2021: A Year of Impact

Cutting Edge Capital would like to thank each and every client, partner organization, community member, and ally that helped make 2021 another impactful year. Join us in commemorating highlights that made 2021 a year we’ll never forget.

Before you go, download a PDF copy of the video to access live links to our innovative clients, current capital raises, SVX investing platform, and more.

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We’re Hiring! Operations and Office Manager (PT)


Summary of our Firm

Our law firm and consulting practice help mission-driven organizations raise capital in alignment with their values and goals. We use our experience, legal knowledge, and passion to assist businesses, cooperatives, and nonprofits with innovative and successful capital raising campaigns. We believe that community-centered offerings help social enterprises maintain control, stay mission-aligned and build a more just, equitable and sustainable economy. Our services include strategic and capital raise consulting and related legal services.

What We are Looking For

  • You are a mission focused individual dedicated to a more resilient, sustainable, and equitable economy
  • You are actively engaged in your community, offering support to initiatives that align with your values
  • You are a strategic thinker that can look at complex problems and offer straightforward solutions
  • You are a generalist that is excited to roll up your sleeves and learn about all aspects of our business operations including front line client communications, organizational management and bookkeeping
  • You are organized, efficient, and self-disciplined

Summary of the Position

You will act as the operational and organizational guru for our law firm and consulting practice. Your primary responsibilities include driving the company’s day-to-day activities, increasing the firm’s organization and efficiency, managing firm software and technology, supporting client experience (including client management and light bookkeeping) and working with the principals on strategic initiatives.

Job Responsibilities

  • Respond to potential client inquiries and schedule consultations
  • Manage client pipeline and follow up communications
  • Onboard clients including finalizing agreements and recordkeeping
  • Document and streamline company policies and procedures
  • Manage firm systems and software including GSuite, Salesforce, Zoom conferencing and webinars, Bill.com, and Gusto, among others
  • Assist with bookkeeping functions in conjunction with the firm’s accountant:
    • Accounts receivable management in Bill.com and communication with clients regarding payments
    • Accounts Payable management in Bill.com and communication with vendors
    • Process payroll on semi-monthly schedule
  • Assist with human resources, marketing, and operations tasks
  • Troubleshoot minor IT and software issues; work with vendors to resolve as needed
  • Provide administrative support to attorneys and consultants
  • Handle insurance renewals and other compliance matters
  • Assist with special projects as requested

Qualifications

  • Relevant associate or bachelor’s degree preferred
  • Two years of related operations and/or bookkeeping experience
  • Ability to adapt to a changing environment and handle multiple priorities
  • Experience with GSuite, Microsoft products, Salesforce, Zoom, Bill.com, Adobe Acrobat, Docusign preferred
  • Strong writing and communication skills
  • Ability to prioritize projects effectively
  • Self-starter and able to work well without constant direction
  • Well-organized and possessing excellent attention to detail

Compensation, time and location: $26 per hour; 18-22 hours per week (flexible number of hours per week; 4-5 days per week); we are based in Oakland, CA and would prefer a person located in the Bay Area in order to be in the office once per week but we will consider a remote placement.

Please send a resume with a cover letter and references describing why you are interested in the position to info@cuttingedgecapital.com. 

How Co-ops Raise Capital

How Co-ops Raise Capital

An overview of funding sources for cooperative start-up and development

If you are starting or developing a cooperative, you have probably noticed that cooperatives do not use the same approach to capital-raising that standard businesses do. The standard approach–selling a slice of a profitable business to investors–is not easily available for cooperatives. But, there are also capital-raising strategies available to cooperatives that are not available to standard profit corporations.

Cooperatives are democratically owned and governed by their members, and exist to serve their members by providing goods or services, helping members sell their goods or services, or providing a workplace for worker-members to provide service and receive wages. Cooperatives are a social business form. The cooperative form has more potential to heal social relationships and ecosystems than investor-owned business forms, because of the incentive structure and the way decisions are made. We will all benefit from the presence of more and bigger cooperatives. To create this growth, it is important that cooperatives receive adequate funding. 

When any enterprise is getting started, it usually must raise start-up funding from multiple sources. Amounts from different sources add up to what is called a “capital stack.” 

In a cooperative, the capital stack often looks like this:

*CDFI – community development financial institution.

Q: Where does capital for cooperatives come from?

