You have a great idea, a market and you have started to make money. Now you need some serious capital for expansion. In a non-cannabis industry an entrepreneur might simply go to the bank for financing, but not so in the marijuana world. Few lenders are ready to do business with a startup whose status is still questionable under federal law. Is crowdfunding an option?
The idea is simple enough, and a number of ancillary businesses are already finding money there. The big payoff, however, may come from equity-based crowdfunding. It is still illegal, but possibly for only a few more weeks, and the financial potential could dwarf current crowdfunding schemes.
Collaborative funding is as old as passing the hat. Crowdfunding is just an adaptation that uses the internet. In theory, all it requires is a WordPress site and a way to accept payments, but to succeed in your campaign, you would likely do better with an established platform such as Kickstarter and IndieGoGo. There are many of them, and each is slightly different in terms of focus and control, so site selection is important.
Kickstarter, for example, features creative projects and is generally not for businesses. IndieGoGo is more varied. Some are “all or nothing,” requiring that donations be returned if the campaign goal is not met. Others permit the project to retain any funds raised. Most are reward-based, which means that the donor gets something of nominal value, like a t-shirt or bite of potato salad. Although these contributions are termed “donations” you should check carefully with your tax adviser about the status of these funds for income tax purposes.
A few sites are equity-based, which means that contributors are actually buying an interest in the company. Equity-based schemes are currently very limited, so much so that it essentially takes the “crowd” out of crowdfunding. That may be about to change.
This is where fundraising comes crashing into federal securities laws. Many of the provisions in the Securities Act of 1933 were designed to protect unwary investors. Issuers of securities are required to disclose a great deal of information and prohibited from advertising and solicitation. Complying with those two requirements is prohibitively expensive for most startups.
There are some exceptions having to do with the solicitation of well-to-do investors, termed “accredited,” on the theory that they are more financially sophisticated. The interaction of these two restrictions has unfortunate consequences. Startups starve for capital, and only the wealthy can get in on the ground floor of the next new Facebook or Google.
Congress attempted to fix this problem by enacting the Jumpstart Our Business Startups Act (JOBS Act) two years ago. The changes, which would allow smaller investors into the game, cannot be fully implemented until the SEC adopts final regulations. This has taken more than two years, but securities professionals are still hopeful that final guidance will be out by the end of the summer.
In the meantime, some states have acted on their own. Both Georgia and Kansas have made changes in state securities laws that permit some equity-based crowdfunding, and Texas is considering similar measures. None of these states has a legal marijuana industry, though.
So, where can you find the financing for expansion? If nothing else, the marijuana industry’s strange semi-legal status does seem to spark creativity. Plain vanilla bank financing would make life a lot easier, and states including Colorado seem to be inching toward that goal. Rewards-based crowdfunding may have some short-range potential. In terms of raw dollars, though, equity crowdfunding may be the place to watch. The changes that could make this possible may happen very soon.