Norm Brod­sky

These changes let small in­vestors fund small busi­nesses, like mine and yours

Inc. (USA) - - DEPARTMENTS CONTENTS - Norm Brod­sky Norm Brod­sky is a veteran entrepreneur. He is the co-au­thor of Street Smarts: An All-Pur­pose Tool Kit for En­trepreneurs. Fol­low him on Twit­ter: @norm­brod­sky.

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.

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