Potential sources of capital for cooperatives include:

We often see some non-member investment in a capital stack. (The term “member” has a technical legal meaning, but in this blog post, “non-member” just means someone who does not use the cooperative’s services.) Non-member investors often provide a layer of funding that serves as the bridge between the initial member investment and an institutional loan. In certain cases, cooperatives have done larger private or public capital raises to meet their full funding needs.

Q: Why do cooperatives seek funding from non-member investors?

Members often cannot provide all of the necessary start-up capital themselves. They must rely on other sources before they can get a CDFI or bank loan. Sometimes these institutional lenders require a co-op to raise other capital first. Some types of cooperatives are small by nature, including most worker cooperatives. For this reason, members need help from outside capital that is friendly and patient.

Q: What can a cooperative offer to outside investors?

This is a difficult question for cooperatives because of the nature of doing business on a cooperative basis. Cooperatives exist to benefit members by doing business with those members. The goal in organizing a cooperative is to provide goods that were not already available in the market, or to help producers sell their goods and have more market access collectively than they would separately, or to operate a business through which members can provide services and receive wages. In general, the goal of a cooperative is to operate at cost, maintaining only a necessary reserve, and return all surplus to members. A cooperative’s goal is not to accumulate profit for itself or for investors. It is typically not seeking to be acquired by another company. This means cooperatives cannot approach capital-raising the same way that founder-owned businesses do.

However, many cooperatives can and do provide reasonable, non-extractive returns to investors. Cooperatives can be a meaningful way for “impact investors” to put their investment dollars to good use, and potentially receive a reasonable return on their investment.

At Cutting Edge, we regularly help cooperatives prepare capital campaigns. Here are a few types of investments that a cooperative can offer:

  1. Redeemable, non-voting preferred stock with a dividend that is a percentage of the original amount invested. Generally the investor will have to hold the stock until the cooperative has cash available to buy it back.
  2. Revenue-share debt or equity. In a revenue-share instrument, the cooperative will set a total repayment price, which is a multiple of the original investment amount (such as 1.5x–it generally does not need to be a high multiple for impact focused opportunities). Then the cooperative uses a specified portion of its top-line revenue to make payments to the investors over time. If the instrument is debt, those payments will be part interest and part repayment of principal. If the instrument is equity (stock), those payments will be part dividend, and part repurchase of the stock. When the full repayment amount is reached, the debt is repaid, or the stock is repurchased. The variable that affects investor returns is the speed at which the enterprise can increase its revenue.
  3. Debt. Asking investors to lend, and promising repayment of principal with simple interest, is a good option for cooperatives who want to keep it simple. Before planning to take on debt, though, cooperatives should plan ahead and determine what later investments they will need. Debt on the balance sheet can deter later investors, especially institutional lenders, so we want to make sure the cooperative will have adequate equity before adding debt.

Q: If we have “outside investors,” is it still a cooperative?

Yes, as long as the members democratically govern the cooperative, and as long as the total design of the cooperative’s finances will primarily return surplus to members, in proportion to their use of the cooperative’s services. 

All enterprises, including cooperatives, have to pay the cost of capital. For example, cooperatives can borrow from a bank and pay interest. The cost of interest takes away from the surplus that would otherwise be available for members as patronage dividends. However, the bank loan does not make the organization any less cooperative.

We can think of non-voting shareholders in a similar way. They may have approval rights over certain decisions that would affect them, such as dissolving the cooperative. But we always give preferred stock minimal or no voting rights–outside investors do not play any meaningful role in governance during normal operation. Preferred shareholders receive a dividend (when cash is available), but after that dividend is paid, the rest of the cooperative’s surplus can be returned to members. Some cooperative purists say that cooperatives should not have outside investors, but if a cooperative needs equity capital in order to succeed, we would like to see that equity capital come in, from supportive, non-voting investors.

Successful Examples:

Food Shed Co-op, a start-up food cooperative in Illinois, is in the middle of a capital raise now, and has reached over $1 Million of its $1.75 Million goal, in a combination of debt and non-voting equity. This raise will allow this cooperative to open a community-owned grocery store featuring local products.

Bay Area Ranchers’ Cooperative raised over $300,000 on WeFunder to build a mobile, rancher-owned, responsible meat harvesting facility, so that Northern California ranchers will no longer have to drive to the few, far-away processing facilities.

Switchgrass Spirits is a worker-owned distillery in St. Louis, Missouri. Early private investors supported the start-up phase by investing in non-voting equity and debt. Thanks in part to these early investors, spirits sales are now growing quickly.

