Introduction to Investment Crowdfunding
For as long as entrepreneurs have started businesses they have also needed capital to grow and scale those businesses. To that end, this article explores how HBCUs can leverage Investment Crowdfunding to help their students, teachers and alumni raise capital for their businesses, while providing HBCU community members the opportunity to be more than just customers of businesses but also equity owners in the businesses they make successful.
Investment crowdfunding is when businesses and entrepreneurs engage the general public to become investors into their businesses. Title III of the Jump Start Our Businesses & Startups Act (also known as the JOBS Act), was signed into law by President Obama on May 16, 2016. With this historic Act, it finally enabled Main Street Businesses to raise investment capital from retail investors (also known as Customers), along with accredited and institutional investors, aka “Sharks”, “Angels” and “VCs” or Venture Capitalists. Some key data points:
- Since 2016 $585M has been raised via Investment Crowdfunding.
- In 2020 alone, this new capital formation tool resulted in $214M in small business funding, an increase of 105% over 2019, and that's even with the Pandemic.
- 88,000 jobs have been created since the launch of Title III, and numerous families have been able to get back to work, and all of this using a regulation that is enabling for communities, investors & businesses.
- Economic impact (based on income statement disclosures) of the firms that have raised money via Investment Crowdfunding to date is $3.2B and that is spread across 1,000+ communities in all 50 states.
- On March 15, 2021 the amount of funds that startups and businesses can raise under RegCF and RegA+ securities exemptions were raised to $5M and $75M respectively.
The opportunity of Investment Crowdfunding & HBCUs
HBCUs = Historically Black Colleges & Universities. Mindful of the fact that many of those reading this article may be unfamiliar with the concept of Regulated Investment Crowdfunding (also known as RegCF, Equity Crowdfunding or CrowdInvesting) and the nomenclature of the capital formation industry, we also want to be mindful that there is the potential that many reading this article may not be familiar with the history and amazing legacies of the 107 Historically Black Colleges and Universities, also known collectively as, HBCUs. As such, we’ll be keen on spelling out acronyms and defining words and concepts that may otherwise be known to certain individuals / groups but not others.
What is Investment Crowdfunding
The premise of crowdfunding is straightforward. The majority of Americans have in fact engaged in some type of crowdfunding, mostly donation-based crowdfunding. For instance, if you’ve ever been to church and donated money when the plate was passed you’ve been an active participant in donation-based crowdfunding. However, in Investment Crowdfunding individuals are not making donations. Instead in Investment Crowdfunding, founders solicit investments from thousands of investors in their community, fraternities/sororities, customer base, affinity groups, and other social networks; primarily over the internet and social media. In Investment Crowdfunding, participants are investing funds as investors, with the expectations of some sort of financial return.
To gain a deeper understanding of “What really is Investment Crowdfunding?” we look at the television show Shark Tank. On Shark Tank the “Sharks” are so-called sophisticated investors (e.g.: Daymond John, Mr. Wonderful, Mark Cuban, Lori Greiner, etc…) who are legally allowed, due to their net worth and income, to invest into startups and existing businesses. In Investment Crowdfunding offerings, the same premise as Shark Tank prevails, with one very big difference. Instead of just having a tank of Sharks review, evaluate and determine if they want to invest in your business everyone over the age of 18, who is interested and able, can be an investor in a business for as low as $100 dollars.
The ability to have Customers also be investors in a business is what JOBS Act Investment Crowdfunding enables. Why this is such a pivotal moment in capital formation and generational wealth creation is because for the first time in history retail customers can directly own a share of the businesses that they make profitable. The ability for customers to be early investors into the businesses that customers will eventually make extremely profitable and valuable is at the root of creating generational wealth, while building sustainable businesses and a resilient community.
Investment Crowdfunding’s Potential Impact to HBCUs
Now having an idea of what Investment Crowdfunding is and the impact is has had since its inception, the following are high level points that HBCUs should consider to help create stronger, more financially independent and secure student and alumni communities:
- Under the Securities & Exchange Commission rules, your student and alumni members can raise up to $5M via RegCF and $75M under RegA+ from retail and accredited investors alike.
