Lenders to crowdfunding-reliant firms face steep hurdles

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Better early than never.

That was the underlying premise for Communities First Financial's plan to lend to crowdfunded companies. While the program, which set aside $10 million to lend to companies seeking equity crowdfunding, fell short of expectations after an 18-month pilot, the Fresno, Calif., company's leaders said they learned a lot about the process.

The effort turned out to be "pretty complicated" for borrowers, said Steve Miller, president and CEO of the $410 million-asset parent of Fresno First Bank. "There’s a big difference between, 'Hey, I’ll loan you $50 to go make a product' versus, 'I’m going to give you a couple thousand dollars to take an equity position in your company.' "

While Communities First made many contacts and had "a lot of good conversations" with prospects, Miller said the pilot yielded only one success story — with Full Circle Brewing in Fresno. "Unfortunately we didn’t have a big wave customers that engaged in equity crowdfunding last year, so that was the only disappointing side.”

Communities First launched its venture in September 2016 as part of a partnership with Breakaway Funding, a crowdfunding firm in Novato, Calif. For Miller, the goal was to gain exposure to early stage companies that often go overlooked by banks.

Breakaway’s managing partner, Kim Kaselionis, did not respond to a request for comment.

Full Circle Brewing received a $685,000 loan in January after securing $124,000 through a crowdfunding campaign.

“They went through the equity crowdfunding process, and we were able to come in and give traditional financing at the end to help bridge the gap,” Miller said. “That worked really well, obviously, for the customer and for us. This has developed into a very strong relationship."

Fresno First faced few hurdles handling its end of deals, but prospects seemed to struggle lining up equity investors, Miller said.

Equity crowdfunding was legalized by the Jumpstart Our Business Startups Act in 2012. It took another four years for the Securities and Exchange Commission to implement the necessary regulations. Under the rules, crowdfunding issuers do not have to register with the SEC, but they must comply with other mandates, including a disclosure standard and a requirement that an SEC-approved intermediary must handle all transactions.

Indiegogo, a prominent crowdfunding site, began supporting equity crowdfunding ventures in late 2016. Indiegogo has helped launch more than 275,000 campaigns of all types. Its equity crowdfunding numbers are far more modest. In the first 12 months, Indiegogo reported 30 campaigns, raising $7.5 million.

Equity crowdfunding brought in about $2.5 billion globally in 2017, according to Fundly. The crowdfunding firm estimated that half of all crowdfunding campaigns succeeded last year.

Broadly, Fresno First wants to make loans that are similar to the Small Business Administration’s 504 program, which requires borrowers to secure funding from a certified development company before turning to a bank to complete the funding. A big difference is that companies seeking 504 loans must have significant income and net worth to qualify; companies looking to crowdfund often lack both.

While he applauded Fresno First for taking a chance, Chris Nichols, chief strategy officer at the $10.3 billion-asset CenterState Bank in Winter Haven, Fla., wrote in an email that companies looking at crowdfunding are often too green to be serious candidates for bank loans.

“That Venn diagram just doesn't intersect that much,” Nichols said. “I give Steve Miller credit for trying, but companies that legitimately crowdfund themselves are usually not bankable.”

Though Fresno First isn’t giving up on its equity crowdfunding experiment, Miller said the bank has started looking at other ways to forge ties with early stage companies.

“A good company is a good company — whether they’re a year old or 10 years old,” Miller said. “If you know what you’re looking for, a bank can come into the cycle a little earlier, which we view as a big competitive advantage.”

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