Since the U.S. Securities and Exchange Commission (SEC) adopted rules permitting private companies to offer and sell shares of their stock and other securities via equity crowdfunding in May 2016, four Texas-based companies have taken advantage of this new path to access capital.
What is crowdfunding?
Crowdfunding means raising capital in small amounts from a large number of investors, typically over the internet. The concept has been around for years, with companies using websites such as Kickstarter to raise funds for all sorts of projects.
What is equity crowdfunding?
Equity crowdfunding is the name given to offering stock or other securities in exchange for a crowdfunding investment. Historically, a company could not legally offer securities to crowdfunding investors because to do so would be conducting an unregistered public offering. Therefore, crowdfunding contributors were offered other rewards, such as a T-shirt, a role in the movie being produced, or a copy of the finished product for free or at a discount. The SEC’s new rules, named Regulation Crowdfunding, permit equity crowdfunding.
Why would a company be interested in equity crowdfunding?
State and federal securities laws and capital market dynamics can make it challenging for many small business to access equity capital from traditional sources such as friends and family, angel investors or private equity firms. It is hoped that equity crowdfunding will become a valuable vehicle for small business seeking to access capital.
How many companies have funded their business in reliance on Regulation Crowdfunding?
From May 2016, when Regulation Crowdfunding was adopted, through August 26, 89 small businesses have filed a Form C with the SEC, indicating that they planned to conduct an offering of securities in reliance on Regulation Crowdfunding. Of those 89 companies, four were based in Texas. All four Texas-based companies have successfully closed their offerings.
Which Texas companies have conducted successful Regulation Crowdfunding offerings?
These four Texas companies have filed Form Cs with the SEC:
1. Native Hostel Austin LLC has raised $396,500 from 227 investors to open a boutique luxury hostel near downtown Austin. Native was the first company in the country to file a Form C with the SEC. (One might say that Native was restless to file!)
2. Brewer’s Table – East Austin LLC has raised $300,000 from 190 investors to build a restaurant and craft brewery in Austin, which will serve its craft beer.
3. Vigilante Gaming Bar LLC has raised $119,700 from 117 investors to build a bar and restaurant in Austin that will provide social board gaming, local craft beers and bar food. Vigilante plans to stock nearly 150 games in its game library, including classic board games, modern euro games and contemporary party games.
4. Hops and Grain Production LLC has arguably been the most successful user of crowdfunding in Texas, having raised the full $1 million annual limit under Regulation Crowdfunding from 307 investors. It will build a second production facility in San Marcos to produce more of its craft beer.
Where can one learn about these crowdfunded companies?
Regulation Crowdfunding requires companies conducting crowdfunding offerings to file their offering materials with the SEC, which is publicly available at the SEC’s website through its EDGAR database. But a more convenient place to access the information is the crowdfunding investment portals through which they have conducted their crowdfunding offerings.
Native, Brewer’s Table and Vigilante Gaming Bar conducted their offerings through NextSeed (www.NextSeed.co). Hops and Grain Production conducted its offering through WeFunder (www.WeFunder.com).
What sort of company should consider Regulation Crowdfunding?
Companies seeking up to a relatively small amount of capital that have not had success with traditional sources of capital might explore crowdfunding. Because companies are limited to raising $1 million in any 12-month period under Regulation Crowdfunding, crowdfunding is not a realistic option for a start-up with capital needs in excess of that limit. Even for companies seeking less than $1 million in capital, the quickest and easiest way for a company to meet its capital needs is usually still the traditional sources, such as a small number of high-net-worth individuals, private equity funds and similar investors who can write large checks to capitalize the company. If a company does not have success seeking capital through traditional means, however, crowdfunding might be an interesting option to explore.
Douglas Clayton is a corporate and securities partner with the law firm of Cantey Hanger LLP, where he is vice chairman of the firm’s Business Transactions Practice Group. He is a graduate of Harvard Law School and Texas Tech University. Clayton focuses his practice on mergers and acquisitions, corporate finance, securities offerings and other business transactions. For more information, call 817-877-2890 or visit www.canteyhanger.com or his blog at www.NorthTexasSECLawyer.com.
This article is for information purposes only and is not intended to be legal advice or substitute for consulting an attorney. We recommend that you discuss your particular situation with your attorney when you need legal advice.