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InvestmentBank.com | #EquityCrowdfunding for Mergers & Acquisitions: Liquidity for Business Owners?
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22 Aug #EquityCrowdfunding for Mergers & Acquisitions: Liquidity for Business Owners?

The hype over the JOBS Act was certainly warranted. For over 70 years, the ability for private companies to have access to capital has been limited–and for good reason. Lack of sophistication on the investors’ part combined with the inevitability of the snake oil coming out, makes for a bad combination. But, some parts of the 33′ Act have had a stifling effect on the ability to access capital infusion.

The creative methods available to businesses for gaining access to capital under the changes in “general solicitation” rules have broadened substantially. I want to take a brief look at the rules themselves and how they can directly be used in the world of mergers and acquisitions to help provide liquidity for business exits.

Unlike the SEC rules of yesteryear, the lifted ban on general solicitation for investment allows would be start-ups, or any business looking for growth or buyout capital, to invite investment from “general” sources. In today’s era that could include television, radio and even Twitter–if you so desire.

But while you can generally solicit, the rules for gaining investors remain (at least until the entire law is fully implemented and all the rules are addressed). In short, your investors need to be accredited. If you need an outline, go here.

For specific M&A opportunities or a sellout of a particular venture, the JOBS Act–once fully enacted– will do a couple of things most companies may not realize.

First, business owners will be able to crowdfund from non-accredited investors of up to $1M per anum. Title IV or RegA+ of the JOBS Act allow for up to $50M with the right structure.  So, instead of a traditional, single liquidity event from say a private equity group or strategic buyer, owners will have the option of a company sellout with a group of several hundred smaller investors who believe in the longevity and sustainability of a more traditional business–a business that may have a long-standing track record, existing management and a sustainable story.

Secondly, if an owner wanted to maintain controlling interest in his/her company, but take some money off the table, it could be a good option–depending on personal circumstances–to sell some portion to a group of investors in a crowdfund campaign. The owner could opt to sell to a much larger group of investors, perhaps over an extended period which could last several years.

While selling out to large numbers of unaccredited, unsophisticated investors over an extended period doesn’t sound ideal, it’s an option for liquidity that many may not have considered. And, who knows, with the right creativity, investors and deal structure in place, it may provide an owner with tax and lifestyle advantages not available through other methods.

We’re currently seeing some interest from a few of our clients who’re not desiring a complete sellout of the business . The owners still see potential growth and cash flows far into the future, but still want to take some risk off the table. If a suitable single private equity buyer cannot be found, an eventual option may be a private placement in a crowdfund campaign–maybe.

It’s important to understand as Gigaom correctly outlines, the JOBS Act isn’t a catchall and does not follow the typical “crowdfunding” model. In reality, using the “crowdfunding” terminology here may actually be a misnomer. In any event, utilizing equity crowdfunding for capital raising and financing will almost always add a much deeper layer of finance and investor management complexity–a direct issue that most private companies won’t have the in-house capacity to manage. But, if a struggle for finding the right valuation and buyer ensues when it comes time to sell, it could be time to get creative and think outside the box.

Just for clarification: I’m not recommending crowdfunding as an M&A solution for any client nor will I likely do so in the future. This is just an attempt at “what if…” scenarios involving how crowdfunding could impact the world of traditional M&A. I would rather let other firms be the guinea pigs. That doesn’t mean we can’t predict. What do you think?