The word “crowdfunding” has become associated with on-line portals like kickstarter or IndieGoGo which provide people the opportunity to donate to a business start up-sometimes in exchange for basic merchandise. Because these are basically considered donations with a high “buyer beware” threshold, they aren’t deemed a security. Those of us that concentrate on funding for small businesses, and the expansion of existing locally owned businesses know that the true power of crowdfunding comes when people consider their funding power as a legitimate investment in their local economy.
The problem with soliciting funds on a mass scale from the general public is that you can inadvertently form a “security” and easily violate securities rules and regulations. These legal standards were set in place to prevent individuals from taking advantage of unsuspecting investors by requiring that solicitors follow a set of guidelines. The Kansas Securities and Exchange Commission found a middle ground between regulated securities and crowdfunding with their IKE fundraising mechanism.
For those of you familiar with the Radius Brewing Company concept, IKE was used to solicit funds from twenty-two local investors at a maximum $5,000 level (larger investors used a different mechanism). The IKE program resulted in approximately $100,000 raised with the principal paid back after a seven year period and interest paid in the form of $30 monthly gift certificates (this equals approximately a 7% interest rate).
IKE still has a series of rules (CLICK HERE for more information), but it simplifies the investing process. The form is relatively short (CLICK HERE for the link), and the process is fairly straightforward. The major things you want to remember are: 1. File BEFORE you solicit. 2. IKE was meant for in-state investors, and 3. The maximum contribution for non-vested investors is $5,000. There are, of course, other regulations to consider.
More programs exist within the Kansas Securities and Exchange Commission that are designed to help businesses and prospective businesses raise capital. The IKE program has been used a total of eight times in the state of Kansas since its inception, and Radius is generally referred to as the “best example of success” within the program parameters. But, for people looking to raise more extensive funding, there are other programs and assistance within the Kansas Securities and Exchange Commission.
These programs aren’t a good fit for everyone. Typically, crowdfunding requires a business type that the community identifies as a pervasive need that is unique within the market trade area. If you are opening up the fourth version of the same type of business within a market, it may be difficult to garner public investment support. If you have a unique concept, and need capital and the public support that encompasses crowdfunding activities, then IKE (or other programs) may be right for you.
Potential investors need to know that IKE funding, security based funding, or even securities based funding are typically an “at risk” funding type- meaning you can lose some or all of your investment. If you purchase a stock on the stock market for $50, and the company implodes and suddenly the stock is worth 25 cents, you’ve lost $49.75. All investments carry risk. One of the reasons why we met with Kansas Securities and Exchange officials was to talk about ways to mitigate those risks.
Risk displays elasticity in economic models. By working with the Kansas Securities and Exchange Commission to create centralized portals, and working with backing agencies to help modify the parameters of principal associated with loans, equity investments or convertible notes, we hope to mitigate risk to an extent where we can encourage involvement in vetted business concepts.
Emporia Main Street researches potential funding avenues for you and other potential entrepreneurs because we understand the importance of full capitalization on the success of a business. While we will admit that delving into the world of securities isn’t exactly “fun”, all of you are worth the hours of research to promote existing programs and modify market opportunities to fit your needs.
See this article and much more in this week’s Emporia Main Street E-newsletter!