By: Derek J. Famulari
At some point of every day, you are most likely involved in the purchase of a product or service from a franchise. Whether it’s your morning coffee from 7-Eleven or Dunkin’ Donuts; your lunch from Subway; or perhaps a Big Mac (on those particularly stressful days). After work, you may swing by your town’s Planet Fitness or take your kids to My Gym. The list goes on and on. Franchises are everywhere, and your interaction with a franchised business is inevitable.
In fact, in 2012, the International Franchise Association estimated that there are approximately 750,000 franchised establishments in the U.S., directly employing 8.1 million people, and contributing $439 billion to U.S. Gross Domestic Product, which numbers have continued to rise.
Now, what if you were able to capitalize on your continued support and patronage of your local franchised businesses? Under the proposed rules of the Jumpstart Our Business Startups Act (“JOBS Act”), a new, non-accredited investor class will be created and may make a new unique way of investor capital solicitation possible.
The JOBS Act was signed into law in 2012. The intended purpose of the JOBS Act is to spur job creation through small companies and start-ups by relaxing the current stringent regulatory burdens of raising capital. Specifically, Title III of the JOBS Act allows small businesses seeking investor capital to solicit investment opportunities not only from the wealthy, but from the general public. Through “Equity-based crowdfunding” – the process by which investors buy a slice of a small business –everyday Americans can now participate in this style of investing.
What this Means for Franchising
One of the most common issues facing prospective franchisees is the ability to find sufficient financing to start the business. Franchises, because many are start-ups, are constantly faced with limited access to credit. One solution to this credit-crunch may be equity-based crowdfunding. From the franchisee’s perspective, the JOBS Act will allow the opportunity to solicit investors and get the capital they require to start and run their new venture.
This new avenue of capital can help franchisees get the funding that they need, all the while creating a natural clientele before they even open their doors. Funding through local investors can assist in creating a solid base of customer support and people who are personally vested, on behalf of themselves and the community at large, in the success of the franchise. Likewise, franchisors can use equity-based crowdfunding as a non-traditional way of accelerating growth or enhancing growth strategies.
The Big Question
Despite being signed into law for two years, the SEC has failed to indicate how fast and loose it is willing to play with the idea of equity-based crowdfunding. Even after a year of hearings and public comments on the subject, there is no definitive answer on how the new law will play out in the real world. However, through the implementation of the new law, we should see the birth of a whole new investor in the world of franchising.