In the past few months, I've been involved in a couple of unique, and fascinating, crowdfunding efforts. In one case, a very good friend and fellow Georgetown alumnus, Jeff Chapski, accepted the challenge of navigating New York City for a day in a wheelchair for the NextStep "Wheelchair for a Day" Challenge. I'm also fascinated by the effort at NPR's Planet Money to track the creation of a modern t-shirt from field to factory to retail sale. So, my wife and I are one of over 20,000 funders of the Planet Money T-shirt Project over on Kickstarter.
Many have noted that equity crowdfunding could be one way out of the credit crunch currently facing franchising--a credit crunch that has now lasted many years longer than the recession itself. Formal rules for equity crowdfunding--whereby investors could purchase a slice of a small business--would allow more prospective franchisees to tap nontraditional sources of funding from individual investors, especially small investors. While there have been some successes with franchisees using crowdfunding, they have been limited thus far.
One of the reasons the International Franchise Association strongly supported the 2012 JOBS Act was that the Act directed the SEC to develop rules for crowdfunding. In fact, crowdfunding has strong bipartisan support in Congress. Unfortunately, under previous chairmen, the SEC had failed to take any significant action respecting rule-making for the crowdfunding portions of the JOBS Act.
Chairman Mary Jo White, however, has been a strong supporter of crowdfunding. On July 10th, just about three months after taking the chairmanship, the SEC announced new rules for crowdfunding that will permit advertising/solicitation to Accredited Investors--investors with a net worth of at least $1 million or annual income of at least $200,000--within a "walled garden". This rule-making, combined with a recent SEC "no action" letter, are significant steps toward broad-based crowdfunding. Moreover, these SEC actions mean that companies will soon--but not yet--be able to advertise for funders on social media sites outside of walled gardens, so long as prospective investors are led back to a site where their Accredited Investor status can be verified.
Even more exciting is the fact that the SEC is now evaluating rules that would allow non-Accredited Investors to participate in crowdfunding. Given the relatively quick action by Chairman White on the rules for Accredited Investors, some SEC watchers believe that rules will be announced in the next few months, followed by the required 90-day comment period before an SEC vote.
After many months, it looks like the mandate of the JOBS Act that the SEC adopt reasonable regulatory rules for crowdfunding is finally becoming a reality. I do believe that crowdfunding will be transformative for the franchising industry, allowing many more people who wish to become small business owners through franchising to enlist small investors in that effort. While crowdfunding will necessarily require careful quality control and oversight by franchisors, the SEC and state securities agencies, crowdfunding likely provides the greatest opportunity ever to bring access to capital to potential franchisees who lack ready access to networks of wealth.
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