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A Natural Fit
"We certainly believe crowdfunding has tremendous potential for franchise finance specifically," says Mark Mohler, a Florida business lawyer and CEO of Sprigster, which is currently donation-based but could convert to equity crowdfunding once the SEC releases its rules. "It provides for the true democratization of private equity." Daniel Gorfine, director of financial markets policy and legal counsel at the Milken Institute, a Santa Monica, Calif.-based think tank that investigates innovations in capital markets, has co-authored several reports on the JOBS Act and securities crowdfunding. "There are certain things that make crowdfunding and franchising a natural fit," he says. "Number one, the size of the investment from the franchisee is not so great that it would exceed the $1 million limit. Next, most franchisees aren't interested in seeking late-stage investments like some small businesses. Having tens or hundreds of shareholders sometimes scares away venture capital groups, but that doesn't really matter here. "But the most important thing," he adds, "is that crowdfunding creates a natural clientele. If you start out with 100 or 1,000 local investors, it might be a nice base of customer support and people invested in your success. The investors can see the property and business, and that adds enhanced credibility to the investment." Gorfine also believes crowdfunding could become a novel way for franchisors to screen candidates and assess demand for their products. "There could be a situation in which a franchisor does a prequalification contingent on a candidate being able to successfully raise money from crowdsourcing," he says. "A franchisor could get feedback about how desirable a particular franchise would be in a certain location. The local community could tell them if they want a coffee shop on this corner or not. They could tell a franchisee, 'If you raise a certain dollar amount or number of investors, we'll be able to do a transaction with you.'" Jonathan Sandlund, who runs online research and advocacy platform TheCrowdCafe, contends that crowdfunding could be a major step forward for equal opportunity. "This has an enormous potential to bring access to capital to franchisees without networks of wealth," he says. "Banks are really pulling back, and right now if you need $50,000 or $150,000 to start a franchise, you have to be wealthy or be connected to wealthy friends and family to get it. This will put people on equal footing." Sandlund also argues it's a great opportunity for investors. "Studies show that only 13 percent of Americans trust the stock market. But there's really no other place to go with your money," he says. "They can get 0.5 percent from their checking account, or go into bonds, which have been weak also. With crowdfunding there will be an opportunity to invest locally."Start your Nevada LLC in
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