030. Crowdfunding is seen as a way creative and diverse companies can access the capital they need to grow, as well as opening up investment opportunities to those who may not meet the net worth and other standards required for blue-chip investments.

We were recently fortunate to work with a start-up women’s soccer team on a crowdfunding equity raise. Small investors from the community flocked to support the team and claim a piece of ownership! And in that spirit of entrepreneurial enthusiasm, my 13-year-old soccer-loving niece bought four shares and is now the part owner of a professional sports team!

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