The shortage of capital for entrepreneurs due to the Great Recession is now over. Capital is starting to flow into the system from banks, hedge funds, venture groups, finance companies and individual investors. On top of all this, 2014 brings two new and exciting options: a public offering and equity crowd funding to accredited and unaccredited investors.
We all know about the major public offerings of 2013, but few entrepreneurs are also aware that many new firms have set themselves up to finance public offerings for small and midsize entrepreneurial companies. Companies with annual revenues as low as $5 million can raise up to $5 million in a public offering. Some investment bankers, if they really like the private company, will front the entire expense of the public offering. This was unheard of the last few years. The cost of going public has always been an expensive undertaking. Today, the upfront, legal, accounting and other costs can run up to $300,000 or more. During the Great Recession, any small private company that wanted to go public had to foot the bill themselves. Now, with the market for IPOs heating up again, some investment banks are fronting these costs to get good deals.
On top of all this is the capital that is flowing into companies from all directions once they become a public company. Small companies going public usually end up on the over-the-counter market or even the Pink Sheets. But those OTC or Pink Sheets companies now have new choices for more capital from many new hedge funds, which, if they like the company, offer many attractive funding terms to help grow the new public company.
The other new financing avenue opening up—crowd funding—is a result of the Jobs Act. Reward crowd funding—in which the “crowd” gives money to a business in exchange for a product, service or other “reward,”—has been very successful through sites such as Kickstarter and Indiegogo. But the new rules for equity crowd funding will open the gates to all kinds of new investors.
Now, only accredited investors are allowed to do equity crowd funding; but sometime in 2014 unaccredited investors will come on board and everyone who wants to invest in an entrepreneurial company will be allowed to under the new rules of the Jobs Act. [Editor’s note: The SEC is expected to finalize its new equity crowd funding rules sometime in February 2014. Investment portals may be up by the third quarter.]
For the first time, Financial Industry Regulatory Authority (FINRA) broker-dealers are taking advantage of being able to advertise to accredited investors, and are looking for firms to finance.
My phone and the phones of investment bankers like me are ringing off the hook from all kinds of new funding sources looking for good entrepreneurial companies to support. My advice to entrepreneurs is to take advantage of all this new capital available to them. Remember: first come, first served.