Reg CF Crowdfunding for Franchises
Franchisors looking to expand into new markets and franchisees looking to “take the plunge” often face a dilemma: where to get the upfront capital. Franchise attorney Schuyler Reidel recently explored some traditional ways franchisees broach this issue. They include Franchise financing programs, loan guarantees, working capital loans, royalty fee deferrals, franchise associations, SBA loans or alternative investment networks.
All these methods have helped entrepreneurs begin their franchise journey. But another method has recently emerged that may overtake all past avenues for the added benefits both franchisors and franchisees get in publicity and more intense customer loyalty. This new method is Regulation Crowdfunding (Reg CF).
Reg CF is a set of regulations created by the Securities and Exchange Commission (SEC) deriving from Title III of the JOBS Act of 2012. Although passed into law over a decade ago the regulations did not go live until 2016. In 2021, the SEC modified the rules making them more founder and investor friendly.
Reg CF allows anyone to become an investor in a small business or startup, this includes franchises. (Publicly traded companies such as McDonalds are not eligible). Investors buy the securities over funding portals or traditional broker dealers. The securities can cover a wide range of financial instruments from equity, to future equity, to traditional notes, and profit-sharing “rev shares.”
Franchisors who have established customer bases are well suited for these types of raises given their consumer-facing businesses and the ability for the company (issuer) to include coveted perquisites thematic to the raise.
Reg CF crowdfunding allows franchisors and franchisees to collaborate on capital needs
Here are two scenarios where the franchisors and franchisees can benefit from a Reg CF raise:
Scenario One
An established BBQ restaurant with a loyal following wants to add two more stores. The total capital needed is $1.2M. They hire an attorney, contact a portal, get the required financial review completed and eventually go live with their raise. In the meantime, the owners reach out to their customer base to “Test the Waters” and gauge interest in the raise. They receive an enthusiastic response. When the raise goes live investors learn their investment entitles them to other benefits depending on their investment level including free T-shirts, “comped” meals, and the opportunity to attend a private dinner with the owners after the grand opening. After three months the raise closes and six months later the owners have two new stores.
Scenario Two
A pizza franchisor discusses a franchisee deal with two young entrepreneurs. The potential franchisees are eager to get into the business but do not have the $500k of upfront capital required. The franchisor allows them to use the company’s marks and email list in a Reg CF campaign. Because the raise will be imputed to the franchisor, the security is structured as a “rev share.” That way, the franchisor will not sell any equity in the company. Instead, the franchisees will finance the upfront capital by promising a part of future profits to the investors.
The franchisees hire an attorney, set up an LLC, and conduct the raise through a broker dealer with the franchisor’s blessing. The franchisor brings his customer base “closer” to him by making them investors and not just customers. The customers feel more aligned with the pizza franchise as investors and eat there more often. After four months the franchisees secure the capital needed to open the store. Two years later they have paid off the investors and start the process over for their next store.
*All investment comes with risk; these scenarios are for information purposes only.
Reg CF will upend capital raising for franchises
Reg CF is the future in franchise capital. It allows franchisors the chance to expand their business in a way the promotes brand awareness and loyalty. Franchisees looking for upfront capital may be able to use the franchisor’s goodwill and tap into their existing customers to create an investor base.
For more information on starting a franchise contact Schuyler Reidel at [email protected]
For more information on Reg CF raises for franchises contact Paul H. Jossey at [email protected]
By Jossey PLLC
