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Crowdfunding as collateral
Wisconsin is paving the way for this emerging financial investment tool

By GUY FIORITA

November 2015

So you want to start a business, but donít have the start-up money or the collateral to ask the bank for a loan? And you donít want to ask friends or family? Do the next best thing ó ask a stranger. Better yet, ask a lot of them. With crowdfunding, itís easy. There are numerous specialized websites where you can pitch your idea and then sit back and wait for total strangers to pledge you money. Funding projects like this arenít new. To build the Vietnam Veterans Memorial, 275,000 Americans, along with corporations, foundations, veterans groups, civic organizations and labor unions, pitched in a total of $8.4 million to the project. And that was before the Internet.

One of the most popular crowdfunding websites, Kickstarter, launched in 2009 and has received more than $1.9 billion in pledges from more than 9 million people. To date, over 89,000 creative projects have been funded through the site. The important thing to note about sites like Kickstarter, however, is that the backers are not in it for the money. They are supporting creative projects to help them come to life. They do not profit financially. The only rewards they receive are things like copies of books or invitations to showings or premieres for the projects they help fund.

But a new wave of crowdfunding is hitting the Internet. Crowdfunding is now being used as a financial investment tool, attracting both lenders and borrowers, and Wisconsin is a pioneer in the field. In November 2013, Wisconsin became the first state to pass a crowdfunding law that allows companies to seek investments from state residents online. The law went into effect last year, and since then, more 20 states have passed similar laws.

"I am sure that the laws will change to become more workable. Ultimately, a national law will emerge to allow companies to source capital online from nonaccredited investors nationwide. In 10 years, I would expect the U.S. market to more closely resemble what is going on in the U.K., where investment crowdfunding has been legal for three years," says David Dupee.

He should know. Dupee not only helped pass the law, but he is also the founder and CEO of CraftFund. Launched in 2012 as the stateís first local crowdfunding site, CraftFund is a platform for local residents to invest in local food and drink and real estate development companies.

So far, CraftFund has helped three companies ó two craft breweries and one real estate developer ó raise a total of nearly $100,000 on the site. For now, CraftFund is only for food and drink investors and companies. "We are focused on food and beverage for two reasons. First, because we believe niche is important as far creating expectations. We donít want people coming to our site seeing opportunities to invest in everything from the next Facebook to a local bakery. We are about activating local capital and turning local customers into owners and advocates of local businesses," he explains. "Second, we believe food and beverage is well suited for this kind of capital. It is a tangible investment that is easy to do due diligence on. Plus, there is a great demand for consumers to connect with their food and drink producers. Invest local is the next logical extension of the buy local movement."

CraftFund investment opportunities are only open to Wisconsin residents. Each person can invest up to $10,000, and so far, the average investment has been around $1,500. "The motivation to invest is both financial and experiential. Most of the companies will be giving up equity, meaning that investors own a piece of the company," Dupee says. "However, many investors view this as a way to support local in a new and meaningful way."

As a pure investment vehicle, Dupee says each investor needs to understand that this is not a way to get rich quick. "But like being a Packer shareholder, there is a certain satisfaction in owning a piece of your favorite local food and drink producer," he says.

 


This story ran in the November 2015 issue of: