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Washington, D.C. – Access to capital continues to be a top challenge for struggling local businesses and entrepreneurs, and COVID-19’s economic impact is deepening its toll on Main Street and local economies. Congress is struggling to respond to this profound need, but doing nothing is not an option for small business owners and their employees who are working harder than ever to stay afloat and relevant during this uncertain period. That is why the trio of advocates who stewarded the policy and legislative changes that made investment crowdfunding a reality, are urging Congress to supercharge this promising model by establishing a co-investment fund that would support small business owners by boosting the capital they raise locally. Today, Crowdfund Capital Advisors (CCA) and the Small Business & Entrepreneurship Council (SBE Council) released a new report detailing the growing power and prevalence of investment crowdfunding and the need for a “Main Street Recovery Co-Investment Fund.”
“We need to act quickly to stop the bleeding on Main Street,” says Sherwood Neiss, Principal at Crowdfund Capital Advisors. “Short term band aids might slow the trauma, but we need a program that can quickly get capital to local businesses in a way that is supported by local investors. This will create a long-term win that will rebuild and sustain local economies, provide dividends to investors and achieve what Congress is trying to accomplish at the local level,” adds Neiss.
In the report, Regulation Crowdfunding by Congressional District: A Report Card, CCA and SBE Council review the progress of investment crowdfunding since 2016. The Jumpstart Our Businesses Startup Act (JOBS Act) of 2012 enacted changes that ushered in investment crowdfunding, which officially launched following the finalization of Securities and Exchange Commission (SEC) rules in 2016. Currently, the SEC is in the process of advancing regulatory proposals that would enable issuers to raise more capital than what is allowed by current caps, and provide for other changes to make Regulation Crowdfunding more accessible and effective for small businesses and startups. In addition, in response to COVID-19, the SEC recently extended temporary rules intended to expedite the offering process for small businesses by providing conditional relief from certain requirements of Regulation Crowdfunding.
As noted in the report, there are no cases of fraud with investment crowdfunding. And the democratization of capital is truly taking hold through this method, which allows small business owners to more easily identify investors and raise capital using SEC regulated platforms. However, the effects of COVID-19 have created a capital dearth, and CARES Act programs have not been a good fit for many small businesses. SBE Council president & CEO Karen Kerrigan asserts that innovative solutions like a “Main Street Recovery Co-Investment Fund” are desperately needed to help the nation’s economy dig out of its deep hole, and allow local communities to survive by supporting their businesses and new startups.
“As noted by a Goldman Sach’s recent 10,000 Small Business Survey, small business owners believe Washington is putting the needs of big business above small business, and 99% of survey respondents think a comprehensive federal agenda is important to help small businesses recover from COVID-19. A comprehensive approach needs to include a co-investment fund to help local economies recover, rebuild and reinvent themselves. This includes urban and rural areas alike, along with enabling new business creation given the massive volume of business closures that will profoundly affect local communities. The good news is that this type of fund has been successful in the UK through its Future Fund, which means our government will not be testing a new concept. The co-investment fund injects federal dollars into businesses that have been validated by local investors on regulated platforms, accountable under an existing federal framework. There has been no fraud since inception,” said Kerrigan.
Under the co-investment funding model, the federal government would match 100% of funds raised from communities via a securities-based crowdfunding platform (not to exceed $250,000 per business). The federal money that is received by small businesses would be paid back.
The early numbers for investment crowdfunding are very promising, and almost every member of the U.S. House has business constituents that have used regulation crowdfunding along with local investors who have supported a small business in this way.
Highlights of the data include:
JOBS Act Equity and Debt Crowdfunding Results Since 2016:
· 3,100 stock offerings have been listed by 2600-plus companies.
· These offerings occurred in 90% of U.S. Congressional Districts (393 districts):
o 95% of women-led districts had JOBS Act stock offerings
o 93% of minority-led districts had JOBS Act stock offerings
o 77% of districts had multiple offerings
o Nearly 50% of districts had campaigns that raised from $250,000 to $5 million
· $500,000,000 has been committed to these offerings.
· 700,000 retail investors participated in diverse offerings across the United States.
· Capital has been delivered to companies in 450-plus industries and across 850 cities.
· This capital has supported over 100,000 JOBS.
· Average amount raised per offering: $342,000.
· Since inception, the SEC and Crowdfund Capital Advisors have each concluded that there has been NO SECURITIES FRAUD in these offerings.
· Pre-Covid-19: The monthly volume of capital raised in February 2020 was $9 million. During the Covid-19 crisis, the monthly amount raised has increased dramatically.
· In August 2020, the amount of capital raised was $25 million, which represents an INCREASE of 2.8x in just 6 months. Community-focused investing is delivering significant capital to local businesses.
o During the last 2 months (July and August, 2020) equity and debt crowdfunding delivered the same amount of capital ($48 million) as the first full year (2016-2017) of online fundraising.
· Top 10 industries by dollars raised:
o Restaurants (*Currently one of the largest local industries suffering the most.)
o Diversified Media
o Personal Services
o Household/Personal Products
o Software Applications
o Specialty Finance
o Beverages (e.g. wineries/distilleries)
o Packaged Foods
o Information Technology Services
o Education and Training Services
· 13% of companies that raised capital once via the JOBS Act have already raised a second round of capital via the JOBS Act.
o Companies that have done a follow-on round saw an average increase in revenues of 23%
“This program can deliver meaningful capital to small businesses all across the United States immediately,” says Jason Best, Principal at Crowdfund Capital Advisors. “And because it happens online on regulated platforms where standardized data is fed through us, we can provide real-time insights into how this capital is being used and how local economies are benefitting. This data transparency is something that doesn’t exist in other programs advanced by Congress,” he added.
Crowdfund Capital Advisors (CCA) is a consulting and advisory firm. Its principals created the framework that became the basis for Regulation Crowdfunding. They have testified in front of 5 US House and Senate Committee Hearings on the subject and authored a book and World Bank report on the topic. They created the CCLEAR database that collects, cleans, normalizes and reports on offerings available under the JOBS Act. This data is transmitted to Bloomberg on a daily basis. They have worked in 43 countries helping governments and regulators create policy to enable startup and small business finance and job creation. Visit CCA’s website for additional information.