Blog by: Kathleen Minogue of CROWDFUND BETTER “EQUITY CROWDFUNDING FOR THE 99%)
(Part 2 of a series on recent changes in the crowdfunding laws)
Eighty-two years ago our government sought to protect us from snake oil salesman and hustlers trying to sell us blue sky. While well-intended in a time when communication was limited and our ability to get information outside of our immediate community required an incredible amount of time and research, technology has given us a gift of transparency that makes these laws an antique of another time. The laws inadvertently excluded the 99% from the ability to directly impact the course of emerging businesses in this country and to benefit from their success. The JOBS Act of 2012 sought to remedy many of the antiquated laws remaining on the books, and after 2 1/2 years of scrutiny, the SEC has finally published the rules for Title III that will begin to enable the 99% to act as an aggregate with the same powerful financial influence as private equity and venture capital investors.
From my vantage point in the world of crowdfunding, this new equity crowdfunding environment will function less like accredited equity crowdfunding and more like its sibling in the rewards crowdfunding space. First, while traditional equity investing focuses primarily on financial profits, these new unaccredited investors will want to see other profits produced alongside money. Innovation, as well as the health, safety, and sustainability of their immediate communities and the world at large, will play a significant factor. Second, the most successful unaccredited equity campaigns will look a lot like the most successful rewards crowdfunding campaigns. Building relationships with your audience over time prior to launch will be the key to success, as well as reaching out with a clear call to action to create an emotional connection between your business and a potential investor.
The models that will help show us the way already exist. All we need to do is look across the pond. The UK’s most successful unaccredited equity campaign is not in the technology sector, but in food, specifically the craft brewing industry. Securities law in the UK has allowed for the equivalent of our Title III unaccredited equity crowdfunding since its inception. Brewdog, a punk brewery based in Scotland, is the phenom of the unaccredited equity world. They have so far raised the equivalent of $21.5 million from over 35,000 investors who needed less than $130 to become a shareholder.
How did Brewdog reach 35,000 investors? The answer: incrementally. Their first equity raise attracted over 1,300 fans to become investors. In addition to voting shares, these investor-backers were given lifetime discounts on Brewdog products, an invitation to the company general meeting, and most importantly, the ability to connect with others like themselves who were attracted to the punk culture at the heart of Brewdog. Even their annual general meeting reflects their culture. It is not an old-fashion board room experience, but rather a punk beer festival that gathers their community together to celebrate. Brewdog has since launched a series of equity rounds to reach their current numbers, each one leveraging on the strength of their existing relationships with their customers. They have also been strategic with their marketing efforts, which are designed to help the company locate and connect with individuals who align with their values and mission through the development of a lifestyle brand.
What does this say about what’s possible for food businesses like your own? Although the $21.5 million dollar funding amount is not realistic, or even desireable, for your average unaccredited equity crowdfunding food campaign, the Brewdog example highlights the desire and willingness of everyday people to get behind businesses that are personal, local, and sustainable if their mission aligns with their own. Small amounts of money from the crowd will function in aggregate to give financial backing to deliberate growth businesses that would otherwise be overlooked by accredited investors looking for 2.5-10x return on investment (ROI).
Will equity crowdfunding for unaccredited investors be the right funding solution for your food business? There are still a lot of questions that will need to be answered about how it will function. One thing to consider is that the SEC rules in the US require businesses seeking funding to make significant financial investments in due diligence and financial reporting. This may be a barrier to entry. The best thing you can do is listen and learn from people who are studying the new rules to understand the possibilities and the challenges. Then in May 2016 when the Title III equity rules come into effect, you will have more choices for how to help your business acquire the funding it needs to grow thoughtfully and deliberately over time.
Founder: Crowdfund Better