Crowdfunding Rules Hold Promise for Raising Billboard Equity

The SEC just published rules which will allow small businesses to raise money from non-accredited investors (e.g. non-millionaires) using crowdfunding.  A summary of the rules is available on the sec.gov website.  The rules will go into effect in early 2014 after the comment period expires.  The rules will open up a new source of capital to small businesses but there are regulatory drawbacks and the financing costs.

Here are the pros of the proposed rule.

• A small business can raise up to $1 million/year using crowdfunding.
• Investors make their own representation that they meet the act's requirements.  Your small business won't have to verify each investor's net income or net worth.

Here are the cons of the proposed rules.

• Investments are limited to 5-10% or each investors net worth or net income, with a maximum investment of $100,000 in any twelve month period.  I don't think this is a huge drawback because in my experience investors rarely want to put more than $100,000 into a small illiquid investment.
• You can only use one broker/dealer or funding portal at a time so you need to pick the right one.
• You must have reviewed financials if raising up to $500,000 and audited financials if raising more than $500,000.
• You must submit an annual report to the SEC.

Here are the estimated costs of a $1 million crowdfunding issue according to the rulemaking.

Brokers fee $70,000 or 7% of funds raised.
Edgar ID code  $60 at issuance.
Form C filing $6,000 at issuance.
Annual Audit.  My accountant says I should expect $12,000-15,000.  Ask yours.
Annual Report to SEC $4,000.

New SEC Rules Won't Make It Easier To For Small Billboard Companies To Raise Money

On September 30, 2013 the SEC eliminated an 80 year old rule which prohibited companies from soliciting investments via public advertising.  This is a good thing, right?  Nothing can stop your small billboard company from placing a banner on its website saying "Investors Wanted" or from putting up an "Investors Wanted" sign on a billboard you own in order to obtain capital to grow faster.

Not so fast.

The new 506(c) rule says you can only accept money only from an "accredited investor", that is, a person with a single income above $200,000, a married income above $300,000, or a net worth (excluding the value of a home) above $1 million.

The accredited investor rule is nothing new.  Any company raising money from private investors had this restriction in the past.  Put here's the kicker.  Under the original rule 506,  accredited investors self-certified. You asked them if they were accredited they filled out a form saying they were and that was that.  You took their word for it and didn't pry.

Under the new rules you must verify that anyone who gives you money is an accredit investors by getting w2's or an income tax return or bank and brokerage statements or a letter from that investor's CPA or attorney.  Welcome to the nanny state.

There have been several articles in the press by angel investors who've said this will have a chilling effect on capital raising.  My company has decided to continue raising money under the old 506 rule and to forego public advertising in order to protect the privacy of my investors.  Here's an article which explains why the new rules will help wall street more than main street.

Billboard Investment Bankers

A billboard investment bankers will help you buy or sell your company or raise equity or debt in exchange for a fee.

How much will it cost? - Investment banking fees are typically 1-2% to raise debt and 5% to raise equity.    Small deals may have a fixed fee because it takes the same effort to close a small deal as a large deal.  Brokerage fees often involve the Lehman formula: 5% on the first $1 million of sale price, 4% of the second $1 million, 3% of the 3rd $1 million, 2% of the fourth $1 million and 1% of anything after.

What will an investment banker do? - A good investment banker will suggest a transaction price, help you assemble the right information, make initial contact with buyers or financing sources and intercede for your interests.  Most billboard operators are good at billboard operational matters but less educated about financial and banking matters.  An investment banker can help bring them up to speed.

What should I look out for? - Watch out for any investment banker who wants his entire fee up front.  This usually means that he is not confident of getting the transaction done and will waste your time.  I have used investment bankers and brokers at least a dozen times during my investing career to raise capital and to sell companies.  In almost every case I have agreed to pay the investment bankers out of pocket costs during the engagement phase but have agreed to pay the investment banking fee only on success.  They only time I agreed to a fixed fee up front the transaction never closed!