Crowdfunding for contractors. Are you missing the train?
Three years after a new law cleared the way for companies to raise money from small, individual investors via crowdfunding sites, it’s hard to find many small, independent contractors using them to raise capital.
Title III of the JOBS Act, which was implemented in October 2016, allows companies to raise up to $1 million a year in securities from both accredited and non-accredited investors through funding portals that join the Financial Industry Regulatory Authority (FINRA) and register with the Securities and Exchange Commission (SEC). The objective of Title III of the JOBS Act, also referred to as “Regulation Crowdfunding, or “Regulation CF,” was to democratize capital formation for both small businesses and small investors interested in investing in them.
Democratizing capital formation
It achieved this in two ways. First, it created four new securities exemptions that allow small companies to bypass the expensive process of registering their securities with the SEC if they sell those securities on SEC-registered portals. Second, it created a public market where, for the first time, individuals can invest in early-stage companies alongside accredited investors within certain limits tied to their annual income and net worth.
A review of the 42 crowdfunding portals listed on FINRA’s site in mid-October 2018 shows they differ in terms of the types of businesses and investors they serve and securities they offer.
GrowthFountain.com, for instance, enables entrepreneurs to offer revenue share agreements in addition to equity shares in their companies. The agreements allow a company to raise money with a promise to repay a multiple of that amount over time out of a capital pool equal to five percent of the company’s revenue each year. These agreements may be a good option for companies that generate or are expected to generate cash, as well as LLCs.
In exchange for a $500 registration fee, GrowthFountain.com will help a company file all the regulatory paperwork needed to launch a crowdfunding round and present its offers to investors. If an entrepreneur meets his or her minimum fundraising goal, GrowthFountain.com will collect six percent of the amount raised as a commission. If the round falls short, the company will only be out the $500 registration fee, and any funds raised will be returned to investors.
SmallChange.com specializes in helping entrepreneurs find investors for real estate projects that create more livable and sustainable cities. Projects include new construction and remodeling buildings for new uses, such as affordable housing and commercial space. In Pittsburgh, for instance, a partnership recently raised $300,000 of $750,000 in debt it needs to remodel the 19th-century Liberty Bank Building into a shared work facility. A dozen accredited investors funded the loan in exchange for 10 percent interest.
The real estate crowdfunding boom
Real estate developers and investors have been among the biggest users of crowdfunding sites, although much of that activity has focused on debt rather than equity. Sites such as Fundrise.com, PatchofLand.com and PeerStreet.com have prospered in large part, however, because investing in debt secured by real estate is much less risky than buying an equity stake in a small business.
There are now so many sites vying to match real estate investors with U.S. projects that The Real Estate Crowdfunding Review began ranking them in 2015 based on their investor protections, transparency, deal volume, fee structures, customer service, financial backing and other criteria.
“It’s been another earthquake of a year,” site editor Ian Ippolito in his 2018 update to the realestatecrowdfundingreview.com Top 100+. “Thirteen sites in the former top 25 have fallen completely out of the rankings due to abandoning their business models or challenges.”
If the real estate industry is the Wild West of the emerging crowdfunding industry, crowdfunding for contractors may be a ghost town.
Whether the scarcity of campaigns about crowdfunding for contractors is due to a lack of interest by investors or building contractors is not entirely clear.
When one adds up the cost of complying with state bonding and insurance requirements and buying tools and materials, residential contracting businesses are capital-intensive businesses that must lay out significant sums of cash on materials and labor for weeks before getting paid.
Publicist Howard A. Sherman suspects there are so few contractor success stories for two reasons. First, contractors may not be aware that crowdfunding for contractors is a viable option. Second, contractors who have tried crowdfunding may have failed because they did not do enough to drive traffic to the crowdfunding sites hosting their campaigns.
“The biggest problem in crowdfunding for contractors is that a lot of small businesses have the mentality of ‘build it and they will come,’” said Sherman, whose firm, CrowFfund Buzz, specializes exclusively in helping entrepreneurs publicize their crowdfunding campaigns. “It’s the Field of Dreams mentality. People think, ‘I’ll put the campaign up and I’ll get investors.’ Only after a few weeks or a month go by, they say, ‘Wait a minute! I only had 50 people the entire month and they pull the plug.’”
Contrast that to Rick Medlen, who hired Sherman to promote the GarageSkins’ equity crowdfunding campaign on StartEngine after raising his first $100,000 on the site in 2017. Medlen has since raised another $125,995 from 177 investors for the venture in a second round on the site. That puts him more than halfway toward the $435,000 he needs to begin manufacturing GarageSkins, which are magnetized wood veneer panels homeowners can attach to the surfaces of their existing metal garage doors to beautify their homes at a fraction of the cost of installing wooden garage doors.
“He’s killing it,” said Sherman.