Know All the Investor Types

Know All the Investor Types

I recently got the inspiration to do a 6-session book study program in which we go through one of the key chapters of my book, Raise Capital on Your Own Terms, in each session. I was thrilled when almost 90 people decided to join us!

We’ve had two calls so far, and participants have been incredibly engaged, not only asking great questions, but also sharing resources with each other and creating interest groups where they are taking conversations further.

One of the hot topics we’ve been discussing is “who are investors and how do you find the right ones?” I gave a presentation about the following distinctions that you should be aware of when raising money:

  1. Professional investors versus non-professional investors—Professional investors are people who invest in small businesses on a regular basis. Conservatively, they account for only 0.3% of all investors in our country. Everyone else is a non-professional investor—people who go about their lives without thinking much about investing.
  2. Outside-the-box investors versus conventional investors—Outside-the-box investors are those who have an open mind about what makes a good investment while conventional investors are those who have pre-conceived, rigid ideas about investing. Most professional investors are conventional and most non-professional investors are outside-the-box.
  3. Accredited versus unaccredited investors—Accredited investors are defined under federal law, generally, as those who have at least $1 million in net worth or $200,000 in annual income. They make up approximately 10% of the population; 8% of accredited investors are “active,” meaning that they actively invest in small business, usually by joining an angel group. Depending on your legal compliance strategy, you may be limited to only raising money from accredited investors, but there are options that make it possible to raise money from both accredited and unaccredited investors—what I like to call “the 100%.”
  4. Angel investors versus OPM investors—Angels are those who actively invest their own money in small business. OPM investors invest other people’s money (OPM) and therefore are much more constrained than angels due to their obligations to their investors.

Capital on Your Terms Community

Because the book study has been such a success, we are planning to launch a pilot monthly membership program for those who want to learn more about raising capital on your own terms. Topics will include:

  1. Getting clear on your goals and valueshow much capital to raise, when and how often to raise, long-term plans for your business including exit strategy, understanding what you can offer investors, etc.
  2. Your ideal investors—who they are, where to find them, and designing the ideal relationship with them.
  3. What to offer investorsdifferent business structures and how they affect your relationship with investors, what to put in the term sheet, how to describe the offering, how to get literate on various aspects of investments, etc.
  4. Legal compliance strategy—what are the options and how do you stay compliant.
  5. Investor enrollment strategy—what to show potential investors, how to get meetings, what to say in the meeting, how to follow up and close the deal.
  6. Prepare to address mindset obstacles—know what obstacles may arise along the way and prepare to address them, so they don’t stop you on your fundraising journey.

The membership program will include live monthly office hours and an online platform where you can get your questions answered, get feedback, and share resources.

If you’re interested in learning more about this new offering, please click here to sign up for our waiting list, and we will email you with the details.

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Temporary Relief for Investment Crowdfunders

Temporary Relief for Investment Crowdfunders

I recently joined the board of directors of the Crowdfunding Professional Association.  The board asked me to draft a letter to the Securities and Exchange Commission requesting emergency temporary relief from the onerous requirements under Regulation Crowdfunding to prepare reviewed financial statements.  We submitted the letter on April 7.

To our surprise, the SEC released emergency temporary rules on May 4.  The key provisions are:

  • financial statements do not need to be prepared to launch a campaign (but investment commitments cannot be accepted until the financial statements are provided)
  • the amount you can raise without having to prepare reviewed financials has been increased from $107,000 to $250,000

These temporary rules apply for Regulation Crowdfunding campaigns started between now and August 31, 2020, and the issuer must have been organized and operating for at least six months.

If you’d like to take advantage of these temporary rules, please contact us at info@jennykassan.com.

Here is the specific request we put in our letter:

The Crowdfunding Professional Association writes to voice its support for the SEC’s goal to simplify, harmonize, and improve certain aspects of the exempt offering framework to promote capital formation while preserving or enhancing important investor protections.

Given our current health and economic crisis, we would like to respectfully request consideration of the following urgent temporary amendments to some of the registration exemptions to expand short-term access to capital:

. . .

Section 227.201(t):  Suspend the requirement that “the financial statements must be prepared in accordance with U.S. generally accepted accounting principles and include balance sheets, statements of comprehensive income, statements of cash flows, statements of changes in stockholders’ equity and notes to the financial statements” to the extent that the company has a minimal operating history and/or its previous operating history is currently immaterial to an understanding of future operations due to current economic crisis.  Similarly and for the same reasons, suspend the requirement that issuers provide reviewed or audited financial statements for raised over $107,000.

We very much appreciate the opportunity to submit these proposals and believe strongly that they could facilitate much needed capital formation for our country’s small businesses that are struggling during this economic crisis.

 

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Fundraising Tips from Dan Fireside, Capital Coordinator at Equal Exchange

Fundraising Tips from Dan Fireside, Capital Coordinator at Equal Exchange

Equal Exchange is a worker-cooperative that sells Fair Trade coffee, chocolate, and other staples.  They created a revolutionary way of raising money from investors.  Investors receive non-voting preferred stock, and if the co-op is ever sold, any excess revenues would go to another Fair Trade organization.  Investors make money via annual dividends, and Equal Exchange actually has to turn investors away.  They currently have about 550 investors and have sold over $17M in preferred stock.  

Dan’s job is to raise capital and manage investor relations.  Dan says that now is a great time to raise capital because, based on his experience, when Wall Street crashes, investors become more aware of the importance of investing in alignment with their values.

Dan has learned from experience that the most important way to cultivate investment is by building relationships with values-aligned people.  When talking to potential investors, remind them that all investment is risky, but at the end of the day, whether you make money on your investment or lose it all, it’s nice to feel good about what your money is doing in the world.  

