Crowdfunding success indicates small businesses and startups are worthy of government matchmaking program
Community-driven investments have funded small businesses and local startups across the United States. Since 2016, half a billion dollars has been raised through crowdfunding investments, generating $ 2 billion in economic activity and supporting 100,000 jobs.
According to By-Law on Crowdfunding by Congressional District: A report sheet by Crowdfund Capital Advisors, Congress can encourage this further by creating the Main Street Recovery Co-Investment Fund. The UK has already done this with great success. It worked so well that the Fund was increased twice, notably to support small businesses affected by the coronavirus pandemic.
A critical lesson from the 2007-2009 financial crisis is that access to capital for small businesses is important. Small businesses have been hit hardest than big business through the Great Recession. During and for a period after the financial crisis (2009-2013), big banks reduced small business loans by 20%. Yet they increased lending to large corporations by 4%. During the Covid-19 crisis, access to finance for small businesses is more critical than ever.
A new category of funding, crowdfunding, has been created to address part of this need. This article focuses on crowdfunding investment and its three forms enacted by the Employment Act, which allow companies to raise funds through online platforms:
- Regulatory crowdfunding (Reg CF) allows companies to raise around $ 1 million per year from middle and wealthy (accredited) investors.
- Rule 506 of Regulation D allows issuers to raise funds from high net worth investors.
- Regulation A + (Reg A +) allows issuers to raise up to $ 50 million from middle and wealthy investors, provided the offer is qualified by the SEC.
Due to the Covid-19 crisis, the SEC announced an update to certain Reg CF rules, including lift the cap on how much a business can raise from $ 1 million to $ 5 million. Separately, he recommended making this permanent with others rules.
Even in 2012, Congress agreed on little, but they were successful in raising capital for small businesses and startups. An overwhelming bipartisan majority passed the employment law. It aimed to encourage financing for small businesses by relaxing many national securities regulations. It took four years to gradually introduce 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 the co-founder of FlavorRX, which offers flavored medicines that children are more likely to take. “Our phone went off the hook when mothers and fathers asked to invest in the business,” Neiss said. If you weren’t rich, there was no way, as the average Jane or Joe, to invest in a private business. He sold the company in 2007.
When small businesses struggled to obtain financing during and after the Great Recession, Neiss wondered, “What if there is a way to turn customers into investors? This would require changes to the SEC’s investor laws. Naive about the way laws are made in Washington, Neiss and Best enlisted 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 fundraise from the masses to invest in local businesses, especially those owned by minorities and female entrepreneurs.
Some were worried about fraud and denounced this new form of financing. Despite this, on May 16, 2016, Reg CF was the last of the three forms of investment crowdfunding to be adopted. To date, there has been NO FRAUD, which proves that the opponents are wrong. You can fool investors one by one, but it’s hard to fool thousands of investors, Neiss commented. It also turns out that the the crowd chooses the winners as well as, if not better, than professionals, venture capitalists.
Thanks to these new forms of crowdfunding investments, 3,100 offers of shares of more than 2,600 companies in more than 850 jurisdictions across the country were made. Anecdotal evidence reveals that businesses run by minorities and women are successful in raising funds through Reg CF. I have written about a few founders who have raised Reg CF funds, including Liza Velarde by Delee, Max Tuchman from Caribu, Amber mcdonald Indemnity, and Desiree Vargas Wrigley from Pearachute. “There is a disconnect between what is happening in our local communities and what is catching DC’s attention,” said Neiss.
During the pandemic, Reg CF grew up. “[In July and August,] there were over 40,000 investors investing in local businesses every month, ”said Neiss. The vast majority of dollars (80%) come from high net worth investors. “There is massive interest from investors in supporting these companies. $ 25 million has been raised, nearly three times the amount raised six months ago, before the crisis. Major industries include some of the hardest hit by the coronavirus: restaurants and personal services.
Interestingly, 95% of congressional districts led by women had crowdfunding offers and 93% of districts led by minorities. Having role models in leadership positions, not just as entrepreneurs, is especially important for women and minorities, Kerrigan commented. “It’s very stimulating.”
“The the recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to support the economy until it is clearly out of the woods, ”Federal Reserve Chairman Jerome Powell said at The Wall Street Journal. With the Main Street Recovery Co-Investment Fund, the federal government would match 100% of the debt and equity investments raised from communities by high-growth small businesses through SEC-regulated crowdfunding platforms. Matching funds are capped at $ 250,000 per business. A $ 20 billion fund would impact more than 100,000 small businesses and startups.
Community investors have a vested interest in the success of the business and are the users and traders of those businesses. Loans or equity investments are repaid first to community investors, followed by the government. Data on the 100 performance indicators of these companies is 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.
Crowdfunding for investments paves the way for a broader and more inclusive recovery. It could do more. The Main Street Recovery Co-Investment Fund not only provides additional capital to worthy businesses based on client investments, but it would also stimulate interest and investment from others unfamiliar with crowdfunding.
How will you show your support for the creation of the Main Street Fund?