While working with MSB’s in the process of acquiring surety bonds, I have noticed an increase in the number of companies seeking additional capital to finance their growth plans. Due to state regulations, expansion into new states is cost prohibitive for small business owners in this industry. MSB’s are faced with high costs to get licensed and stay compliant in states with varying compliance regulations. MSB’s are also confronted with the financial burden of acquiring the necessary surety bonds for state licensing purposes. In order to be licensed nationally, a company pays a premium of 1-2% on their aggregate bond need, which is anywhere between $6M – $40M.
Due to the lack of debt financing provided by banks, business owners have naturally turned to individual investors as they seek to raise capital. Unfortunately, raising funds as an MSB can be difficult because of a lack of understanding by investors who are not familiar with the industry. It’s not all bad news though. Thanks to the JOBS Act signed into law by President Obama on April 5th 2012, companies will soon have a method to raise capital from those who are already invested in the MSB industry, CUSTOMERS and AGENTS.
I recently attended a talk presented by Jason Best of Crowdfund Capital Advisors. Jason co-created the Crowdfund Investing framework that was the basis for the JOBS Act. The presentation centered on how small business owners can utilize Crowdfunding to raise capital.
What does this mean for MSB’s?
The structure of Crowdfunding benefits companies with a large customer base. MSB’s can capitalize on the Crowdfunding structure by leveraging their customer and agent relationships to aggregate a large number of individuals willing to invest in a business they are already familiar with. Based on how the business owner structures their offering, customers and agents can either own a small percentage of equity or receive a percentage of the money provided to the company as a loan (debt based Crowdfunding).
Why should MSB’s participate in Crowdfunding?
Not only will the MSB benefit from the additional capital, but they will also convert customers and agents into long-term loyal supporters. Customers and agents will naturally continue using the services provided by the company they have invested in.
– A company can raise up to $1M annually
– Investors can invest up to $10,000 annually depending on their income and net worth
– Funding happens through two groups: Broker dealers or funding portals
– Fund raising can be structured as debt or equity financing
– The volume of money raised through Crowdfunding is expected to surpass bank loans, venture capital, and angel investments combined in the next two years.
– The SEC has not released rules regarding equity Crowdfunding campaigns
– The SEC rules are expected to be released in the fall of 2013
Do you have experience with Crowdfunding? Please share your comments.