- Investment Crowdfunding is a way for large affinity groups, like your school and HBCUs as a whole, to pool resources, derisk investments and engage in hyperlocal investment strategies; while building the next generation of student/alumni led businesses.
Crowdfunding is one of the lowest cost-of-funds ways for any business/startup to raise investment capital; with fees running from 5% to 14% of funds raised.
- When a university leverages the power of their community through investments, it builds deeper relationships with students and the alumni community.
- Your community has more money than Venture Capital because your community are the Customers that make business profitable. Don’t just encourage your community members to be users/consumers of good, product or service, enable your communities to be owners.
3 Steps to Investment Crowdfunding
Step 1 - Getting Your Business, Business Ready
A Founder needs to have a BONAFIDE BUSINESS in order to legally raise money for the business. What does this mean if you’ve been in business for a few years or decades? It means you’ve already invested in starting a business and are more than likely 95% Business Ready. If you’ve got an idea or are part of a University’s incubator or accelerator it means that you are probably closer to being Business Ready than most and should be considering using RegCF to raise your startup’s seed round.
Step 2 - Platform Ready
To raise capital via crowdfunding, every business must use a FINRA registered platform. Every FINRA licensed investment platform (also called a “funding portal”) has set objective criteria each offering must meet before you can put your offering on their platform. Currently, there are about 70+ funding portals. You can see the list of FINRA licensed platforms here: https://www.finra.org/about/firms-we-regulate/funding-portals-we-regulate. Before you can place your business’ crowdinvesting offering onto any platform you’ve got to be Platform Ready. Each platform has slightly different requirements. But in general the information you need is to complete disclosures required by the government (e.g.: Your offering’s FORM C document) and your business’ pitch. Remember, you’re not pitching just to Sharks in a tank. But to current, future and potential customers.
Step 3 - Investor Ready
Once you have become Business Ready and organized your documents to be Platform Ready you can now explore if you are Investor Ready.
Is your business Investor Ready? Only the potential investors can tell you that. And only believe the ones who speak with their dollars. Everyone else is lying to you.
What's in it for HBCUs?
- Why would HBCUs want to deploy the mechanism that enables their students, teachers and alumni to be equity investors in the next Fortune 500 business from the ground floor?
- Why would HBCUs want to encourage micro-investments and customer growth in businesses spawn from their student body and alumni networks?
- Why would your school’s accelerators, incubators and business schools not just teach students about business and entrepreneurship but also set up the ecosystem to keep them as part of your school’s community?
At Milky Way Economy we help you answer these questions. Because now you know what Investment Crowdfunding is, the next step in your journey is discovering, “How”. “How does my school, alumni group, church or community leverage this powerful entrepreneurship tool to build deeper relationships within our community?”
At Milky Way Economy we provide the technical assistance to answer the “How” of how schools, affinity groups, communities and entrepreneurs understand JOBS Act Investment Crowdfunding securities regulations in order to raise capital for their businesses. Whether your community’s business and founders are looking to raise funds for a SaaS product, residential or commercial real estate, a franchise or traditional, brick and mortar business you should consider Investment Crowdfunding to meet your and your community’s capital needs.
I look forward to working with you to help you better understand how HBCUs can leverage Title III of the JOBS Act to raise funds for HBCU entrepreneurs, businesses and community members.
About the Author
Samson Williams is a serial entrepreneur and accidental investor. When not starting business with his enemies (“Entrepreneurship is hard. I only recommend it to my enemies.”), Samson is an Adjunct Professor at Columbia University in NYC and University of New Hampshire School of Law where he teaches on blockchain, cryptocurrencies, FinTech and the Space Economy. Samson is also President of the Crowdfunding Professional Association and investor into two Investment Crowdfunding platforms Brite.us - CrowdInvesting Done Brite and GoingPublic.com. For more information on Samson visit www.SamsonWilliams.com and follow him on social @HustleFundBaby.