Crowdfunding a Revenue Loan

I was talking to a friend last night, and he was telling me he was trying to raise $100,000 for his venture. He is working on something that would be widely supported in the community. I blurted out, "Crowdfund it with revenue loans under the Washington equity crowdfunding law!"

And he reminded me that we can't do that. That issuing debt is not allowed under Washington's equity crowdfunding law.

But before we got to that--if you don't know--a revenue loan is a loan that typically has the following characteristics:

  • The monthly payment amount is a percentage of the business's revenue in the preceding month. This is why revenue loans are sometimes referred to as royalty based financing. The monthly repayment amounts look like a royalty payment, because they are a percent of revenue. And the revenue base looks a lot like gross revenue--save for a few deductions like customer returns, discounts, etc.
  • The loan is repaid in full when the lender gets a multiple of the amount loaned. Typically anywhere from 1.5X to 3X the amount of the loan.

But to get back to the question--why can't we crowdfund a revenue loan in Washington State under the Washington State equity crowdfunding law?

Because when the Washington State Department of Financial Institutions was finalizing the regulations for equity crowdfunding it concluded that loans were not an appropriate security to sell in an equity crowdfunding offering.

Here is the rule in which the DFI disallowed crowdfunded debt offerings:

(4) The crowdfunding exemption is available only to equity offerings by the issuer of the securities and is not available to any affiliate of that issuer or to any other person for resale of the issuer's securities. The exemption is not available to debt offerings.

What can we do about this? Well, we can all beseech our elected representatives to try to change this rule. In any event, I still think the Washington State crowdfunding law is a good one. But you can't sell debt in that type of offering.