April is National Financial Literacy Month! Is That a Good Thing?

April is National Financial Literacy Month! Is That a Good Thing?

It’s the time of year when you may hear politicians wringing their hands about the low levels of financial literacy in our country and advocating for teaching financial literacy in our schools.

While I absolutely applaud efforts to help everyone become more knowledgeable and empowered about finance, I am concerned about what financial literacy programs teach.

A scholarly analysis that reviewed financial literacy teaching materials in the U.S. and Canada found the following:

  • financial misfortune is attributed almost exclusively to personal failures such as the failure to get an education, open a savings account, etc.
  • fewer than 10% of the materials mention wealth or income inequality and almost none provide explanations for it
  • conditions of financial insecurity are presented as natural and inevitable and instead of students being asked how collective solutions could remedy these conditions, they are urged to develop good individualized financial habits to increase their chances of survival.


When it comes to learning how to be a good investor, the message is simple: maximize your contribution to tax advantaged retirement savings accounts and choose investments that maximize financial return and minimize risk.

In their recent Harvard Law Review article, “Rethinking Retirement Savings,” Jason Fernandes and Janelle Orsi describe how U.S. law governing our retirement accounts requires our retirement funds to be invested in a way that maximizes financial returns. But as Fernandes and Orsi point out, this mandate has led directly to outcomes that create great harm to our society and planet – worker disenfranchisement, climate change, and the hollowing out of our communities’ economic well-being.

To address the existential threats created by the mandate to maximize financial returns, we need to re-examine our most basic assumptions – those taught in financial literacy 101.

Join Angels of Main Street, our club for people of all levels of wealth or income to learn about investing, if you would like to be part of these conversations!

Why Access to Capital is Not Evenly Distributed: Racism and Finance

Why Access to Capital is Not Evenly Distributed: Racism and Finance

What is finance?

Finance is the use of money to fund activities in the economy. These activities include everything from building buildings and starting businesses to buying stock in public companies and investing in exotic financial instruments that have no connection to any productive activity in the real economy.

How does it get decided what activities receive finance and which ones don’t?

Does the most money go to the activities that create the greatest benefit for all of us? Or does it go to activities that are spearheaded by those with the easiest access to funding?

In Econ 101, we learn that money flows to its highest and best use. But we all know that is not true. How many times have we seen ridiculous ideas for tech start ups garner tens of millions in funding while our friends’ amazing proven companies get turned down for loans and languish for lack of sufficient resources?

Why do some players in the economy have such easy access to more finance than they could ever need while others struggle for financial crumbs?

Who has easy access to finance?

Finance flows to those who

  • Have relationships with people who control large amounts of wealth
  • Come from families with wealth
  • Have an education from a prestigious university
  • Are seen as smart and capable
  • Seem less risky to those who control wealth

These characteristics are not distributed evenly among all members of our society.

Because of our country’s history of enslavement of human beings, the lack of payment of reparations for slavery, legally sanctioned discrimination in finance (e.g. through redlining), and the violent destruction of communities of color that have managed to build wealth in spite of the odds, people of color, and in particular the descendants of enslaved Africans, are much less likely to have the characteristics that lead to access to finance.

According to one estimate, if enslaved people had been paid for their work, the value of that income today, assuming 3% annual compounding interest, would be between $5.9 trillion and $14.2 trillion. After the Civil War, formerly enslaved people were promised reparations, but after Lincoln was assassinated, that promise was rescinded. Until the 1960s, blatantly racist practices in finance were legal and common. For example, during the New Deal, Black families  were excluded from federal backing of home loans by the Federal Housing Administration. Racism in housing finance didn’t become illegal until 1968 with the passage of the Fair Housing Act. Discrimination continued however and in 1974 Congress passed the Equal Credit Opportunity Act which “forbids credit discrimination on the basis of race, color, religion, national origin, sex, marital status, age, or whether you receive income from a public assistance program.” While discrimination in finance was finally made illegal, there are reams of studies that show that it continues to be widespread. And in the world of private finance, like angel investing, venture capital, and private equity, it continues to be legal to discriminate.

When Black communities managed to build wealth in spite of the huge barriers resulting from our racist history, they were vulnerable to violent attack by white mobs. For example, in 1921, white mobs attacked the community of Greenwood (also known as Black Wall Street) in Tulsa, Oklahoma. An estimated 300 people were killed and approximately 35 acres of commercial and residential property were destroyed. According to the American Journal of Economics and Sociology, the value of the destroyed homes and property would be $200 million today.

No wonder there is such a wide gap between the wealth of white and Black households.

The net wealth of the average Black family in America is around one-tenth that of a white family and no progress has been made in reducing income and wealth inequalities between Black and white households over the past 70 years.

