We are the Ones We’ve Been Waiting for

We are the Ones We’ve Been Waiting for

This year’s CoCap (Community Capital Conference) was our best yet, and I walked away feeling very hopeful. One of the main themes was this: we don’t have to wait for a white knight to move capital into what we love. For example:

  • Anyone in California can invest in the East Bay Permanent Real Estate Cooperative, an organization that protects land from the speculative market—everyone can buy equity in the co-op for $1,000. Those who cannot make a one-time payment of $1,000 may set up regular payments, with a minimum first payment of $100.
  • Anyone (if you have self-employment income) can work with The Next Egg to set up a low-fee self-directed retirement account from which you can invest your retirement funds into businesses you care about.
  • Anyone can go to Crowdfund Mainstreet and invest as little as $100 in a mission-driven business. This platform offers investments under Regulation Crowdfunding, an investment tool which has only been legal since 2016. According to data gathered by Investibule.co, while 66% of investment crowdfunding campaigns are successful, 77% of women-owned companies and 75% of people of color-owned companies that raise money using investment crowdfunding are successful.

These are just three examples of how everyone can invest in the next economy—one that is just, sustainable, and creates equitable prosperity for all.

Rather than putting energy into trying to get the big players in the financial markets to stop being extractive and rapacious, let’s use our own money to create the world we want to see. Collectively, we have a lot!

Be a part of the movement to unleash community capital to fund what we want to see in the world.  If you’re interested in learning more about the power of community investing, go to https://www.angelsofmainstreet.com/ to join our movement.    

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How to get your fundraising done quickly so you can move on with your life

How to get your fundraising done quickly so you can move on with your life

Here is an exercise we recommend in order to make sure you get your fundraising done within a reasonable amount of time.

1. Imagine you have reached your fundraising goal. You are looking at the list of all your investors and how much each one invested.  What is the lowest amount that someone invested and what is the highest amount?  Try to create a clear picture in your mind of your investor list and the amounts invested.

2. In your imagination, scan the list and estimate what the average investment size per investor is. For example, you may picture that you’ll have some people come in at $5,000, some at $10,000, a few at $25,000, maybe one or two at $50,000, and one at $100,000.  In that case, you may estimate the average per investor to be $20,000.  You can use this tool to decide how much you’ll ask for from each potential investor: http://www.jennykassan.com/blog/7-steps-for-making-the-big-ask/

3. Now, take the total amount you want to raise and divide it by the average per investor. That will tell you the approximate number of investors you’ll have when you reach your goal.  So, if you want to raise $400,000, you’ll end up with around 20 investors.

4. Multiply that number by 10. That is the approximate number of potential investors you’ll need to talk to about your offering.  (This assumes that an average of one out of ten people you talk to will say yes—you may do much better than that, but it’s best to be conservative).  In our example, this would be 200.

5. Divide that number by the number of weeks you would like to devote to reaching your funding goal. This is the number of people you will contact per week about investing.  So, if you’d like to reach your goal within six months, divide 200 by 26 weeks—you need to contact 7-8 people per week.

6. Assume that for each contact you’ll need to spend 30-60 minutes on average. Multiply the number of people you’ll talk to per week by the average number of minutes you think each contact will take.  That is the total number of hours you should schedule into your calendar for contacting potential investors.  Add at least half that many hours to give yourself time to follow up with people who haven’t yet given you a definitive answer.  In the example above, I would assume eight hours per week plus another four for follow up—so a total of 12 hours per week should be spent contacting potential investors.

7. Now block out that time in your calendar for the number of weeks you gave yourself to reach your goal.

If you use this method, you’ll keep your momentum going and get that fundraising done before you know it!

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Investor Management 101

Investor Management 101

I advise my clients to be open to having a larger number of smaller investors rather than one or two big ones.  Why? There are two reasons: (1) it’s easier to reach your fundraising goal when you allow lower minimums per investor and (2) when each investor puts in a relatively small amount, it is very unlikely that any of them will try to micromanage or bug you with constant requests for information.  Because they have put in an amount that is not ‘make or break’ for their financial situation, they are far too busy to worry about your day-to-day decisions.

I have raised money four times from hundreds of investors, and I have never had a single one become demanding or irritating.  On the contrary, all of my investors have been patient, supportive, and tolerant when things haven’t gone quite as planned.  

What do you need to have in place to take care of your investors and meet your financial obligations to them?

  1. A professionally managed accounting system that allows you to track your investors
  2. A process to ensure that you have up to date contact information for your investors including W-9s so you can report to the IRS the payments you make to them
  3. A system for providing regular updates—a quarterly email newsletter works great
  4. A process for making payments to your investors in accordance with your agreement with them—this often involves sending an annual dividend or loan repayment to each investor, via check, ACH, or wire.

Of course, the more investors you have, the more time and effort may be involved in maintaining these systems and processes.  I recently sent out about 140 checks to investors and am now trying to track down those who haven’t cashed their checks yet.

