Market timing is key for any startup.
CraftFund, the subject of this second installment in Xconomy’s series about Wisconsin “beertech” companies, is a reminder of that fact. The Milwaukee-based website is in the vanguard of the equity crowdfunding movement in the U.S., and it’s still too early to tell if founder David Dupee’s bet will pay off.
His company’s story also demonstrates how regulatory hurdles—especially in a young industry—can complicate things for startups.
CraftFund’s website hosts equity crowdfunding campaigns, primarily for the food and beverage industry. Equity crowdfunding allows anybody—not just accredited investors—to buy a small stake in a company.
The practice has gotten some traction in places like the U.K., which has implemented nationwide equity crowdfunding regulations. The beneficiaries include investment crowdfunding platform Crowdcube, which says it has enabled 311 businesses to raise nearly $171 million from 214,000-plus investors since 2011.
But so far it’s been slow going for equity crowdfunding in the U.S.—and that’s been the case for CraftFund, too, Dupee says. His company is mainly targeting food and beverage makers, restaurants, and real estate developers. The challenge has been overcoming regulatory hurdles and convincing cautious startups (and their attorneys and accountants) that equity crowdfunding is a secure and worthwhile method of raising capital, he says.
Until the SEC implements long-awaited rules allowing for equity crowdfunding nationwide, CraftFund can only host campaigns for companies located in states that have passed laws allowing intrastate equity crowdfunding. That means companies based in a given state can only solicit and accept investments from investors also located in that state. Wisconsin is among the states that have such rules in place.
Three companies have completed campaigns on CraftFund so far. Madison-based MobCraft Beer raised about $68,000 from more than 50 investors, failing to reach its minimum $250,000 goal. Nine investors committed $20,500 to Ellsworth, WI-based Common Man Brewing, which fell short of its goal of raising between $50,000 and $112,500. And Timber Mill Theater, a proposed live entertainment venue in Appleton, WI, raised just $7,000 of its goal of $500,000 to $2 million, according to CraftFund’s website.
Dupee says the organizer of the music venue didn’t accept the investments—which were in the form of debt financing, not equity—because he ran an all-or-nothing campaign. (That’s not the case with other CraftFund projects. Wisconsin law gives would-be investors in equity crowdfunding deals the option to back out of their commitments if the campaign doesn’t hit its goal. MobCraft, for example, originally raised about $75,000, but it ended up with less after a handful of investors changed their minds.)
“It was very ambitious,” Dupee says of the developer’s $2 million target for the proposed Timber Mill Theater. “And he knew that going in. He just wanted to kind of put it out there.”
Creating a steady flow of deals for CraftFund has been difficult, Dupee says, but he’s starting to see more interest as awareness of equity crowdfunding builds. He’s trying to spread the word, partly by going to events and speaking on panels.
“I think it remains to be seen how much this exemption will be used,” Dupee says, referring to the rules allowing intrastate equity crowdfunding. “We remain hopeful, but there’s also a lot of difficulties built into the regulations.”
One of the barriers, Dupee says, is a federal securities rule that requires companies to ensure they don’t direct the stock offering to anyone outside state lines. That makes companies like MobCraft “very wary about what they put out on social media,” and it has “attorneys scratching their heads” about how to interpret it.
“For the type of companies we’re trying to attract, which presumably would have a strong social media following, it just hampers their ability to get the word out about it,” Dupee says. “I think there are ways to address that, but it definitely does cause companies to pause.”
Dupee is still optimistic that equity crowdfunding will catch on in the U.S. It’s “just a matter of our regulations catching up,” he says.
“I still envision a world five years from now where we’re more like the U.K.,” he adds. “Equity crowdfunding is not a pipe dream.”