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Why Has Hardly Anyone Applied for Equity CrowdFunding in D.C.?

Why Has Hardly Anyone Applied for Equity CrowdFunding in D.C.?

02.11.2015

District regulators approved the city’s first equity crowdfunding campaign last week. It was also the only application they’ve received to date.

The Department of Insurance, Securities and Banking approved equity crowdfunding rules last October as a way for the city’s entrepreneurs to raise small sums of money from city residents in exchange for a piece of their business.

Only two entrepreneurs have submitted applications to date, and one of them was withdrawn shortly thereafter, a department spokeswoman said.

Start-up enthusiasts have endorsed crowdfunding on the local and national level for years as a way for entrepreneurs to raise much-needed capital from people who believe in their business. The money can be especially helpful for small business owners and minorities, who may have less access to traditional venture capital.

But if there was pent up demand, it certainly doesn't show.

The first crowdfunding application, which was approved last Wednesday, allows District-based EquityEats to raise $200,000 for an entertainment and dining venue in Penn Quarter that will host five different restaurant concepts on a rotating basis. The eatery, called Prequel, is slated to open this spring.

Speculation varies on why other entrepreneurs have yet to show interest.
  • Many entrepreneurs have successfully used non-equity crowdfunding to support their ventures in recent years, some even raising millions of dollars. Instead of an equity stake, these entrepreneurs offer donors early access to their products or other perks.
  • Non-equity crowdfunding can be more advantageous to entrepreneurs in the long run as the capital is non-dilutive, meaning it does not impact how much of the business is owned by founders and future large investors.
  • The process to pursue equity crowdfunding in the District may still be unknown to some entrepreneurs and opaque to others. After all, the practice is only in its fourth month. However, a spokeswoman said the department has sought to make members of the local business community aware that the option is available.
  • D.C. regulators can only permit intrastate equity crowdfunding, meaning that both the company and its funders must be located in District. That places obvious limitations on the number of companies that can apply and the number of investors available to them.
  • It’s a problem other jurisdictions have encountered.
  • The Securities and Exchange Commission must publish guidelines before equity crowdfunding is allowed across state lines. The agency has said for years that such rules are in the works.
  • Finally, the rules also place a cap on how much money a company may raise. The $2 million limit in D.C. is quite high compared to rules enacted in other states, but it means those seeking a heftier sum need to look elsewhere.
 Article cited from: http://goo.gl/47Sb8Q