There’s no going back – a way forward

There’s no going back – a way forward

My colleague Angela Barbash of Revalue wrote a great blog post with some practical resources for those of us who want to use the COVID 19 crisis as an opportunity to move toward a healthier, just, and sustainable economy that creates wealth and prosperity for all.

Here is an excerpt.  For the full post, click here.

As each town and state considers the logistics of reopening, there will be a void in our collective consciousness where once a flawed-yet-understood socioeconomic infrastructure existed, but now there is only a vast, open landscape of opportunity for a newly reconstructed infrastructure that will, hopefully, carry us all into a more equitable future for generations to come.

We need a different way forward, what we might call the Theory of Comparative Resilience. My basic proposition is simple: Those communities that are best able to withstand future crises—whether pandemics, climate disruptions, or financial meltdowns—will be the ones that thrive economically. They will be the best places for investors to park their money. They will attract the best and the brightest people. They will be the places where residents feel secure enough to innovate. As your community begins the long road of rebuilding, here are eight criteria by which you might measure your community’s comparative resilience.

Local Ownership

Local Investment

Economic Diversity

Regeneration

Innovation

Social Equity

Connectivity

Social Performance of Business

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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!

2019 Social Venture Circle Conference Highlights

2019 Social Venture Circle Conference Highlights

I have been attending Social Venture Circle (fka Social Venture Network) conferences for about 10 years, and they never disappoint. These conferences attract business and finance leaders of all ages to discuss how business and investing can transform our world and hasten the arrival of the “next economy”—one that provides health, happiness, and sustainable prosperity for all.

One of the highlights of the 2019 conference was a conversation between SVC Executive Director Valerie Red-Horse Mohl and Anand Giridharadas, author of Winners Take All.

Anand’s book was difficult for many in the impact investing and social enterprise space to read. Anand called out changemakers for “falling prey to . . . a belief in ‘changing the world’ in ways that tend to keep it the same, in using the tools of hypercapitalism to soften its blows, all while refusing to question the system generating the problems.”

Presentations by Morgan Simon, Diana Marie Lee, Taij Kumarie Moteelall, Hope Lehman, Nathalie Molina Niño, Derek Razo, and many more (including me!) provided glimpses of what a truly just, sustainable, and regenerative economy and financial system would look like.

While it is true that some who call themselves impact investors are doing more harm than good by providing a fig leaf of respectability for rapacious, extractive finance, many speakers at the SVC conference delved into the hard questions and put forth radical ideas—exactly what is needed in this time of growing wealth inequality, economic insecurity, and political disengagement.

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Main Street America: Notes from the Field

Main Street America: Notes from the Field

Last month Jenny and I attended Main Street Now 2019the annual Main Street America™ Conference which was held in Seattle.

Main Street America is a grassroots network made up of small cities, towns and urban commercial districts that work on preservation based economic development and revitalization.

The work of the Main Street America network is increasingly vital for the support of local business communities that are relentlessly decaying in the face of the huge disparity in investment capital between Wall Street and Main Street.

One of the unique focuses of the conference this year was the topic of Opportunity Zones. Created by the 2017 Tax Cuts and Jobs Act, the Opportunity Zone program was designed to stimulate private investment in distressed communities throughout the country in exchange for capital gain tax incentives.  

In June 2018, more than 8700 communities in all 50 states, the District of Columbia, and five U.S. territories were designated as qualified Opportunity Zones and will retain their designation for 10 years. By making an appropriate investment in a zone, private individuals may defer tax on almost any capital gain until 2026 AND pay NO capital gains tax on the investment in the zone.

The tax benefits provided for investments in opportunity zones are a welcome addition to the self-directed investment tool we launched last year—Crowdfund Mainstreet. We are working toward building  a robust finance ecosystem for the small businesses that create local jobs and preserve local character.  Please join us in the movement to fund and grow small businesses throughout the nation by investing in a business on Crowdfund Mainstreet.  We hope to offer Opportunity Zone investments on the platform in the near future.

If you’re a small business owner looking to raise capital, feel free to schedule a call with us to explore how we can help you.  We can also work with you to determine whether you are in an Opportunity Zone and, if so, how you can take advantage of that.

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How would a President Trump affect small business finance?

How would a President Trump affect small business finance?

One thing is certain.  Trump has an awkward relationship with the chair of the Securities and Exchange Commission, Mary Jo White.

According to this fascinating article in the Washington Post, Mary Jo White, when in private practice, deposed the Donald on behalf of her client, a New York Times reporter that Trump had sued for writing that his net worth was far less than what he claimed.

Apparently the deposition was quite challenging for Trump – he was caught in about 30 lies.

So, Mary Joe White is not likely to be our SEC chair for much longer.

What else might happen?

At a recent crowdfunding conference, some of the speakers expressed optimism that deregulation will make capital raising and secondary trading easier for small business.  It is certainly true that it has become so expensive to be a public company that very few companies are choosing to go public these days and some are choosing to go private.

It’s hard to know what might change under a Trump presidency, but one possibility is that the restrictions on who can invest in a small business could be loosened.

As the Republican member of the SEC says, “I want to move beyond the artificial distinction between so-called “accredited” and “non-accredited” investors and challenge the notion that non-accredited investors are “being protected” when the government prohibits them from investing in high-risk securities. . . .  Because most investors are risk averse, riskier securities must offer investors higher returns. This means that prohibiting non-accredited investors from investing in high-risk securities is the same thing as prohibiting them from investing in high-return securities. . . .  [E]ven a well-intentioned investor protection policy can ultimately harm the very investors the policy is intended to protect. . . .  Remarkably, if you think about it, by allowing only high-income and high-net-worth individuals to reap the risk and return benefits from investing in certain securities, the government may actually exacerbate wealth inequality.”

What do you think?  How do we balance the need to protect “un-sophisticated” investors with the need to make it possible for small businesses to raise capital from their communities, customers, and fans?

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