And wealth begets more wealth because tax policies favor asset owners over laborers.

What can we do?

What are some possible solutions? Reparations for slavery and a wealth tax would be a great start. On a more individual level, consider investing in a Black-owned business today. Here are two investment opportunities to consider: VegBox and East Bay Permanent Real Estate Cooperative.

What Businesses and Investors Can & Can’t Discuss: Six Guidelines for Business-Investor Conversations

What Businesses and Investors Can & Can’t Discuss: Six Guidelines for Business-Investor Conversations

By Jenny Kassan and Michael H. Shuman

What kinds of conversations can a business owner have with potential investors without breaking the law? Over the past year many local investment advocates and practitioners have sought our advice in answering these questions, and this blog attempts to provide some answers.

The law has been rapidly changing in this area, so not all our answers are crystal clear. But below is our best effort to summarize what’s permissible for individuals or groups that wish to have conversations about the possibility of investments in person or online. (We do not cover here new rules that apply to “pitch sessions” before groups of investors.)

(1) Public Conversations Unrelated to Investment – Green Light

The First Amendment protects free speech, including conversations between businesses and supporters. If you’re a fan, customer, or mentor for a business, you can freely talk about anything unrelated to investment.

Once the conversation shifts to investment, however, caution is needed because such conversations are regulated under state and federal securities law. Securities regulators consider any conversations between businesses and potential investors about potential investments, whether one-on-one, in group conversations, or via public platforms, to be an offering of securities. And unless or until you jump through the appropriate legal hoops for a securities offering, you cannot have such conversations.

If you run a web site encouraging conversations between businesses and supporters—say a mentorship platform—you might want to post disclaimers that the conversations should not touch on any potential investment opportunities. Better still, you might actively facilitate the conversations to prevent any violations.

(2) Private Conversations on Investment – Yellow Light

If a business has an informal conversation with a potential investor about a potential investment, this conversation may fall under the definition of a securities offering. A private conversation like this is often legal without the need to do any particular filings or make any particular disclosure. However, the details of what is required vary quite a bit depending on various factors such as what state the potential investor is in, what is being offered, and the potential investor’s wealth and income. Before actually offering an investment opportunity, even privately, it’s important to work with an attorney to determine what rules apply.

Does this mean that any conversation that even mentions an investment opportunity would be considered a regulated securities offering? Not necessarily. A conversation in which an entrepreneur mentions the possibility of raising funding in the future and does not mention any details about the investment offering (e.g. the size, the terms, the timing) is less likely to be considered a securities offering. Unfortunately, the line between an unregulated conversation and a securities offering is not well-defined under the law. Hence the yellow light.

(3) Social Mixers Involving Businesses and Investors – Green Light

Unstructured social gatherings among potential investors and business owners are fine as long as specific investment opportunities are not discussed. The original conception of LION, the Local Investment Opportunity Network of Port Townsend, Washington, was to deepen relationships between local investors and local businesses, to facilitate the possibility of future investments.

(4) Investment Clubs – Yellow Light

Groups of investors are welcome to come together, form a club, and collectively invest. They can have robust conversations about potential investments among fellow investors (but not potential investees). The presumption also is that members do not pitch one another to invest in their own businesses.

As soon as the club enters conversations with outside businesses about potential investments, the federal and state rules apply.

(5) Open, Online Conversations About Potential Investments – Red Light

Generally, an online public platform cannot host free-wheeling conversations between businesses and potential investors. This is regarded as facilitating general solicitation. And the host might be considered a broker-dealer, which would mean that it would have to register with the Securities & Exchange Commission (SEC), or under state law, as a broker. Some states are very strict about what constitutes a broker-dealer. One business was shut down by the state of California for hosting a platform that did nothing more than facilitate private investments for a flat fee.

But the next point offers a potential exemption for platforms that wish to help businesses “test the waters” (TTW) with potential investors.

(6) “Testing the Waters” Conversations in Preparation for an Investment Crowdfunding Campaign – Yellow Light

The SEC recently announced a new Rule 206 that permits businesses planning to raise money through investment crowdfunding to “test the waters” with potential investors. Participating businesses effectively must announce their interest in crowdfunding, agree to various disclaimers, and then conversations can begin.

But there’s a catch: If you meet a potential investor through public testing the waters activities, and then decide not to do a crowdfunding campaign, you may not be able to ask that person privately to invest in your business later. Thanks to little-appreciated rules around “integrating” separate offers, you cannot engage in general solicitation now, meet a bunch of new people, and then pitch them with a private offering later.

