Norm Brodsky
These changes let small investors fund small businesses, like mine and yours
Taking advantage of crowdfunding’s new rules
THE CROWDFUNDING PHENOMENON has been fascinating to watch, but it never seemed relevant to any of my businesses, until now. There’s a new form of crowdfunding being led by companies such as GrowthFountain that has been made possible by changes in investment rules that the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (Finra) enacted in May 2016. The new rules essentially allow anyone to invest in a small business and get equity in return, up to certain limits. Just as important, you can now use crowdfunding to solicit loans, and that really interests me. I may do this to fund the expansion of the Kobeyaki chain of Japanese fast-casual restaurants that I own with three partners.
I ran into GrowthFountain CEO Ken Staut at a meeting of the North Brooklyn Chamber of Commerce. OK, it wasn’t a coincidence: My wife, Elaine, is the chamber’s chair. Staut’s company is one of about 20 so-called Reg CF portals (others include NextSeed and Sprowtt Crowdfunding), and it has its own twist on crowdfunding. For a registration fee of $500, you gain access to a variety of resources, including someone to do all the regulatory paperwork needed to launch an equity crowdfunding round. If your company meets its minimum fundraising goal, GrowthFountain charges 6 percent of the amount raised. If your issue doesn’t fly, you’re out only the $500; investors get their money back. In effect, GrowthFountain has streamlined and updated the friends-and-family phase of fundraising that most entrepreneurs go through to obtain capital to start or expand a business. This was the promise of crowdfunding from the beginning, but it was limited to the wealthy until the SEC and Finra implemented Title III of the JOBS (Jumpstart Our Business Startups) Act of 2012. Before, you had to be “accredited” to receive equity, as opposed to products or gifts à la Kickstarter or Indiegogo, in return for an investment. Accredited meant you had to have earned more than $200,000 annually for at least two years ($300,000 for couples) and have a net worth greater than $1 million, not including your primary residence. Hardly democratic. Now you can invest up to $2,200 or 5 percent of your net income, whichever is greater, and get equity in return.
I’m not interested in raising equity; remember, equity is more expensive than debt, and can be very expensive in the long run. But GrowthFountain also has a program that will let me borrow up to $1 million under a clever revenuesharing agreement designed with local businesses in mind. You establish a repayment pool, pledging 5 percent of your annual sales to repay your lenders. After one year, when your business is (presumably) up and running, you start repaying investors out of the revenue pool until they’ve earned back 2x on their investment. This setup allows you to maintain a pristine capital structure in case you plan on raising private equity at a later date. And you don’t have to issue the K-1 tax reports typically required of partnerships and S corporations.
It occurred to me that my Kobeyaki partners and I could use this option with new restaurants— perhaps even the one we’re planning to open in Jersey City, New Jersey. We have some very loyal customers who might be interested in such a revenue-sharing deal. We also have a track record; we can forecast quite accurately how well our new restaurants will do. This could be a great opportunity to build our community and reward our best customers for their loyalty. Maybe we should put it on the menu: You want a side of debt with that Kobe burger? I’ll let you know how it goes.