When Wall Street crashes, investors become more aware of the importance of investing in alignment with their values.

Once you have investors, you have to communicate with them and not just send them a check each year.  Help them see why they should be excited about their investment.  Tell stories about your impact—be as specific as possible.  Click here for an example of what Equal Exchange sends to their investors.

Keep building relationships with your investors.  If you’re ever in trouble, they will be the first ones to support you.

If you’d like to learn more about raising capital using the same principles as Equal Exchange, click here for information on our upcoming online book study of Raise Capital on Your Own Terms: How to Fund Your Business without Selling Your Soul.

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Major Changes to Securities Rules

Major Changes to Securities Rules

For those of us who care about moving investment dollars into the businesses we love, March 4, 2020 was like Christmas, New Year’s Eve, and the Fourth of July all wrapped into one. The Securities and Exchange Commission (SEC) released proposed rule changes that will make raising funds from investors easier for smaller businesses. The new rules aren’t perfect, and there are some things we wish they had included but didn’t, but these changes are really exciting! 

We are currently in a comment period, and we expect the new rules to take effect in the next couple of months. Please let us know if you have any comments you’d like us to add to our comment letter!

Here is a summary of the most exciting changes. But first, a big caveat: these rules do not preempt state law. So, for example, even though the new federal rule may allow you to publicly announce that you’re raising money at a pitch event, the law of the state you’re in very well may not.

Integration of Securities Offerings

Under current rules, if you switch from one type of offering to another (e.g. from a private offering that includes unaccredited investors to a publicly advertised offering under Rule 506(c)), you generally have to let six months pass between the end of the first offering and the beginning of the second. Under the new rules, the maximum amount of time you would have to wait between two offerings is 30 days. Unfortunately, state level integration rules could still prevent this.

Speaking at Pitch Events

We have often told our clients that if they speak at a pitch event, they cannot mention they are raising money without violating the rules against public solicitation of an investment offering. The new rules state that if you speak at certain types of events and publicly say that you are raising money, this will not be considered a public solicitation. The event has to be sponsored by a college, university, or other institution of higher education; a local government; a nonprofit organization; or an angel investor group, incubator, or accelerator. The sponsor would not be permitted to charge a fee to attendees of the event, other than reasonable administrative fees.

Testing the Waters

Under the current rules, you cannot offer an investment opportunity unless you have determined what compliance strategy you plan to use and, in many cases, complete compliance filings. The new rules propose to permit the solicitation of interest in an investment opportunity before having to incur the expense and effort associated with securities compliance. This is especially exciting if you are planning to raise under Regulation Crowdfunding because you will now be able to talk about a potential Reg CF offering without first having to complete all of the compliance requirements. And Reg CF preempts state requirements so you will be able to do this country-wide.

Offering and Investment Limits

The proposed rules increase the limit of how much you can raise under Rule 504 from $5 million to $10 million. This exemption allows you to include both accredited and unaccredited investors. The proposed rules also increase the amount you can raise under Reg CF from $1.07 million to $5 million, increase the cap on what each investor can invest, as well as remove caps altogether for accredited investors.

Crowdfunding Vehicles

The rules allow the creation of a special type of entity called a Crowdfunding Vehicle. The purpose of this entity is to hold equity investments that are then invested in the company that is raising money under Reg CF.  This means that all of the equity investors in a Reg CF raise can be combined into a single entity. There are significant limitations on the nature and scope of the crowdfunding vehicle’s permitted activities under the proposed rule.

Regulation Crowdfunding Eligible Securities

The rules propose to prohibit the offering of SAFEs (Simple Agreements for Future Equity) under Reg CF.

Stay tuned for updates on the final rules!

Fundraising in Uncertain Times

Fundraising in Uncertain Times

The stock market volatility index reached an all time high on Monday, March 16. The index has increased 500% this year. According to CNN, market activity is being driven by “extreme fear.”

After ten years of a rising market, this feels like a whole new world. Many investors became overconfident in the reliability of steady growth in their mutual funds. When my clients (small private companies) sought investment, they were competing with this seemingly predictable source of 8% plus returns.

The perception that an investment in a small, private business is riskier than a stock market investment is being challenged for the first time in many years.

Now we are being reminded that what the markets give, they can quickly take away. My mantra has always been that all investments are risky—there is no sure thing. The perception that an investment in a small, private business is riskier than a stock market investment is being challenged for the first time in many years.

Many investors may now be looking for an alternative and a way to diversify. There will likely be a growing demand for direct investments in businesses we understand and trust.

If you’re raising money for your business, your biggest competitor (i.e. Wall Street) is not looking very good right now. Take the opportunity to remind your potential investors that this is a great time to move investment dollars out of the volatile public markets and into a business that is values-aligned and run by someone they know and trust.

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Angels of Main Street is one year old and growing fast!

Angels of Main Street is one year old and growing fast!

A little over a year ago, Crowdfund Mainstreet CEO Michelle Thimesch and I had a crazy idea—create an angel group for EVERYBODY!

The traditional definition of an angel investor is a wealthy person who invests their own money in startups. There are groups all over the country where angels gather to support each other with finding and making investments. To join these groups a person must meet the definition under federal law of an accredited investor (minimum of $200,000 in annual income or $1 million in net worth, excluding their primary residence).

Angels of Main Street was formed so that EVERYONE could be part of an angel group—there is no minimum wealth or income requirement. AMS currently has almost 70 members who collectively invested over $500,000 in small businesses in 2019. Investment amounts ranged from $500 to $25,000.

It’s easy to join Angels of Main Street. Just pay the one-time membership fee, commit to investing at least $500 per year in businesses you care about, and join us for our calls, events, and learning opportunities.

For details, visit https://www.angelsofmainstreet.com, or feel free to email info@jennykassan.com if you have any questions.

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