Nov 07, 2020

How Crowdfunding Can Help a Small Business ‘Go Public’

Ever dream of your small business going public on a stock exchange, selling stock to investors, and raising more than a million dollars in capital? That dream could be easier to achieve than you might realize.

If you’ve heard of Kickstarter, GoFundMe, or IndieGoGo, you’re familiar with the concept of crowdfunding. Bootstrapped businesses with new creative ideas, or nonprofits, or just regular people with staggering medical bills sometimes turn to their core supporters, customers, or friends to raise money for some particular financial need. 

But there’s another form of crowdfunding that’s more institutionally advanced and can help you raise funding for your small business to actually go public on an accredited stock exchange.  

A relatively new 2012 law called the Jumpstart Our Business Startups (JOBS) Act allows small businesses to use crowdfunding platforms to launch “mini-IPOs” on the stock market. 

The JOBS Act has been a huge success. A Forbes analysis notes that “Since 2016, half a billion dollars has been raised from investment crowdfunding, generating $2 billion in economic activity and supporting 100,000 jobs.”

These low-cost investment opportunities allow your business to launch on a stock exchange along what are sometimes unflatteringly called ”penny stocks.” Investors in these stock exchanges prefer to call them “small-cap stocks” or “OTC stocks,” meaning Over The Counter stocks.

But plenty of people have become billionaires thanks to penny stock offerings. And an infusion of investor cash could be just what your business needs in the current challenging environment when your sales may be down.

Penny Stocks Have Created Billionaires 

Both Apple and Amazon were once penny stocks. Penny stocks don’t really cost a penny—“penny stock” is a casual investment industry term for a stock that trades at a price of $5 or less per share. 

And that definition applies to both Apple and Amazon. Apple stock traded for only 13 cents a share when it went public in 1980, adjusting for subsequent stock splits (It’s now well over $100 a share). Amazon’s 1997 IPO had shares trading for only $1.73, adjusting for splits, and is currently trading for more than $3,000 per share.

What Are Penny Stocks?

You may recall the 2013 movie The Wolf of Wall Street, where investment industry con artists started on the penny stock market and worked their schemes up to the major stock exchanges. Yes, there are a few bad players on the penny stock markets, just as there are on the major stock markets. But the majority of investment operators on these exchanges have historically been reputable operators, and most still are.

If you think your business has enough friends, family, and fans who could fund a multiple-hundred-thousand dollar crowdfunding campaign, you could go public with a “mini-IPO” and trade on a stock market. That’s a real milestone for a small business and a potential goldmine for early casual investors who may be getting in on something special.

There are 2 distinct legal types of crowdfunded IPOs. One lets your business raise $1 million a year from small investors. The other allows your small business to raise up to $50 million in investment money.

Both come with some pretty demanding financial disclosure requirements, which we’ll explain below. But if your business has enough loyal fans or potential investors to catapult you to the next level, you may want to consider these crowdfunding investment options.   

Regulation Crowdfunding (Reg CF) Investment

Regulation Crowdfunding, called “Reg CF” in shorthand, allows your small business to raise about $1 million per year from small investors. But there are very strict accounting requirements, and of course, laws insisting that investors receive their agreed-upon share of profits.

Your small business must meet the following regulatory requirements for a Reg CF offering:

A Reg CF offering allows your business to raise a maximum of $1.07 million a year. Another crowdfunded stock offering allows for much higher sums.

Regulation A (Reg A) Investment

A crowdfunded stock offering classification called Regulation A (or “Reg A”) enables an emerging small business to raise $20 million a year—or even as much as $50 million per year—in investor stock. 

There are, of course, very detailed Reg A reporting and eligibility requirements. This level of investment comes with obligations to document your due diligence on anti-fraud provisions, accredited investor verification, and state legal requirements.

Crowdfunding Could Get Matching Federal Funds

Forbes recently published an influential editorial arguing that these crowdfunding campaigns should receive matching federal funds on top of what they receive through their traditional investors. Forbes’ work cites a proposed Main Street Recovery Co-Investment Fund for which crowdfunding platforms could be a big financial driver of an American economic recovery.

“The federal government would match 100% of debt and equity investments raised from communities by small and high-growth businesses via SEC-regulated crowdfunding platforms,” Forbes writes, spelling out an elaborate but potentially game-changing government investment in success. “Matching funds are capped at $250,000 per business. A $20 billion fund would impact over 100,000 small businesses and startups.”

There are already international precedents showing that such programs do work.

“The United Kingdom has already done this to great success,” Forbes adds. “It worked so well that the Fund was re-upped twice, including to support small businesses impacted by the coronavirus pandemic.”

With Congress at an uncertain stalemate over another COVID-19 relief bill and the dust still settling from the 2020 election, small businesses need to get creative to find new revenue streams. A Reg CF or Reg A investment offering may be the right solution for your business to raise money by working the crowd.

About the author

Joe Kukura
Joe Kukura
Joe Kukura is a San Francisco freelance writer whose work also appears in SF Weekly and SFist. He’s written financial advice for NerdWallet, tech industry analysis for the Daily Dot, sports content for NBC Bay Area, and good, old-fashioned clickbait for Thrillist.

Comments

Quickly Compare Loan Offers from Multiple Lenders

Compare Offers
from 300+ Lenders

Applying is free and won’t impact your credit
Talk to a rep at (855) 853-6346

Mon–Fri | 9am–9pm ET

Phone Icon

Give us a call
(855) 853-6346

Monday - Friday | 9am - 9pm Eastern Time