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Partner Section | Arizona Small Business Association | May 2015
Crowdfunding in Arizona
by Rick Murray
Raising money to start a business or take a business to the next level has always been a challenge. Many great ideas and businesses have gone under because they lacked the ability to stay in the game long enough before revenues could support the business. Under-capitalization is the number one reason businesses fail.
Banks know this. Unless there is collateral or solid financial history, it's not likely they're going to lend money. So where does that leave the small business owner wanna-be? Typically, they resort to using their retirement funds, obtaining a 2nd mortgage, maxing out credit cards, and borrowing from friends and family to help fund their business. In most cases, it is not enough. Without the ability to tap into other sources of funds, many businesses are doomed for failure. That's why the Arizona Small Business Association championed a new law that allows Arizona businesses to solicit investors for an equity positon in their company without having to comply with SEC laws.
Equity Crowdfunding is different from typical Kickstarter crowdfunding in that you are actually selling shares of the business in return for an investment. Previously, this option required SEC compliance, which is complicated and expensive and reserved for companies seeking millions of dollars.
The 2012 JOBS Act allowed for equity fundraising at much smaller levels and bypassing SEC requirements, but states needed to set up the framework in order to participate. With the new Equity Crowdfunding law, Arizona businesses can solicit up to $10,000 per investor and raise as much as $2.5 million. The Arizona Corporation Commission will have oversight and, along with submitting a business plan, there are several disclosures that a company must comply with in order to participate in Equity Crowdfunding.
This new way for businesses to raise capital is a game-changer. Businesses that have a solid business plan, competent people at the helm, and a clear plan to profitability will succeed in raising the needed capital. The obvious by-product will be new jobs and added tax revenue for Arizona. It will also provide the public with the opportunity to invest in ideas, people and businesses within their community, creating opportunities in areas of the state where none existed before.
But as with all investments, it's buyer beware. Due diligence will be critical. The average person new to investing will need to be diligent, educating themselves before investing in any opportunity. Asking the hard questions will not only help the investor learn more about the business, but also force the business owner to know more what investors are expecting. It is hard to predict what equity crowdfunding will look like in 10 years, but one thing is certain: Opening a new avenue for small business to access capital will create new opportunities and new competition in the business lending/funding arena. It's the booster shot the Arizona economy needs to continue the gradual climb back to economic relevance.
Rick Murray is chief executive officer of ASBA
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