It’s important to point out here the difference between public and private offerings. Public offerings, like investment crowdfunding, allow you to advertise to the general public. Private offerings can only be made privately through one-on-one conversations. One of the virtues of the LION approach is that it is a legal way of developing relationships with people who you might be able to approach privately about a potential investment.

So if you’re a business seeking capital, the only way you can transform an investor you met through a public TTW discussion (a precursor for a public offering under Regulation Crowdfunding) into a private investor is by developing a substantial relationship with him or her after the public solicitation round. If someone you met online becomes your best fishing buddy, for example, you might be able to pitch him privately.

The good news is that if you only are pitching accredited (that is, wealthy) investors after your crowdfunding campaign, you can use Rule 506(c) to pitch them. Under this rule, public advertising is permitted and all investors must be accredited and their wealth or income status must be carefully established. If you want to also pitch unaccredited investors and include people you met through public solicitation, you will have to stick with investment crowdfunding going forward.

There’s one other possible opening that’s useless now but could be useful later—and that’s the newly announced Rule 241. It’s like Rule 206—permission for public “testing the waters” conversations with appropriate disclaimers—except that businesses do not need to announce that they are only interested in crowdfunding. All kinds of investment options, public and private, could be discussed. The problem is that the SEC did not preempt state laws that mostly prohibit such conversations. If you want to lobby your state to harmonize its laws with Rule 241, then this option could be helpful—especially to community investment groups having preliminary conversations with local businesses.

We should say, finally, that we are explaining the law, not defending it. Whether these legal rules are sensible is another blog for another day.

What if I told you the only thing standing in the way of large-scale prosocial economic development was you?

What if I told you the only thing standing in the way of large-scale prosocial economic development was you?

Few people know about the potential of Investment Crowdfunding to save the middle class and bring back the unique character and charm of our individual states, cities, and towns.

Investment Crowdfunding is a newer tool that allows the American people to fund the innovations and enterprises they want to see in their communities and in the world.

Crowdsourcing itself is not new. Virtually every society has developed some type of crowd sourced solution to economic scarcity, such as micro-lending groups and cooperative business practices. But prior to a national model like Regulation Crowdfunding, it was difficult to have broad coverage of high impact solutions.

Today, we want to begin in earnest the discussion about the use of Investment Crowdfunding in our states, cities, and towns to bring about enterprise solutions and job creation from within those places. We are talking big. We are talking about a path to save the middle class on our own, community by community, without interference from Washington or Wall Street.

Our case study will be the newly launched Crowdfund Montana platform and the Pacific Northwest Rural Broadband Alliance (PNWRBA) offering.

Montana is known for many things: breathtaking vistas, a rugged can-do spirit, and really terrible internet service.

PNWRBA is a company that was co-founded by a native Montanan, Elvis Nuno, who returned home after receiving an education and professional experience in the telecom and wireless ISP industry. Elvis has specialization in network engineering, automation, and cloud engineering, and together with co-founders Kevin Mesiab and Jacob Dobie, is on a mission to bring affordable and reliable internet service to Montana and other rural states.

To kick things off, there will be an online launch of Crowdfund Montana and the PNWRBA offering on Wednesday, October 20th from 12 – 1 PM Mountain Time. Please join us for a discussion about taking our economic health in our own hands and a lively Q&A session. Click here to register.

 

Next, the Angels of Main Street Due Diligence Learning Cohort featuring Pacific Northwest Rural Broadband Alliance will be held on Mondays at 5 PM Pacific Time/8 PM Eastern Time starting Monday, November 1st to Monday, December 6th. Angels of Main Street Community Manager Amy Short, a successfully exited entrepreneur and investor, will host a series of interactive discussion sessions designed to take the mystery out of direct investing. This group learning opportunity will flow as follows, based on a 5-6 week schedule with one Zoom-based 90 minute meeting per week. Changes to the schedule will be made when necessary to suit the emergent nature of the group learning experience:

Week 1: Introductions: topic of due diligence, principles, methods, and introductions among members of the group

Week 2: Review of offering: Group goes through the offering together. All documents are available online at https://crowdfundmontana.com/campaigns/uqipv02

Week 3: Review of offering: Issuer (Pacific Northwest Rural Broadband Alliance) goes through the terms of the offering with the group and answers questions

Week 4: Review of offering: Securities lawyer and CEO of Crowdfund MainStreet, Michelle Thimesch, goes through the offering documents with the group and answers questions

Week 5: Group suggests further questions for issuer, and if ready, group wrap-up

Week 6: Additional answers to questions and group wrap up, if desired

There is no obligation to invest and the conversation is open to EVERYONE! Come join us and get inspired to direct your hard earned savings into the prosocial solutions you long for. Contact amy@jennykassan.com to join this inclusive learning cohort.

