In a bold move, the District of Columbia recently proposed new rules to permit equity crowdfunding in the city. Equity crowdfunding is a business financing method that allows companies to sell equity or ownership stakes to a large number of people using online platforms.
With this move, the District becomes the latest locality to allow start-ups and small businesses to use this new business funding tool. Twelve states, including Maryland, currently allow equity crowdfunding. Maryland firms can raise up to $100,000 through such schemes. D.C.’s proposal goes well beyond this limit, placing the city at the forefront of efforts to develop locally based, self sustaining, independent business financing methods.
For small-business owners and others, this new D.C. equity crowdfunding proposal means the stranglehold venture capitalists and banks have had on access to business start-up capital will loosen a bit.
D.C. proposes to allow the creation of a process through which new and existing companies will be able to obtain funding from a large number of small investors. These small-scale investors might purchase shares for as little as $10 in, say, the next Google or Apple. More likely, the process will be used to raise start-up capital for the coffee shop down the street or for the day-care center up the block. This is a wonderful option, currently absent from the small-business funding tool kit.
D.C.’s proposal contains a number safeguards: a company can raise up to $500,000 if it has financial statements (balance sheet, income statement, cash flow statements) that have been certified as accurate by the company’s chief executive. Companies that have undergone a financial statement review conducted using standard accounting procedures can raise up to $1 million. Finally, companies that have undergone a full-scale external audit conducted by a certified public accounting firm can raise up to $2 million.
For small businesses currently shut out of the capital markets, this is a major advance. If your fan or customer base is strong enough, you may be able to raise enough capital to pursue a dream. For example, Kugler Cycles, owners of Bikespace DC, wants to manufacture bikes in the city. They have started a donations-based (not equity) crowdfunding campaign on Indiegogo. A donations-based crowdfunding campaign allows supporters to support a company by donating money in exchange for some reward, such as first dibs on a new product. With a donation, or reward-based campaign, you are not actually purchasing an ownership stake in the company you are supporting. In Kugler’s case, imagine being able to actually buy an ownership stake, or equity, in a D.C.-based bike manufacturing company. This alone might be enough to trigger a D.C. manufacturing renaissance. (Full disclosure: I helped create the Kugler Cycles donation-based Indiegogo crowdfunding campaign).
The D.C. proposal applies only to companies located in the city, and all investors must be D.C. residents as well. While these rules limit both the number of potential firms and the number of investors, we believe the amount of good this may have on the local small-business community outweighs any drawbacks.
William Michael Cunningham is an economist, D.C. native and author. He is managing partner at National Crowdfunding Services, which has partnered with the D.C. government to provide donations-based crowdfunding services.
More from Capital Business: