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Why Low Minimum Funding Targets Hurt Investment Crowdfunding

January 15, 2019 By Locavesting

Many businesses raising money under Title III of the JOBS Act are setting “target amounts” as low as $10,000. I understand the motivation, but I’d urge issuers and the platforms to think twice.

Background

In Title III Crowdfunding (also known as “Regulation Crowdfunding” or “Regulation CF” or simply “Reg CF”), the business (known as the issuer) establishes a target amount for the offering. Once the offering achieves the target amount, the issuer can start spending the money raised from investors, even while continuing to raise more money. That gives issuers a strong incentive to set a low target amount.

Here’s an example: A new brewery needs to raise $400,000 for equipment, fit-out, marketing, and salaries. If the brewery establishes $400,000 as the target amount, it can’t start spending the money from investors until it raises the entire $400,000. If it establishes $10,000 as the target amount, on the other hand, it can start spending investor money as soon as it raises the first $10,000 — even if the business will fail without the full $400,000.

The platform benefits, also, in two ways:

  • If the brewery establishes a target amount of $10,000 and raises at least that much, the offering can include the brewery in its “Reached Target Amount” list, even if overall the brewery raised only $12,000 and failed.
  • The platform receives a commission only on funds released to the issuer. The sooner money is released to the issuer, the sooner the platform earns a commission.

Minimum Offering Amounts

Target amounts were around long before Title III Crowdfunding, in the form of “minimum offering amounts.” A company raising capital would establish a “minimum offering” equal to the lowest amount of money that would make the business viable. If a brewery absolutely needs $400,000 to be viable, then the minimum offering would be $400,000. If it could plausibly scrape by with $315,000 — maybe by deferring the purchase of an $85,000 piece of equipment — then the minimum offering would be $315,000.

Issuers don’t establish minimum offerings because they want to, but because experienced investors won’t invest otherwise. If $315,000 is the minimum that will make the brewery successful, an experienced investor writing the first check will demand that her money be held in escrow until the offering raises $315,000. If the offering doesn’t raise $315,000, she gets her money back. Investing is hard enough:  why invest in a company that’s guaranteed to fail? […]

The post Why Low Minimum Funding Targets Hurt Investment Crowdfunding appeared first on Locavesting.

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The full and original article can be viewed on Locavesting.com


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Filed Under: -Community Investing, -Impact Investing

About Locavesting

Locavesting - A book, a movement... now a media site! News, analysis and resources focused on the intersection of community + financial innovation. Founded by Amy Cortese.
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