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Getting The SME Crowdfunding Model Off The Ground

By PYMNTS

Regulation A+ has made a mostly quiet splash on the market. Years in the making, the regulation was born from the JOBS Act, which was signed into law in 2012, with Title IV of the act — also known as Regulation A+ — enabling average joes to invest in companies seeking capital.

As this legislative effort played out over the last four years, the alternative finance space in the U.S. has exploded, and small businesses are overwhelmed with choices to access funding. But Regulation A+ is only just starting to gain its footing. One of the first platforms to receive clearance from the Securities and Exchange Commission to operate as a crowdfunding portal for small businesses is Funding Wonder, which enables SMEs to raise funds from individual investors — accredited or not.

“There are definitely barriers to entry,” said COO and cofounder Alan McGlade, speaking of the current market that, so far, has seen only a few platforms come into operation under Regulation A+. “It’s complex to set up a portal and get it certified and create a seamless operating model.”

With the rules now coming into effect, one of the biggest challenges to getting this business model off the ground, McGlade said, is making sure businesses know they have this path they can choose when seeking financing.

“Most businesses don’t know this is an option that available to them,” he said. “This is true cutting-edge alternative finance. This is very, very new.”

The process of getting the word out may look like the one used by other alternative lenders in the past few years. Like many of those platforms, McGlade referenced the 2008 global financial crisis that led banks to pull back from SME lending and cleared the way for marketplace and other alternative lending platforms to emerge. Today, traditional banks are still the most common way small businesses seek a loan. But according to McGlade, the business model of certified crowdfunding platforms can have a competitive advantage over alt-lending peers: Crowdfunding is its own kind of ad campaign.

“One of the real benefits that businesses are going to see is that they’re actually running a campaign to bring in investors, and by going through that process and campaigning, they create tremendous buzz for their brand and their company,” he explained. “You’re creating a lot of activity in the marketplace through social media, paid advertising, email, and you’re drawing a lot of attention to the company. We hope there will be a residual effect — not only will they raise the money they need, but they will have a much bigger presence as a company after they raise the money. Plus, they have a group of investors that want to see them win.”

Last month Funding Wonder announced that it secured its first business to seek funds through the platform. The firm is a franchisee, and that’s not by accident: McGlade said Funding Wonder will initially target the franchise industry as it adds more businesses.

“Franchisors have spent a lot of time and money developing business models that work well, and they have a track record — they have data you can see,” he said. Once a franchisee is financed and able to invest in the equipment and other things needed to get the business up and running, the COO continued, franchisors can replicate that process. Plus, franchisees typically have to obtain a license, so there is a level of commitment to the business that may bring greater confidence to investors.

Considering how new both Funding Wonder and the legislation that makes the company possible are, there are uncertainties about how popular small business crowdfunding will become. And the business model has its critics.

Crowdfunding expert Data Albright, for instance, spoke with reporters in 2015 warning that there may be downsides.

“What we don’t want to see are companies going public before proving their business model,” she told Entrepreneur at the time. “We will just bring back the problems we had with the pink sheets and penny stock companies that troubled regulators.”

Another critic, Shri Bhashyam, director of EquityZen, said A+ may not be the best idea for even later-stage SMEs considering the time and cost it takes to successfully raise funds this way.

“Until that spigot dries up, there’s not much incentive to be an early adopter of Reg. A+,” Bhashyam stated in a blog post.

Two years later, though, McGlade said he is confident that this business model can be beneficial to SMEs and is gradually gaining traction.

“I think all the signs are there that this is going to grow into a substantial segment,” he said. “There is a lot of momentum, particularly when you look at younger people. They’re comfortable doing financial transactions online. As a business owner who wants to raise money or as an investor who wants to put money someplace, this will be a very interesting path for them — as opposed to working with traditional financial institutions.”

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