Regulation crowdfunding (Reg CF) was the final step in the implementation of the Jumpstart Our Businesses Startups Act (JOBS Act) that President Obama signed into law in 2012. Reg CF means that for the first time, anyone over 18 years of age can invest in private securities offered by startups seeking equity capital and/or loan money to businesses in need of debt financing.
If you are considering using crowdfunding to secure equity investment or a business loan, the first step is to determine if it is the right approach for your business. The name "crowdfunding" says it all. To successfully raise money using crowdfunding, a club owner will need to draw from a crowd. Since owners of a fitness center can draw from their members and prospective members, it appears our industry is perfectly suited to this form of financing. The club owner should have an extensive network of members, friends and family who will contribute to get the ball rolling, especially if incentives are offered.
For the most part, crowdfunding has been used to fund new companies or products in exchange for equity in the company or simply to receive their initial product offering. You can use sites such as Funding Wonder, a licensed Reg CF portal, that apply crowdfunding to finance loans for small and medium businesses. These offer a viable alternative for loans under $250,000, an amount that is most needed by small businesses and typically the hardest to finance.
For example, the owners of a chain of health clubs with a membership list of 30,000 decided to use crowdfunding to finance the opening of a ninth club. They offered their member base the opportunity to invest in a loan with a good interest rate on their investment. For all amounts over $500, the members received an extension on their current membership. This not only raised capital, but it also reinforced the relationship with the members that participated since they then had a vested interest in the success of the clubs.
Assuming you are confident that your business is a solid crowdfunding candidate, you must prepare to mount a campaign by pulling together all the information you will need to get approved for posting a loan and creating your loan offering document.
Here are the general categories of information that are required:
- Personal information, such as name, address, birthdate and social security number.
- Business information such as legal entity, tax ID number and a list of owners with 20 percent or more equity
- How much you want to borrow, for what duration and for what proposed interest rate.
- How much equity you wish to sell and the price per share.
- What you intend to do with the loan or equity investment.
- Personal documents, such as bank statements and tax returns.
- Business documents, such as operating agreements and tax returns, and financial documents that were reviewed by your accountant including balance sheets, cash flow and profit and loss statements.
- Marketing materials including business description, photos and videos.
- Your business experience and that of the management team.
The marketing materials are particularly important to mount a successful campaign. Most casual investors will be greatly influenced by a compelling business description with supporting photos and videos of the business or its products.
The final step is to generate and file a legal document called the Form C on EDGAR, the online public database of the U.S. Securities and Exchange Commission (SEC). An online app called iDisclose makes the generation of the Form C easy. iDisclose takes you through a sequence of questions about the business (similar to TurboTax), such as key personnel, competitors, suppliers, prior transactions, how you intend to use the funds, etc., and combines it with the informational items listed above. Then it automatically generates a document that is ready to be reviewed by your lawyer and can be posted directly from iDisclose to EDGAR.
Now you are ready to go. But you must think of the crowdfunding process like it's a political campaign. You have a finite period to get a large group of investors to rally around your cause, and it is up to you to drive it with all the tools at your disposal from email to social media. And if we learned anything about running a campaign in the last year it was that you should make sure to regularly tweet to your followers.
BIO
Paul Bosley is managing member of Healthclubexperts.com dba Business Finance Depot. He can be reached at [email protected].