Closing the gaps in the regenerative investment ecosystem

Closing the gaps in the regenerative investment ecosystem

My colleagues and I are on a mission to create a robust infrastructure and ecosystem that will make regenerative community investing easy, seamless, accessible to all, and fun!

To this end, we have put many pieces in place: legal/coaching services (Jenny Kassan Consulting), a community investment platform (Crowdfund Mainstreet), and an investor community open to all (Angels of Main Street). We are always asking ourselves what else we can do to support the movement for community investing.

One big missing piece is welcoming and inclusive physical locations where entrepreneurs, investors, and allies can come together to connect and build trust. In the last year and a half, we have all come to appreciate in-person gatherings. The human species was not designed to connect via video camera! Yet coming together in person continues to be challenging, especially for small businesses whose livelihoods depend on being able to meet customers face to face.

Michelle Thimesch and I have launched an investment fund called Opportunity Main Street with the mission to lift up and sustain overlooked entrepreneurs and the investors who want to support them by providing a physical location where they can meet and share resources. We are thrilled to announce our first investment—Charm City Inn, a beautiful building in Baltimore, MD.

The building will be a hub for community investing—a place where entrepreneurs can connect with local investors, sell their products in a cooperative retail space, and produce products in a commercial kitchen. It also includes short term residential units and a pub/eatery in the basement.

By providing affordable cooperative space for entrepreneurs with shared resources like a point-of-sale system, shared staffing, and meeting space, we can help them ease back into community-facing businesses without having to bear all the risk and expense.

Opportunity Main Street is offering the opportunity to invest in this project through secured promissory notes at 7% interest and preferred equity with a projected 12-15% IRR. This offering is only open to accredited investors. The last day to invest is September 28.

Please email Michelle@OpportunityMainStreet.com for details!

When it Comes to Investment Crowdfunding—Compliance Matters!

When it Comes to Investment Crowdfunding—Compliance Matters!

What to Know Before You Take the Plunge

The investment crowdfunding marketplace is growing faster than ever before, and is projected to grow by $196.36 billion from 2021 to 2025.

Unfortunately, industry watchers have observed an alarming level of non-compliance with the most basic rules of Regulation Crowdfunding by both companies raising capital and the platforms hosting the campaigns.

Non-compliance can result in regulatory enforcement action and/or investor lawsuits.  So if you’re considering dipping a toe into the crowdfunding world, compliance should be at the top of your list.

In 2016, the SEC completed its rulemaking process for Regulation Crowdfunding.  It suddenly became possible for a business to list an investment offering on a platform, and anyone in the United States could invest in the offering.  But before doing that, the business, as well as the platform, must comply with some basic rules of the road.

According to a recent analysis, only a small minority of offerings listed on Regulation Crowdfunding platforms are compliant!  

 

Crowdfunding compliance—what to watch for 

To offer securities under Regulation Crowdfunding, you must complete a federal Form C (also known as the offering statement).  The form takes about 60+ hours to properly complete and is designed to provide all the information investors need before deciding whether to invest.  Without this documentation, investors would essentially be going in blind.

A properly prepared Form C protects the business that is raising funds from future lawsuits from investors who claim they did not receive the information that was supposed to be disclosed.

In addition to the Form C, there are requirements for additional reports after you complete your raise.

Failure to comply with these requirements can result in private litigation—all of the investors in a non-compliant offering are entitled, at a minimum, to rescission.  In a rescission, the company must return the proceeds of the investment to the investor and pay interest.  The company may also be subject to enforcement actions by federal and state regulators.

If you fail to comply with all of the regulations, you create a potential liability for your company which would have to be disclosed to all future potential investors.

The effort of making sure you are compliant on the front end is well worth avoiding the potential nightmare scenarios if you don’t!

 

What to expect from a regulation crowdfunding platform

With compliance top of mind, it’s essential to seriously examine the level of compliance and transparency your platform of choice is practicing. 

At a minimum, here are a few helpful questions any investor or entrepreneur should ask before choosing a crowdfunding platform:

  1. What efforts are they taking to meet the regulatory requirements?
  2. Do they prepare the Form C for the companies that list on their platform?  If so, what is the training of the person that prepares it (is that person a lawyer)?
  3. If the platform prepares your Form C and it is found to be deficient, does the platform cover the resulting litigation and other expenses?

Compliance isn’t optional—it’s a must

As investment crowdfunding continues to grow, so do the concerns surrounding regulation and compliance and the likelihood that private lawsuits and public enforcement actions will become commonplace.

If you’re interested in connecting with one of our team members to discuss how we can support you with planning and implementing a compliant fundraising campaign, complete our Interest Form.