Don’t let the thought of these obligations deter you from raising money!  Depending on how you design your offering, most of the effort happens just once a year or even less frequently.  And the benefit of having supportive investors—who have no interest in telling you how to run your business—far outweighs the relatively small effort needed to treat them well and pay them for the use of their money.

If you would like to get my eyes on your particular situation, please apply for a strategy session, and we’ll reach out if it’s a fit.

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FAQ:  How can I get funded without giving up too much of my business?

FAQ: How can I get funded without giving up too much of my business?

In a recent virtual training, I asked participants to submit their top questions about raising funding from investors.  Below is one of the most commonly asked questions.

How can I get funded without giving up too much of my business?

Many business owners think that if they raise money from investors, they will have to give up a big chunk of ownership and maybe even control of their company.

This is a myth! It is absolutely possible to raise money from investors without giving up any ownership at all or giving up an ownership percentage that you feel comfortable with.

The reason this is possible is that the return on the investment you offer does not have to be tied to ownership of your company. If the only way an investor can ever get any return is via the sale of your company, then yes, investors will want as big a chunk of ownership as possible. But there are lots of other ways for investors to get paid.

The key is to carefully design your investment offering so that it fits with your goals, values, and plans. If you need help designing your offering, please sign up for a complementary financing strategy session. 

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What entrepreneurs really want to know about raising money

What entrepreneurs really want to know about raising money

I recently held a virtual training and asked participants to submit their top questions about raising funding from investors, and I got a lot of great questions!  I wanted to share answers to some of the most commonly asked questions:

Can I talk to potential investors before I deal with the legal compliance part?

No!  A lot of business owners don’t realize it, but talking to someone about investing in your company is a highly regulated activity and you MUST deal with state and federal legal compliance before you offer an investment opportunity to anyone.  If you inadvertently break the law governing how you can talk to investors, you will create a potential liability that could affect your business’ success in the future. The good news is that there are many legal compliance options available to fit your situation.  Just be sure you know your compliance strategy before offering an investment to anyone.

How do I decide between a public offering and a private offering?

There are two general categories of legal compliance strategies: 1) strategies that allow you to publicly advertise the fact that you are raising money and 2) strategies that require you to keep your investment conversations private.

My clients and I have done both, and I have to say that I am partial to public offerings.  I believe it is much easier to find investors when you can shout from the rooftops that you are raising money!  Plus, with public offerings you can generally set the minimum investment rather low (e.g. $1,000 or less) so that investing is accessible to far more people.  With private offerings, you generally are allowed to have fewer investors, so you have to limit yourself to potential investors that can afford larger amounts.

Whether you do a public or private offering, you will need to do a lot of outreach and have lots of conversations with potential investors.  When you can publicly advertise your offering and the minimum investment is relatively low, it is much easier to find the right investors and have them say “yes”.

So, why doesn’t everyone do public offerings?  The main reason is that public offerings generally require more extensive up-front legal compliance because the law assumes they are riskier for the investing public.

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Regulation Crowdfunding FAQs

Regulation Crowdfunding FAQs

When did it become legal to raise money under Title III of the JOBS Act?

The regulations went into effect in May 2016.

What are some other names for Title III of the JOBS Act?

You may hear it referred to as “Regulation Crowdfunding” or the federal investment crowdfunding exemption.

How much can you raise?

You can raise up to $1,070,000 per year (this cap is adjusted for inflation regularly.

Do you have to use a crowdfunding platform?

Yes.  You can only raise money under Title III by posting your offering on an online platform that has been licensed by the Securities and Exchange Commission.  In fact, communications with potential investors about your offering must take place through the platform (there are very limited things you can say about your offering outside of the platform – see below).  Here is a list of all of the current platforms: https://www.finra.org/about/funding-portals-we-regulate (there may also be broker-dealers that host platforms that aren’t in this list).  

How much can each investor invest?

Each investor has an annual cap on how much he/she can invest per year under Title III:

(i) If either the investor’s annual income or net worth is less than $107,000, the greater of $2,200 or 5% of the lesser of the investor’s annual income or net worth; or

(ii) If both the investor’s annual income and net worth are equal to or more than $107,000, 10% of the lesser of the investor’s annual income or net worth, not to exceed $100,000.

You can rely on the efforts of the crowdfunding intermediary to ensure that the aggregate amount of securities purchased by an investor will not cause the investor to exceed the limits, provided that you don’t know that the investor has exceeded the investor limits or would exceed the investor limits as a result of purchasing securities in your offering.

What regulatory filings are required?

You have to file Form C with the Securities and Exchange Commission.

Under Title III, there are no state level filings required so you can raise from residents of all 50 states without having to worry about state-by-state compliance.  However, under the law, the state of your principal place of business and the state where more than 50% of your investment comes from can require a notice filing and a fee.  To date, very few states are requiring any filings from resident companies raising money under Title III.

What information do you have to provide?

When you set up your offering on a platform, you have to provide detailed information about your company and your offering.  If you’re raising more than $107,000 you have to provide financials reviewed by a CPA.  It can cost several thousand dollars to prepare the financials required under Title III.  This is also the step that can make the process take longer.  The rest of the process can be completed very quickly.

