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Crowdfund Your Restaurant: New Equity Financing Option Could be Industry Game Changer
Have you always dreamed of investing in a restaurant, but never had the capital necessary to make that vision a reality? Or, perhaps you are an aspiring restaurateur looking to engage local food lovers more deeply in the launch of your business. If so, you’re in luck. On May 16, 2016, restaurant ownership will be open to the masses via equity crowdfunding under Title III of the JOBS Act. In October 2015, the Securities and Exchange Commission (SEC) adopted final rules for Title III permitting companies to offer and sell securities to unaccredited investors through web-based crowdfunding portals. For the last couple of years, businesses have been limited to crowdfunding via wealthy, accredited investors. These new rules carry the potential to be a game changer for small businesses, particularly within the restaurant industry.
The Dawn of Crowdfunding: Title II of the Jobs Act
With the JOBS Act came Rule 506(c) under Regulation D, which for the first time permitted those seeking to raise capital the ability to generally solicit their offering to potential investors. Previously, under 506(b), a restaurateur or other enterprise seeking to raise capital could not advertise or generally solicit investments. Companies had to raise capital from only those investors (and usually only those accredited investors) that they knew or were “in their network.” With Title II under Rule 506(c), restaurants are now able to raise capital by generally soliciting or advertising their offering to whomever qualifies as an accredited investor. Companies are not required to use a crowdfunding platform (or the internet, for that matter) but these mediums clearly provide the easiest and most expansive method for reaching potential investors in the US.
If looking to raise capital under Title II:
- A startup can solicit and advertise publicly;
- Only accredited investors can actually invest in generally advertised offerings;
- Disclose details about your general solicitation to the SEC within 15 days through a Form D filing;
- Investors will need to prove and companies must take reasonable steps to verify each investor’s accredited status, which can be done through written confirmation by a CPA, attorney, investment advisor or Broker-Dealer, or income-related IRS forms.
Title III: A Possible Game Changer
Title III of the JOBS Act, the last in a series of new rules under 506(c) of Regulation D, opens up a radically new approach to raising capital, because a company is no longer restricted to pursuing accredited investors. Though it is otherwise a highly regulated and narrow means of raising capital, Title III opens up new possibilities for restaurateurs, the long-term impact of which remain to be seen. Companies are now able to raise capital (up to $1 million in 12 months) through internet-based crowdfunding portals from investors from all walks of life, with no requirement that they be accredited.
More specifically, Title III will:
- Permit a company to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period;
- Permit individual investors, over a 12-month period, to invest in the aggregate across all crowdfunding offerings up to:
- If either their annual income or net worth is less than $100,000, than the greater of:
- $2,000 or
- 5% of the lesser of their annual income or net worth.
- If both their annual income and net worth are equal to or more than $100,000, 10% of the lesser of their annual income or net worth; and
- During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.
The rules also impose disclosure requirements on issuers for certain information about their business and securities offering, and create a regulatory framework for the broker-dealers and funding portals that facilitate the crowdfunding transactions.
There are already some portals out there such as SeedInvest, CircleUp Crowdfunder, EquityEats and others that offer group equity investments from accredited investors. Some of these companies have publicized plans for expanding with smaller investors. There will likely be a surge of state and national intermediaries to include small-investor options.
For an aspiring restaurant owner, there is nothing better than having hundreds of local investors who become your best customers, particularly in smaller cities. In fact, lower dollar investors could be paid partially in credit to the restaurant, rather than cash, which has benefits to the investors and the restaurant.
A New Tool for Restaurateurs
Title III equity crowdfunding may be an exciting new fundraising tool for small businesses in certain circumstances, but may not necessarily be the right tool when seeking to fully capitalize your restaurant or small business. This option is really most useful in situations where a company wants or needs to raise money from more than a handful of non-accredited investors. A restaurant needing total funding is not a great fit for Title III. If a restaurant enterprise simply needs capital and nothing else, then it is probably going to have an easier time raising the capital from accredited investors using more traditional methods under 506(b) or Title II.
On the other hand, for a restaurant that has raised most of its capital, and needs to close a funding gap, Title III is an excellent option. For example, if you need to raise $5 million to open a restaurant, you can pursue $4 million from accredited investors and then raise the remaining $1 million from non-accredited local investors, thus effectively marketing to the communities you plan to open in. This same reasoning holds true for a restaurant that is looking to franchise or develop an expansion unit. If the sum that needs to be raised is under $1 million, Title III is an attractive option, especially where you are expanding into a community where you do not already have built-in brand recognition.
One reason that this option might be preferable for restaurateurs looking to pursue gap funding is the manageable tax reporting burden. Non-accredited investors could invest from $1,000 — $5,000 for an equity stake in your business, meaning that at most, 100 K1s need to be sent out – which is manageable with the right accounting team in place. Similarly, audited or reviewed financial statements are not required for the raise, saving thousands of dollars. Finally, as noted above, Title III affords entrepreneurs the ability to convert investors into customers and brand evangelists because they are investing in a local business that they are eager to see succeed.
The real value of equity crowdfunding goes well beyond the generation of capital; when executed strategically, a campaign targeting small investors carries the potential to build brand loyalty and engage the local community. Restaurateurs now have a new tool to turn investors into ambassadors.
This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.