Lack of available funding for their business operations remains a major obstacle for farmers. Banks have generally refused to make loans to small farms direct marketing their products to consumers; grants from government agencies such as USDA often have strings attached which frequently make the cost of compliance with the grant’s terms too high to make it financially worthwhile for the farmer.
Another option for the farmer has been to raise equity capital through a stock offering; the trouble there has been that restrictions in federal and state securities laws have made it difficult for farmers and other small businesses to effectively access investor funds. With the passage of federal securities legislation earlier this year, the regulatory climate for farmers soliciting investor money has the potential to improve significantly.
On April 5 of this year, the Jumpstart Our Business Startups Act (JOBS) was signed into law. The JOBS Act contains a section entitled “Crowdfunding” which provides a new exemption from federal and state securities registration laws.
Unlike other securities registration exemption laws, the crowdfunding exemption allows both advertising to the general public and also an unlimited number of non-accredited investors. Federal law defines an accredited investor, in part, as (1) “a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1million at the time of the (stock) purchase, excluding the value of their primary residence and (2) a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.”
The crowdfunding exemption allows those issuing stock to raise up to $1 million for any 12-month period. Investors can put up “the greater of $2,000 or 5 percent of the annual income or net worth of such investor as applicable, if either the annual income or the net worth of the investor is less than $100,000; and 10 percent of the annual income or net worth of such investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000.”
The crowdfunding exemption can be used by farmers to raise capital to pay down debt or those purchasing land, equipment or livestock. The chances of farmers being successful increase if they can rely on equity investments rather than loans for capital. Typical investors looking for returns on their money would consider small farms more of a speculative investment; not so for the farmer’s customers whose desired return on their investment is continued access to nutrient-dense foods.
Read the Solari Special Report
Most local food consumers would not qualify as accredited investors; the crowdfunding exemption enables them to have “more skin in the game.” They would now have more at stake if the farmer were subject to some type of government enforcement action and would be less likely to walk away from the farmer, looking for another source of food. Crowdfunding can strengthen the bond between consumer and farmer, creating a strong sense of community and potentially increasing the stature of agriculture in the local area. Crowdfunding can broaden the class of investors to include anyone on the internet, but its greatest impact would be through local participation in the farmer’s stock offering.
Under the crowdfunding law, the investor does not make payment for shares purchased directly to the stock issuer but rather to either a broker or funding portal (defined in the JOBS Act as “any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others”). There are numerous other requirements that both the stock issuer and either the broker or funding portal have to meet for the stock offering to be legal. The Securities and Exchange Commission (SEC) is currently writing rules detailing specifics on some of these requirements. Proposed rules on the crowdfunding provisions are due January 5. In spite of the requirements contained in the crowdfunding law, the exemption still holds promise as a vehicle for farmers to raise funds and minimize debt.
Those interested in finding out more information about the crowdfunding rulemaking process can go to the SEC website at www.sec.gov/spotlight/jobs-act.shtml
For more information about crowdfunding in general the following are recommended:
- Special Solari Report
- Crowdfunding via Customers is The New Startup Capital, 28 May 2012
- Day Pitney LLP, “JOBS Act – On Regulation A, Regulation D and Crowdfunding Provisions”, 19 April 2012
- FAQ’s on Crowdfunding at the SEC website