Reg CF crowdfunding for franchises
Many franchises are struggling right now due to many factors, including residual COVID issues, uncertain economic outlook, high interest rates, and labor shortages.
Those looking to start or expand their operations are struggling with limited financing options.
One option many franchises have not considered is Reg CF crowdfunding. Reg CF allows private companies to raise capital and sell securities to the public within certain limits. This law or “exemption” is tailor-made for the franchise industry.
Franchises have natural advantages for Reg CF crowdfunding raises
First, franchises tend to be B-to-C. Working directly with the public means franchisors and franchisees contact potential investors every day by serving them as customers. If you keep in touch with your customers through email and/or social media, you already have a ready-made crowd to tap for investment. You can tailor your raise to suit your existing customers.
Through the Reg CF crowdfunding campaign and after, franchises enjoy further benefits including:
- Broaden your investor base: Unlike other funding models, Reg CF can diversify your investor base from both a financial and geographical standpoint. Reg CF portals can accept investors from anywhere in the US, giving your business a potential foothold in all 50 states.
- Turn your customers into marketers: Reg CF allows your customers to become financially invested in your business and see their investment grow as your business grows. This provides a free marketing campaign for your business with every new investor.
- Incentivize your investors: Reg CF allows you to provide perks as part of the investment. Depending on the product this could include the product itself, ‘founder’ status on your website, access to events, or anything else that may induce an investment.
- Prove value to institutional investors: A successful Reg CF raise can show larger, institutional investors your business is ready for the big money. Many larger investors are now requiring “social proof” of a company’s business model. Your business can show larger investors value and momentum and provide your business “bridge money” while larger investors evaluate your model.
What franchises need to know before a Reg CF crowdfunding campaign
First Reg CF law is somewhat unsettled when it comes to franchises. For example, your raise as a franchisee could be “imputed” to the franchisor. This could complicate things for the franchisor and limit raise capacities. For example, if two franchisees were to raise using Reg CF the aggregate limit may apply to corporate, limiting how much they could offer. This is because Reg CF limits raises through “control.” As the franchisors “control” operations through the franchise agreement it may limit Reg CF’s availability.
One possible workaround is for the franchisor to disavow “control” related to the franchisee’s capital raising in the agreement. But this is yet untested—although less likely to raise SEC concerns absent fraud or misleading statements.
Overall however, Reg CF is a useful financing tool for franchises. One that is bound to become more prevalent in the future, simply because it makes good business sense.
If you’re ready to start or expand your franchise operations, sign up for a free 30-minute consultation: https://www.thecrowdfundinglawyers.com/cfl-scheduler/
By Jossey PLLC
