FAQs: Local Businesses- Raising Capital on the Exchange
1) Why should my company raise capital through crowdfunding? There are many reasons! One reason we are so passionate about crowdfunding is that it creates stronger connections between businesses and customers/community: when you give your customers/community a small financial stake it your success, they’ll likely buy your products/services as much as possible and encourage others to do so to. Your crowdfunding campaign also provides you with an excellent opportunity to expand your customer base—as you work to excite people about your capital campaign, you inevitably end up raising awareness about your business. And if you want to be especially known for being a community-focused company, grassroots crowdfunding provides you with a real way to demonstrate that. With a traditional loan, you oftentimes end up paying interest back to a large, conventional financial institution (which generally sets their own terms for the loan product). Investment crowdfunding enables you to help set your own terms and reward your customers and community for your success. Other common reasons entrepreneurs often gravitate toward this model include having a limited network of friends and family to loan money (or having exhausted their network), its speed (if you’re ready to roll, you can have your funds in hand relatively quickly), and not knowing any angel investors or VCs. Investment crowdfunding gives you a clear path for raising capital from your customers and fans.
2) How much money can my company raise through investment crowdfunding? By law, you can raise up to $5 million per year. The average company doing investment crowdfunding—and there have been thousands of them—raises over $300,000. On the Exchange, we’ve supported businesses raising as little as a few thousand dollar to over a million, although our typical campaigns tend to fall within the $10,000-$50,000 range.
3) Can a nonprofit or cooperative raise capital through crowdfunding? Yes, but you have to raise money in a way that’s consistent with the company character. For example, a nonprofit cannot issue stock, but it can borrow. A cooperative cannot allow anyone to become a member, but it can create a special class of preferred (nonvoting) shareholders. Also important, since you’ll need to pay your investors back (this is not a grant), you need to ensure you’ll have adequate revenues coming in to cover those future costs.
4) Can I advertise? Yes! Once you officially launch a crowdfunding campaign, you may advertise the offering far and wide. That includes promoting through e-mails, public events, Facebook, and Twitter. The Exchange can work with you on your campaign strategy and will also promote your campaign across our networks.
5) Where can I launch a crowdfunding campaign? Through one of eighty-plus federally licensed portals. (You can find the complete list here.) The MD Neighborhood Exchange has formal partnerships with several, and we match each business that we’re working with to one of those based on each business’ industry and the type of investment opportunity it chooses to offer (e.g., our partner, Mainvest, primarily supports “Main Street” businesses that want to offer Shared Revenue Notes). We selected our partner portals, which include Honeycomb Credit, Wefunder, and Mainvest, because they—like us—are committed to growing local business as well as operating in a fully transparent, accountable manner.
6) How long does it take to launch a crowdfunding campaign? Depending on your readiness and goal, it can take anywhere from weeks to months.
7) How do I know if I’m ready to launch a crowdfunding campaign? Reach out to us directly! We welcome the opportunity to learn more about you and your business, and explore if/how we can support you.
8) How long does a crowdfunding campaign last? It can last up to a year, but most companies set a shorter timeframe.
9) What if I raise less than the campaign goal? Crowdfunding campaigns are legally required to set minimum and maximum goals. If you don’t reach your minimum, nothing happens—your investors will not be charged. If that happens, it’s worth figuring out what did not work well and fixing the problem. You can always try again, and the Exchange will provide free support to you throughout the process.
10) How expensive is it to carry out a crowdfunding campaign? Each portal has a slightly different fee structure. Some charge a little money up front (generally just a few hundred dollars), and then take a percentage (6-9%) of the total raise if it’s successful. Others just charge a small percentage (6-8%) of your raise, which they’ll only take if/when you meet your minimum goal. There may be other expenses you face getting ready for a campaign. For example, if your accounts are not in order, you may want to hire an accountant. Campaigns aiming to raise above $350,000 are legally required to get an independent review of their financials, which will likely have a cost. And if you don’t have a robust way to reach your customers/fans, you may want to invest in your social media presence and communication channels.
11) How can the Exchange help? We provide free technical assistance to local businesses interested in launching a grassroots investment crowdfunding campaign. We are there to support you during the entire process-- from figuring out if grassroots investment crowdfunding is the best approach for you through the very end of your campaign. We are passionate about supporting and growing stellar local businesses! We also are committed to raising awareness about local investing since it's such an important (and often overlooked) way to build individual and community wealth and to foster more sustainable, equitable, inclusive, and resilient local economies.
FAQs About the Local Investing & The MD Neighborhood Exchange