By Karl Dakin, Owner, Dakin Capital Guild LLC
Owners of startups and early-stage businesses can now look beyond traditional financing and equity sources when searching for growth capital. Changes in federal and state laws make it possible for everyone — not just the top three percent of income earners known as accredited investors — to invest in small businesses.
Crowdfunding is the activity of raising money from everyone. Organizations have used it since the late 1990s to obtain a large number of small donations for art and philanthropic projects. Rules adopted by the U.S. Securities and Exchange Commission (SEC) in 2015 allow the general public to participate in securities-based crowdfunding. Instead of receiving a tee shirt or other gift of appreciation for a donation, crowdfunding investors get equity in the company they help fund.
Raising money is a regulated activity — a sale of a security. To raise money in New Mexico, permission must be obtained from the Securities Division of the New Mexico Regulation and Licensing Department. An application must be submitted that provides information about who is raising money, how the money will be used, the character of the management team and the promises made to investors — including copies of the documents and materials used to attract them.
Companies are limited to raising $2,500,000 through crowdfunding from New Mexico residents, and different rules and restrictions apply if an organization wants to raise money from people outside of the state.
Partnering with the masses
Crowdfunding is not cheap, quick or easy, but it has advantages over angel or venture capital funding. Company owners don’t need to sell the business to create the ‘cash exit’ angels and institutional investors seek, and low- or no-profit margins may be acceptable to crowdfunding investors while the business is being built.
Crowdfunded money can be leveraged if it is part of a ‘capital stack’ — a combination of money from grants, equipment leasing, and debt financing. Like a cash deposit on a car or house that gives a borrower a lower interest rate and better loan terms, crowdfunded money is an asset that can help the company acquire at lower cost the largest portion of the money it needs.
Crowdfunding must be conducted on the internet, and many platforms claim to have a list of investors ready to make an investment. However, statistics indicate few people on investor lists actually invest and even fewer make a second investment. This means that companies seeking crowdfunding money must develop relationships with a large number of people: crowd-building. No crowd, no funding.
Investor due-diligence
Any investment can be risky, and investors should scrutinize a business before committing money to it. A scoring system that reflects the investor’s values and preferences can help him determine the best place for his money. Companies that are cash-flow positive or whose owners are known by the investor might be a good fit. When the investor is familiar with the company’s products and services, she can research market trends and conduct her own investigation.
As rules of the capital industry democratize the making and receipt of investments and increase funding of local companies that represent the core of our neighborhoods — Main Street businesses — it may be helpful to share resources in order to identify, qualify and engage people to become investors.
For more information, visit https://www.investor.gov/ or read the blog posts at https://www.linkedin.com/in/karldakin.
Finance New Mexico article 572
The scope of equity crowdfunding is much broader than what is described in this article, which gives the impression that the only way for New Mexico businesses to crowdfund is to go through the state. The whole purpose of crowdfunding is to maximize the “crowd” – the people who are willing to invest in a business. By limiting the pool of investors to New Mexico residents, businesses may not reach their potential. The pertinent New Mexico regulations were enacted well before the federal government enacted equity crowdfunding. In 2014 rules were proposed for New Mexico crowdfunding but were never implemented.
Nationally, the vast majority of equity crowdfunding is conducted via online portals regulated by the SEC. The article refers to this in a somewhat confusing manner in the sentence, “Crowdfunding must be conducted on the internet…”
The benefits of going this route are that the pool of potential investors is much larger. New Mexico is a poor state and the number of people who would invest in such undertakings is limited. The one drawback is that the SEC limits the raise in each campaign to $1,080,000. However, that amount is adequate for most New Mexico companies.
Your readers would benefit from a more balanced article that describes all the equity crowdfunding options available to New Mexico businesses.
I am a crowdfunding consultant and have given several local crowdfunding seminars sponsored by SCORE.