Why Crowdfunding is Perfect for Franchising
Equity crowdfunding is a fairly new method that allows companies the ability to raise funds for the purpose of starting and growing a business. We believe this type of financing could be perfect for franchising in particular, as it helps these businesses build brand awareness through growth and through contact with investors. Crowdfunding requires disclosures that can help investors and issuers alike determine with whom they prefer to work. Many of these disclosures can already be found in the Franchise Disclosure Document (FDD). Crowdfunding, while a relatively new idea, has already become a viable option for businesses to acquire funds and for investors to potentially earn returns. With crowdfunding, franchises can potentially grow even more rapidly through offering its investment opportunities to the franchise's already existing customer base.
Companies, especially small startups, traditionally struggle to obtain funding to develop their businesses. In the past, companies wanting to raise capital could present their investment opportunities to accredited investors, limiting the pool of investors from whom small businesses could acquire funding. Because very few people could qualify as accredited investors, the majority of the public could not easily participate in these types of private investment offerings.
The Jumpstart Our Business Startups Act, signed into law in 2012, now allows businesses to raise capital from both accredited and non-accredited investors. For certain types of offerings, the JOBS Act also loosened rules for how businesses can market to potential investors. In the past, private businesses wanting to raise capital could not legally advertise their capital raise to the public. Marketing private securities was only possible via word of mouth.
The JOBS Act creates provisions eliminating the prohibition of general solicitation. Now companies can market and advertise their investment opportunities using all means of media communication, including television ads, newspaper ads, and social media.
Crowdfunding is becoming an increasingly popular way to secure funding for startups and small businesses. New rules under the JOBS Act have made requirements for raising capital less onerous. Additionally, having many different investors allows companies to retain control instead of outsourcing to one or two dominant investors, as is often the case with private equity or venture capital.
The Securities and Exchange Commission’s Regulation Crowdfunding currently limits issuers to $1 million in funds raised during a 12-month period. The SEC recently announced, however, that effective March 15, 2021, the limit on how much money issuers can raise in a Reg CF offering will increase to $5 million.
While equity crowdfunding can raise funds for a variety of companies, we believe it is especially ideal for franchises to secure funding to grow their franchise businesses. Below are a few reasons why crowdfunding is the perfect funding solution for franchise companies:
Successful brands with large customer bases already have a built-in crowd of potential investors. These franchise brands can more easily attract investment from their loyal followers, increasing chances of success in achieving fundraising goals. Crowdfunding a franchise can also help franchisees build a customer base even before it opens for business. If investors believe in a business enough to invest in it, they most likely will do whatever they can to support the business as well. Additionally, investors have an incentive to help a franchise business gain a customer base, as the more money a franchise makes, the more money investors could potentially make as well.
Issuers raising funds via crowdfunding must disclose information required on Form C. Required information includes financial statements/financial information, shareholders owning more than 20% of a company, a company’s location, risk factors, etc. Most of this required information is available in a Franchise Disclosure Document, a document required for every franchise company that simplifies meeting Reg CF’s disclosure requirements.
An Alternative to Obtaining a Business Loan
A franchisee might feel the need to obtain a business loan to start a franchise unit. Business loans, however, often have unattractive terms, especially for new businesses, as perceived risk is higher. Financial institutions may also require personal guarantees and additional collateral, which could entail putting a franchisee’s home or other assets on the line.
Notes and loans issued by a franchisee in a crowdfunding campaign are backed by the assets of the business. Crowdfunding requires no personal guarantees. Additionally, if an issuer raises business capital by issuing equity in its business, the issuer is effectively spreading the risk among its investors.
Secure Financing for Underlying Real Estate
Now that Reg CF limits will soon increase to $5 million, franchisees can potentially crowdfund the purchase of the underlying real estate of their franchise units or build on their own properties. Crowdfunding can therefore allow investors to participate in both the franchise business and real estate holding, creating a scenario in which both franchisees and investors can participate in the potential growth and income from both opportunities.
All in all, crowdfunding could be beneficial for franchisees and franchisors as it helps build brand awareness and unit growth. Through Crowdfunding, franchisees and franchisors can help connect people, create jobs, and make an everlasting impact in their local communities. To learn more, please contact us today.