Cannabis entrepreneurs may underestimate the potential for debt financing, a topic that will be explored in detail by Scott Jordan, Director of Business Development for Dynamic Funding at the Marijuana Investor Summit on Sept. 16 in Los Angeles. The same may be true of debt crowdfunding, also known as crowd lending, peer-to-peer lending or simply P2PL, especially when compared to the flash and dazzle of equity crowdfunding.
But the potential for debt crowdfunding for cannabusinesses may still be a way off. Not all sites will qualify legal marijuana enterprises, not all states permit crowd lending and some states set very low caps on the amount that lenders may risk and borrowers may raise within a given period of time. As the universe of options opens up for legal marijuana businesses, however, debt crowdfunding may become a useful tool.
There are essentially four different models of crowdfunding: donation-based, rewards-based, equity and debt. They differ in terms of what the funders ultimately get.
- Donation crowdfunding is popular with many kinds of charitable and humanitarian causes. Funders get a warm, fuzzy feeling.
- Rewards based crowdfunding is used by individuals and companies seeking contributions in order to develop and launch a new product. Funders receive a token reward of a tee shirt or a DVD in addition to that warm glow.
- With equity crowdfunding, companies raise money from investors who receive shares in the company in exchange. The flip side of that equation, as with any equity financing, is that entrepreneurs may lose control of the business. Equity crowdfunding is also subject to state and federal securities laws.
- With debt crowdfunding, lenders provide needed financing in exchange for a debt instrument that pays interest. It may be cheaper for the entrepreneur over the long run than selling equity. However, banks, the traditional source of debt financing, have been reluctant to deal with marijuana businesses. Enter the crowd.
Debt Crowdfunding Sites
A number of well-known peer-to-peer debt crowdfunding sites, including Prosper, Funding Circle and Upstart offer relatively low interest loans to qualified small businesses. Lending Club, one of the largest sites, will reportedly not qualify a cannabis business. It is not clear that any of the other sites will, either.
ZipCap, a San Diego start-up, offers a new lending model that allows loyal customers, rather than investors, to participate in debt financing. At present, their pilot project targets only a few carefully selected businesses in California and Michigan. But the model suggests an intriguing role for crowd lending in building a market and a customer base, especially since legal cannabis still has something of a “cause” appeal.
State Law Restrictions
Not all states permit debt-based crowdfunding, and of those that do, not all embrace legal marijuana. Furthermore, not all states permit all platforms. State laws set different limits on the amount an individual may invest in a peer-to-peer loan and how much a company may borrow in a given period of time.
Under Maryland law, for example, each individual’s investment is limited to $100 and businesses may not raise more than $100,000 in a given year. In Kansas, individuals may invest up to $5,000 and in Georgia, the limit is $10,000, but neither state permits the establishment of legal marijuana businesses.
The state law restrictions may ultimately present less of an impediment to cannabis debt-based crowdfunding than the present scarcity of sites that will qualify legal marijuana businesses. Just as some non-bank lenders, including Dynamic Alternative Finance, are carving out a niche in the legal marijuana world, solving the debt crowdfunding problem may take the development of a similarly focused peer-to-peer site.