Do your customers love your brand so much that they’re willing to invest in it? Back in 2009, that’s exactly what Michael Migliozzi II and Brian Flatow attempted with BuyABeerCompany.com. The site asked PBR fans to pledge money to purchase the Pabst Brewing Company, which was held by a charitable trust at the time. If fans were able to raise the $300 million needed to buy the company, Migliozzi and Flatow promised to send each contributor a certificate of ownership and their pledge’s worth in beer. They were reportedly $20 million shy of their goal when the Securities and Exchange Commission (SEC) shut them down in April 2010 for failing to properly register a public offering.
The hefty fee involved in registering a public offering, as well as the fact that the number of investors in any one company is limited to 499, have continued to limit the impact of similar projects and crowdfunding sites like Kickstarter and IndiGoGo. To avoid these regulations, fans and potential investors can only make a donation to a project or group, not receive equity in a business. It is possible for companies to receive investments without registering, but these opportunities are legally limited to “sophisticated investors”—those with a net worth of $1 million or $200,000 in annual income—hardly the majority of people looking to support a local business or creative enterprise.
But new legislation may soon change that: on September 14, 2011, Rep. Patrick McHenry (R., N.C) introduced the Entrepreneur Access to Capital Act, which would raise the exemption from registering a public offering to $5 million and permit privately traded businesses to have an unlimited number of contributors invest up to $10,000, or 10% of their annual income, whichever is less. Although the bill is in the preliminary stages, it or similar legislation has a reasonable chance at success, as the White House has proposed exemptions for businesses of up to $1 million, and members of the SEC have indicated interest in reviewing the legislation.
Of course, crowdfunding is not without risks. 419 Kickstarters had a near escape this summer with the Tech-Sync Power System, when project manager Steven Washington claimed he had developed a device and app that would allow people to control home lighting through WiFi. He managed to raise $27,637 before skeptics alerted Kickstarter, and Washington cancelled the project before any money exchanged hands. While some safeguards are in place to protect investors, crowdfunding sites must develop better ways to vet their projects. And as SEC Corporate Finance Division Director Meredith Cross noted in a recent hearing before the House, “If it becomes viewed as a tainted market where people go to fraudulently steal money, then that won’t help anyone.”
If and when this legislation does pass, it will have huge implications for everyone from casual investors to international firms. The interest in direct investment is already strong— as of April 2011, Kickstarted had received over $50 million in pledges and helped to fund 7,496 successful projects; again, purely on a donation basis. Small businesses will have more financing options than just family and friends, and as a result, the banking industry will be be forced to compete with these alternative forms of raising capital. Investors with a smaller net worth, or simply those who want to support a favorite brand‚ will have greater opportunities to contribute directly to companies they care about, even to the point of directing or advising the business. We expect there will be particular interest in local businesses where investors will be able to see their capital in action, providing tangible results in a world where most investments are simply numbers on a screen. Finally, while national and international brands will rarely have to worry about a take-over a la BuyaBeerCompany, they must be attentive to the rising interest in actually owning a part of the brand, and consider how to make customers feel invested in their products and services. We will continue to monitor developments in the industry and are looking forward to watching the industry evolve.