Treefort Music FestThe Boise, Idaho Popular Music and Arts Festival was due to open for the ninth year of a year two weeks after the COVID-19 crisis broke out. It had to be postponed first to September 2020 and then to 2021. It could have meant the death of the legendary community event. But Treefort still plans to move forward next year, thanks in part to a Crowdfunding Campaign that has raised more than $ 200,000 to date.
In contrast to the more popular versions of crowdfunding – reward-based or donation-based – Treefort uses crowdfunding with “equity” or “investment” via the platform Miracle Secure investment finance.
Treefort investors can purchase preferred stock with no dividends or voting rights. According to the Investor questions and answers Section of Treefort’s campaign page: “By the pandemic we were nearing our best year yet and were ready to take the next step towards profitability in order to generate more cash flow for the Rainy Day Fund and better pay our team living wages and expansion of the business model. “
“We really liked that people became owners,” says Eric Gilbert, co-founder and festival director. “We always had a certain amount of transparency with our community. This allowed us to increase transparency and involve more of the community. ”
3 reasons to consider crowdfunding
Crowdfunding has been a bright spot in an otherwise challenging fundraising and small business lending landscape that has recently been dominated by government loan programs such as the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL).
Many even before the coronavirus crisis small businesses failed due to lack of access to capital and / or poor cash flow. “COVID has made it insanely difficult to access capital,” says Sherwood Neiss, co-founder of Crowdfund Capital Advisors, claiming crowdfunding could be one of the best ways to get capital into the hands of small businesses that need it.
There are different types of crowdfunding. While reward-based crowdfunding (Think Kickstarter) and donation-based crowdfunding (Think GoFundMe) often get the most attention, small business regulation crowdfunding is not as well known or well known.
Regulation crowdfunding enables eligible companies to offer and sell securities through SEC-registered intermediaries (broker-dealers or financing portals). Currently, companies can raise a maximum aggregate amount of $ 1,070,000 through crowdfunding offers within 12 months. “Regulation Crowdfunding enables startups and small businesses to raise capital by selling their companies’ securities to the community,” said Abe Chu, co-founder and CMO of NextSeed. “These securities can be in the form of equity, debt, convertible, and other types.”
Regulation Crowdfunding is gaining momentum. For example, in July 2020, a historically low month for crowdfunding, there were “records for the highest number of offers in a single month, the highest number of commitments and the highest number of investors” Data from Crowdfund Capital Advisors. And “80% of the capital comes from friends, family, customers and followers.”
1. Customers become lawyers
One of the greatest advantages of regulation crowdfunding is the relationship founders build with supporters.
The winner of the third MasterChef season, cook Christine Ha, opened her first full restaurant area Xin Chao together with husband John Suh and boss Tony J. Nguyen. Your campaign on NextSeed raised its target of $ 107,000 from 93 investors in the first two hours. The money raised is in the form of a loan, which they paid back despite the challenging environment for restaurants.
“We had to rethink what consumers are looking for these days,” explains Ha. The restaurant has a large terrace that helps and they offer cheaper bites. “We had to keep adapting and changing, but our long-term vision is still the same.”
When asked about her crowdfunding experience, Ha repeatedly suggests that backers want to see the business succeed. “I think the real value is that the team of people who invest in your business really want to help you grow that business and have the floor,” she says.
Treeforts Gilbert agrees. “They will own our company,” he says. “I think that brings with it a higher level of commitment. You’re more likely to take care of it in the future. “
2. It‘is surprisingly diverse
As these examples have shown, regulation crowdfunding is not just for unique retail products or sophisticated biotech companies. A large number of companies also raise money this way.
Crowdfund Capital Advisors research found that the top industry groups in 2019 were “entertainment, application software, consumer products, restaurants, alcoholic beverages, real estate, biotechnology, computer hardware, education, utilities, personal services, advertising and marketing services, automobiles, consulting and banking. ”
That’s a pretty large number of companies, many of which probably wouldn’t get angel funding or venture capital. You might have trouble getting too traditional corporate finance without strong earnings, solid credit scores, and not in business for at least two years.
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3. It can be inexpensive
Raising funds through a crowdfunding campaign costs an average of about 5.3% of the amount raised, says Neiss. The cost can include the campaign video, company details, marketing costs, and legal and accounting fees. Once a platform is successful, an average success fee of 6% is charged.
In addition, investors expect a return. Some campaigns offer justice. others issue loans or offer convertible bonds. The Xin Chao campaign offered investors a gross annual interest rate of 17% payable monthly over a four-year period.
Even so, it can be cheaper than other types of fundraising and you won’t give up as much control as with angel funding or Venture capital. “If you were to make a similar offer on Regulation A, you could easily spend $ 100,000 on the same fees,” Neiss explains. “[Regulation Crowdfunding] scaled to the size of the offer. Other types of fundraising have fixed costs that are much higher. ”
With Regulation Crowdfunding, “companies on Main Street raise around $ 100,000,” adds Neiss, and “the average total is $ 250,000.”
Can US crowdfunding be the next incentive?
End of August 2020 Yelp reports 163,735 US companies on Yelp have been closed since the pandemic began as of March 1, 2020, and 60% of these are permanent closings. That’s nearly 100,000 businesses on Yelp that are closed and not planning to reopen. More companies are likely to join their ranks if there is no further stimulus round.
A few years ago Neiss walked through the halls of Congress to advocate the regulation of crowdfunding, which became legal in 2012 through the JOBS law. Now he’s a driving force behind the proposal Main Street Recovery Co-Investment Fund, This would be a model for the government to raise 100% of the funds (up to $ 250,000) raised by communities through these platforms. This approach would replicate a successful program in the UK and get local communities to support companies they believe in.
“What happens on Wall Street is not the same as on Main Street,” warns Neiss. “Joint ventures are facing the worst economic crisis in decades and are closing their doors. The stimulus programs the government put in place for Main Street are failing. The money they allocated is still there. This program would allow the government to immediately deploy capital to businesses that need it to survive using pre-existing policies and regulations, scalable technology platforms, and real-time data feedback that allows the government to see how the program is working. “
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