Recently passed “crowdfunding” legislation in Arizona empowers a new breed of investors and makes it easier for small businesses and entrepreneurs to get access to capital.
Crowdfunding has surged with the popularity of websites like GoFundMe, Kickstarter and IndieGoGo. These sites have been a great boon to many small businesses and entrepreneurs who want to leverage the power of the crowd to raise money for their product, services or technologies.
But such platforms have primarily been donation- and reward-based, and have not enabled small investors the chance to own equity in the company they are putting their cash into.
That’s all changed now with the passing of a new bill in Arizona in April, which allows companies to raise up to $2.5 million from the general public through “equity crowdfunding,” and also enabling non-accredited investors to give up to $10,000 each, in return for a slice of the company.
The concept of equity crowdfunding adds another funding option for small businesses and entrepreneurs in Arizona, giving them wider access to capital. Before, they would have relied on banks, family and friends or angel investors.
This type of equity-based crowdfunding grew considerably worldwide in 2014, up 182 percent to $1.1 billion, according to market research firm massolution, which specializes in crowdsourcing and crowdfunding. This was part of a $16.2 billion total market in 2014, and expected to more than double to $34.4 billion in 2015. This market figure is made up of funding via several different models for crowdfunding platforms, which include lending, equity, royalty, donation, and reward-based.
According to Arizona-based attorney Jonathan Frutkin, author of the book, “Equity Crowdfunding: Transforming Customers into Loyal Owners”, the new bill changes prior law that only allowed “accredited shareholders” to become shareholders in privately-owned companies. Accredited investors are people who make at least $200,000 annually and have a net worth, exclusive of their home, of at least $1 million. The new bill will allow Arizona residents to invest up to $10,000 in a local business, no matter what their income or net worth is.
Frutkin said in an earlier report, “I think the Arizona law is a great step forward that shows that we really want to find ways for Arizona businesses to be part of this growing trend of creating capital from our community and our customers.”
While crowdfunding has been heralded as an innovative new way for smaller companies to raise capital, it does come with a note of caution from the investor and legal community.
One is the possibility that companies don’t make it, and the small investor should be prepared to lose money. Many professional angel investors and venture capitalists carry out significant due diligence on the companies they invest in, and are often prepared for at least seven out of 10 of their investments to fail (they rely on the two or three out of 10 that are a success to make up for the failures).
In addition, from the company’s point of view, the ability to raise money from the crowd means that all of a sudden you might have hundreds or thousands of investors. That means you need to have a good investor relations program that can handle the communications with more than just a handful of large investors.
Nevertheless, the passing of the new bill in Arizona opens up a whole new world of finance options for businesses and startups looking for money – whether it is to validate a concept, product development, production, marketing or simply working capital. This may be an interim step prior to an angel investment round or venture capital round. Whatever the reason, entrepreneurs in Arizona now have an additional route for access to finance, and the general public have the opportunity to get in on the ground floor and invest in companies which they believe might take off.