District regulators have authorized the city’s first equity-based crowdfunding campaign under rules they wrote last year that allow entrepreneurs to collect as much as $2 million from the general public through online fundraising.
The first venture to receive the green light is Prequel, a pop-up restaurant space scheduled to open in Penn Quarter this spring. The 17,000-square-foot venue will feature a selection of five dining concepts that change each month.
Prequel is the brainchild of the founders behind EquityEats, a District-based crowdfunding platform for budding restaurateurs. The site allows culinary entrepreneurs to raise money, currently from accredited investors, to get their eateries off the ground. The restaurants featured on the site will have an opportunity to showcase their menu and hospitality as one of Prequel’s pop-up restaurants.
Prequel’s creators are aiming to raise $200,000 through the crowdfunding campaign that launched Wednesday. Investors who contribute money will share a 10 percent ownership in the business, according to Prequel’s crowdfunding Web site.
The investors will share 50 percent of the venue’s profits until their initial investment is recouped. Once that money has been returned, they will then split 10 percent of the venue’s future profits.
Executives project revenue of $5.3 million and net profit of about $520,000 in Prequel’s first year, according to the Web site.
Funders also receive ancillary benefits, such as priority reservations, party invitations and free drinks, depending on the size of their investment.
“Restaurants are unique in crowdfunding because the investors actually add a lot of value to the restaurant,” EquityEats chief executive Johann Moonesinghe said. “If I invested in commercial real estate or even a tech start-up, I don’t add a lot of value as an investor other than the capital I am putting in.”
Moonesinghe said restaurant investors can become frequent patrons of the business and encourage friends to do the same, while also providing credible feedback on cuisine, decor and customer service.
Before regulators would accept the campaign, they required a considerable amount of back-and-forth about how EquityEats planned to word the offer, Moonesinghe said. They wanted to ensure those without a background in finance could make sense of it, he said.
“We tried very hard, with the firm’s cooperation, to make these disclosure documents very readable,” “Anyone who is going to take the trouble to look at it, fairly quickly will be able to see what the concerns are and that the investment has certain risks,” said Mike McManus, assistant director of the city’s corporation finance division.
The city’s crowdfunding rules give regulators 10 days to respond to a crowdfunding campaign request. The process took EquityEats exactly two months to receive regulatory approval in part because it was the first equity sale of its kind.
“This is the first one out of the box,” McManus said. “It is one way for firms to raise capital and the city administration is looking for ways to provide appropriate support to businesses. We’re trying to balance that with investor protection.”
Crowdfunding was made popular by Web sites such as Kickstarter, Gofundme and Indiegogo that allow people to collect money for business ventures, personal causes or community service projects. Those sites offer donors a perk in exchange for the dollars, however, not a financial stake in the business they’re backing.
Equity-based crowdfunding was made legal in 2012 as part of the Jumpstart Our Business Startups Act. The Securities and Exchange Commission, however, has moved slowly to publish official guidelines.
More than a dozen states and the District have since approved their own intrastate crowdfunding laws and regulations that allow their residents to invest in state start-ups, according to the North American Securities Administrators Association.
Locally, D.C. has been among the most progressive. In October, the Department of Insurance, Securities and Banking approved crowdfunding rules that allow entrepreneurs to raise as much as $2 million from city residents and businesses. The maximum amount a funder can invest varies based on income, but starts at $10,000 for those making less than $100,000 a year.