Debt vs. Equity

As un-registered small public securities offerings has become a mainstream concept in the US over the past several years, the terminology has migrated to calling the concept “equity-crowdfunding”. This is an unfortunate misnomer. The concept is much more properly termed as “securities-crowdfunding”, which includes, not only offerings of ownership shares in business, but simple loan/debt offerings as well.

Offerings of equity (or straight ownership interests) in a business can be much more complex than simple debt offerings. Offering equity frequently requires a business to re-structure its entire governance structure, including its Articles of Incorporation/Organization, Operating Agreement, Bylaws, Shareholders Agreements and many other aspects. This can be a costly, time consuming and uncertain prospect which usually requires the assistance of legal counsel, and, often, filings with State regulatory agencies.

On the other hand, small, simple offerings of debt to the public can have a significantly reduced level of documentation and formality. Usually, all that is required is to set an interest rate and repayment schedule and to document that offering and sale with a simple Note Purchase Agreement and related Promissory Note. Small businesses tend to favor this procedure not only because of its simplicity, but also because it does not require giving up ownership of the business to unknown investors at an uncertain valuation.

For all of the foregoing reasons, we believe that small debt offerings, including loans from alternative lenders and peer-to peer lending sources are likely to continue to gain in popularity in the US in 2016, and, ultimately, will become more popular than the equity based alternatives.

Talk to SparkMarket about how we can help facilitate your small debt offering transaction.

Thanks for Your Continued Support,

The SparkMarket Team