We’ve been curious to see whether crowdfunding would findthe world of franchising. Traditionally, the solicitation of investors through general advertisinghas been severely restricted under federal and state securities law; these limitationsalso applyto crowdfunding, or seeking capital contributions through online solicitation of the masses. The JOBS Act of 2012 sought to remove some of these restrictions, under the theory that both investors and businesses seeking capital could benefit from this new internet marketplace, as long as certain protections are in place.
Now Fund A Franchise, has begun to accept applications from prospective franchisees and invite investors to provide funding in a manner similar to that deployed by Kickstarter. It appears that Fund a Franchise is the first crowdfunding platform organized to cater to the franchising market.
Fund a Franchise requires that a prospective franchisee complete an application and be accepted into the program. The prospective franchisor must agree that it will consider a franchisee capitalized at least in part through the crowdfunding program. The prospective franchisees pay a monthly fee to be listed on the site and have access to a “deal room”; investors may participate at no charge. Investments may be made in the form of equity or debt.
Crowdfunding has the potential to match individuals who wish to open a franchised business, but lack the necessary capital investment to do so, with investors who might be willing to take a chance on a franchising opportunity. But several questions and issues occur to us, including:
- Will franchisors agree to participate? Generally, franchisors generally want to limit the number of owners of a franchisee. If the franchisee has too many owners, it may not be clear who has the right to make decisions on behalf of the franchisee. Many franchisors may be reluctant to approve a franchisee that raised capital through contributions from numerous individuals. A franchisor would be more likely to accept a franchisee that consists of one manager/entrepreneur providing primarily services to the start-up business and a single sophisticated investor whose principal contribution is capital. The Fund a Franchise website suggests that several franchisors are willing to participate, but none are large systems.
- Will a manager/entrepreneur and investor(s) who are brought together online be compatible? Such arrangements generally succeed when there is a great deal of trust established among the parties; written contracts can only go so far.
- At this time, only accredited investors (generally, individuals with over $1 million in assets or with income in excess of $200,000 in each of the last two years) can participate in crowdfunding on Fund a Franchise and similar platforms. This places a significant constraint on the number of persons who are eligible to invest through the site. The prohibition against participation by non-accredited investors will end when the SEC finalizes regulations permitting such investments, but these regulations are not likely to be in place before early 2016.
- Using Fund a Franchise will not avoid legal fees; the site requires users to retain a securities lawyer (although the site will apparently provide referrals to such counsel upon request).
(Note: This post is provided for information purposes only; we make no recommendation as to the advisability of utilizing Fund a Franchise or any other investment platform or investing in any business. You should consult legal counsel and your financial advisor before entering any such arrangement)