The second time you raise money under Title III, if you’re raising more than $535,000, you have to provide audited financials.

When can you get the money?

Before you start your campaign, you’ll set a minimum amount that you want to raise and a target amount.  You’ll also set a length of time for the offering to be open.  You can’t collect the money until your offering ends.  And if the offering ends before you’ve reached the minimum, the funds will be returned to the investors.  Investors are required to be informed that they have the right to change their mind about an investment right up until two days before the close.

Do you have to do reports after you complete the raise?

You have to file an annual report (including financial information) which is required to be posted on your web site.  Under certain circumstances, the requirement for filing the annual report terminates after the first year.  The annual report requires that your financials be prepared in accordance with Generally Accepted Accounting Principles.

The annual report, including your financials, must be posted on your company web site.

Can the investors sell their securities to someone else?

Securities purchased under Title III can be re-sold one year after the initial purchase.

Do you have to have a U.S. company?

Yes, only U.S. companies can take advantage of the crowdfunding exemption.

Can you be raising in a different way at the same time or close in time to an offering under Title III?

Yes! Unlike many other capital raising strategies, you are allowed to raise money under the crowdfunding exemption at the same time that you are raising money in another way, such as through a different kind of direct public offering or an offering to all accredited investors under Rule 506(c).

What can you offer?

Even though some people call this “equity crowdfunding,” you can offer any type of security – you don’t have to offer equity.

What can you say during your Title III Crowdfunding campaign?

One way to think about this is that every time you are getting ready to publicly advertise the offering, you have to decide whether or not you want to talk about the terms.  If you do want to talk about the terms, you are very limited in what you can say – you can’t go on and on talking about how great your company is, how it’s better than the competition, etc.  If you don’t feel the need to mention the terms, you can say whatever you want and just direct people to the intermediary for more information.

So, basically, there are two types of allowable communications outside of the platform (you can say whatever you want on the platform):

Type 1: Non-terms communication

You can talk about the offering however you want as long as you don’t mention the TERMS of the offering:

  • the amount of securities offered, i.e. how much you’re raising
  • the nature of the securities, i.e. equity versus debt and details about the economic and governance rights of the investors
  • the price of the securities, and
  • the closing date of the offering period

This means you can make any kind of communication or advertising in which you say you are doing an offering (although not WHAT you are offering; that would be a “term”) and include all sorts of information about the company, its track record, its mission, what it will use the money for, etc.  Of course, you can link to your fundraising page on the crowdfunding platform.

Whether you are identifying a “term” of the offering can be pretty subtle. “We are making an offering so that all our fans can be co-owners,” might indirectly include a term because it’s hinting that you are offering equity.  Try to avoid hints as to what you are offering, and just drive investors to the intermediary’s site to find out more.

Type 2: Communication that includes the terms (aka tombstone advertisement)

If you want to talk about the terms, you have to limit what you say to the short list of permitted items (the terms, the issuer’s name and contact information, a brief description of the business, a statement that you’re conducting the offering pursuant to Section 4(a)(6) of the Securities Act, and a link to your page on the platform).

“Brief description of the business of the issuer” means that you should not say more than just a general description of your principal products and services.

An advertisement that includes terms should not be included with other communications because that will likely mean that you are including more information that you are supposed to.  For example, if you have a notice that includes terms on your web site and your web site has all kinds of detailed information about your company, the whole communication taken together will have way too much information to be counted as a tombstone ad.

A tombstone ad should not contain any links other than the link to your crowdfunding page.

Here is some more useful information from CrowdCheck:

Interviews with the media can be thorny because participation with a journalist makes the resulting article a communication of the company.  In fact, the SEC Staff have stated that they don’t see how interviews can easily be conducted, because even if the company personnel stick to the tombstone information (which would make for a pretty weird interview), the journalist could add non-tombstone information later, which would result in the article being a notice that didn’t comply with the tombstone rule.

The same thing could happen with interviews where the company tries to keep the interview on a non- terms basis.  The company personnel could refrain from mentioning any terms (again, it’s going to be pretty odd saying, “Yes, we are making an offering of securities but I can’t say what we are offering”), but the first thing the journalist is going to do is get the detailed terms from the company’s campaign page on the platform’s site, and again the result is that the article becomes a non-complying notice.

These rules apply to all articles that the company “participates in.”  This means that if you (or your publicists) tell the press, “Hey, take a look at the Company X crowdfunding campaign” any resulting article is probably going to result in a violation of the rules.  By you.

If you link to an article, [it is basically the same as if you made all of the statements in the article yourself].  If the article mentions the terms of the offering then you can’t link to it from a non-terms communication (such as your website) and if it includes soft non-terms information, then you can’t link to it from a tombstone communication.  And if it includes misleading statements, you are now making those statements.

In general, if you (or your publicists) didn’t participate in or suggest to a journalist that he or she write an article, it’s not your problem.  You aren’t required to monitor the media or correct mistakes.

 

If you’d like our help deciding whether investment crowdfunding is right for you, click here.

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