By Rick Murray
CEO, Arizona Small Business Association
Raising money to launch a business or to take one to the next level is challenging.
Many great ideas and businesses have failed because they are unable to stay in the game long enough to generate enough revenue to support them. Undercapitalization is the No. 1 reason businesses fail.
Banks know this. Unless there is collateral or a solid financial history, it’s not likely they will lend money. So where does that leave the small business owner “wanna-be?”
Typically, the fledgling entrepreneur resorts to using retirement funds, obtaining a 2nd mortgage, maxing out credit cards or borrowing from friends and family. In most cases, it is not enough. Without the ability to tap into other sources of revenue, many businesses are doomed for failure.
That’s why the Arizona Small Business Association became a champion of a new law that allows Arizona businesses to solicit investors for an equity position in their company without having to comply with U.S. Securities and Exchange Commission (SEC) regulations.
Equity Crowdfunding is different than a typical Kick Starter crowdfunding in that you actually are selling shares of the business in return for an investment. This option used to require SEC compliance, which is complicated, expensive and reserved for companies seeking millions of dollars.
The 2012 JOBS Act allowed for equity fundraising at much lower levels, thereby getting around SEC requirements. However, states are required to set up the framework for participants. Under the new law, Arizona businesses can solicit up to $10,000 per investor and raise as much as $2.5 million. The Arizona Corporation Commission has oversight and, along with submitting a business plan, a company must comply with several disclosures in order to participate in Equity Crowdfunding.
This new way for businesses to raise capital is a game changer. Businesses that have a solid business plan, competent people at the helm and a clear plan to profitability will succeed in raising the needed capital.
The obvious byproducts will be new jobs and added tax revenue for Arizona. It also will provide the public with the opportunity to invest in ideas, people and businesses within their communities, creating opportunities in areas of the state where none existed previously.
But as with all investments, it’s buyer beware. Due diligence is critical. The average new investor will need to educate himself or herself in any opportunity. Asking the hard questions will help the person learn more about the business and force the owner to know more what investors expect.
It is hard to predict what equity crowdfunding will look like in 10 years, but one thing is certain: Opening a new avenue for small business to access capital will create new opportunities and new competition in the business lending/funding arena.
It’s the booster shot the Arizona economy needs to continue the gradual climb back to economic relevance