Equity crowdfunding, a method of raising capital from small-dollar investors implemented by Title III of the Jumpstart Our Business Startups (JOBS) Act, came online nearly a year ago. The measure was touted as an alternative way to finance both early-stage and local companies that might have trouble securing a loan or attracting more conventional investors.
By its nature, equity crowdfunding is a horizontal endeavor; companies soliciting small investments register with the SEC through an intermediary platform and begin to build capital toward their goal. If they reach that goal, they receive the funding and the investors officially become shareholders. One intermediary platform, GrowthFountain, saw an opportunity to merge the concept of equity crowdfunding with another kind of horizontal institution: the credit union.
Credit unions are financial institutions similar to banks, except for one major difference: Credit unions are not for-profit entities, but rather cooperatives. Each account holder in a credit union is a part owner that retains a democratic stake in the institution and receives dividends in the form of more favorable interest rates, whether it's on deposits or loans. Marrying equity crowdfunding with credit unions was a no-brainer, said Ken Staut, CEO of GrowthFountain.
"When we formed GrowthFountain and thought about crowdfunding, a lightbulb kind of went off over my head," Staut told Business News Daily. "Our mission has so many similarities with a credit union's. We're both focused on people helping people and community development."
The intersection of equity crowdfunding and credit unions
After Staut realized equity crowdfunding and credit unions should go together, he reached out to Callahan & Associates, a prominent credit union think tank, to gauge some of the unions' interest in offering access to GrowthFountain's equity crowdfunding platform. It turned out interest was immense, Staut said. Although the company is still early in the process, it already has three credit union partners: Digital Credit Union, a top 10 credit union with 620,000 members across 50 states; Massachusetts-based Jeanne D'Arc Credit Union with 85,000 members; and Oregon-based Rivermark Community Credit Union, also with 85,000 members.
About a dozen more contracts are in the works, and Staut estimates that when the ink is dry, GrowthFountain's equity crowdfunding platform will be available to roughly 3 million credit union members nationwide.
Each credit union leverages GrowthFountain's platform, but the branding and imagery is all unique to the credit union that's offering it to members. The foremost businesses displayed on each site are unique to the geographic region in which the credit union operates as well, meaning members can invest in local companies – maybe even ones they visit and patronize.
Keeping the money in the local economy
Equity crowdfunding boasts the ability to keep wealth in local communities, which complements the financial cooperative nature of credit unions. When investors are regular people receiving small dividends, instead of large venture capitalist firms or private angel investors in far-off cities, the money tends to remain in smaller economies.
"These credit unions are jumping at the opportunity to add equity crowdfunding as a tool for their members," Staut said. "The profits [from crowdfunded companies] stay local and recirculate in that economy, so I think the potential for us to work with credit unions to support local businesses is something you wouldn't usually get from a conventional bank."
There are limits, however, to how much equity individual investors can purchase. Under the Title III equity crowdfunding rules, investors with either a net worth or annual income below $100,000 are restricted from investing more than 5 percent of their annual income or net worth, whichever is less. Those with a net worth or income greater than $100,000 remain restricted to 10 percent, and no investor may purchase more than $100,000 in securities in one year through all crowdfunded offerings.
When it comes down to it, Staut said, equity crowdfunding through credit unions is particularly useful for small, local and early-stage companies.
"This is a powerful tool to connect entrepreneurs with their investors," he said. "To me, crowdfunding is perfect for local businesses and early-stage businesses, and credit unions give us the reach to connect with them across the country in a way I don't think we could have just done otherwise."