If you would like help designing a capital raise for a cooperative, or if you have questions about cooperative formation, feel free to get in touch for a free consultation


Direct Public Offering Strategies: Which One Is Right For You?

Direct Public Offering Strategies: Which One Is Right For You?

direct offering strategies

Considering a capital raise that you can publicly promote? This overview chart is designed to compare key features of direct offering strategies that permit an issuer to solicit investment from its network. None of these strategies require the use of a broker but all have options to allow you to list your offering on a listing portal like SVX.us.com or a Reg CF listing portal. Some strategies are better suited to issuers trying to raise capital primarily from a large group of community (nonaccredited) investors, others are designed to reach a mix of high net worth (accredited) and community investors and one is limited only to accredited investors. Some are limited to one or a few states while others can be nationwide.

There are many factors beyond those noted in the chart that go into deciding what capital raise strategy is right for your enterprise given the location and makeup of your network and the amount to be raised. Some of these strategies allow for testing the waters before moving forward with a direct offering. Note too that there are a lot of details and nuances to consider for setting up a raise that are not captured on this chart. If you are considering a public raise, we are available to help you choose a strategy and design the direct offering that best fits your goals. Contact us for a free consult call to learn more.

Compare and Contrast: Direct Public Offering Strategies

Type of Offering Raise Limit Type of Investors Solicitation and Advertising Permitted Use of Portal or Listing Platform State Registration Required Financial Materials
Rule 504 (multi-state) direct public offering $10 million per 12 months Accredited and nonaccredited Yes, as permitted by state regulations Permitted if advertising allowed by state regulations Yes, if intending to use general solicitation and advertising to reach investors Varies by state; usually reviewed financial statements
Rule 147 (147A)(intrastate or single state) direct public offering No federal limit; Some states impose a limit of $1 to 5 million per 12 months Accredited and nonaccredited Yes, as permitted by state regulations Permitted if advertising allowed by state regulations Yes, if intending to use general solicitation and advertising to reach investors Varies by state; usually reviewed financial statements
Rule 506(c) No cap Verified accredited investors only Yes Permitted No No specific requirement
Regulation CF $1.07 million or $5 million with audited financials per 12 months Accredited and nonaccredited; nonaccredited investors have investment limits Yes, most advertising is limited to the registered portal Use of registered Reg CF portal required No Reviewed financials for raises between $107k to $1.07MM; audited financials for raises over $1.07MM up to $5MM
Regulation A (Tier 1) $20 million in 12 months Accredited and nonaccredited; nonaccredited investors typically have investment limits per state regulations Yes Permitted Yes Varies by state; typically reviewed or audited financials
Regulation A (Tier 2) $75 million in 12 months Accredited and nonaccredited; nonaccredited investors have investment limits Yes Permitted No Audited financials required

Testing the Waters for Securities Offerings

Testing the Waters for Securities Offerings

Securities Offerings

Suppose your organization needs growth capital and you’ve talked about doing a securities offering of some sort.  But you’re reluctant to commit the time and resources that it takes to gear up for a  securities offering without having some confidence that it will be successful. What you’d really like to do is to put some feelers out there, at a minimal compliance cost, to see if potential investors would be interested. Then you could make a better-informed decision.

This is what we call “testing the waters.” In addition to helping your organization decide whether to launch a securities offering, a testing-the-waters campaign could potentially also help you choose from among several capital raising strategies. 

For example, if you find there is strong interest among accredited investors but less interest among non-accredited investors, you may opt for a Rule 506 offering targeted to accredited investors. If you find the opposite, you might choose a Regulation Crowdfund offering or a direct public offering. You might also gauge interest among out-of-state investors, which can help you decide whether to do an intrastate offering or a multi-state offering.

Legal Strategies for Testing the Waters

It has always been possible for organizations to speak privately with potential investors to test the waters. But the last few years have given us some new ways of doing this publicly. For example, the expanded Regulation A, which went into effect in 2015, has its own testing-the-waters provisions in Rule 255, for organizations contemplating a Reg A Tier 2 offering.

Then last November, an SEC final release gave us two new testing-the-waters pathways: Rule 206 for organizations contemplating a Regulation Crowdfund offering; and Rule 241 for organizations that haven’t yet decided on an offering strategy. 

This trio of testing-the-waters rules has some similarities. All of them generally require the following:

  • No money may be solicited or accepted when testing the waters.
  • Testing-the-waters materials must state that:
    • No money is being solicited or will be accepted;
    • Offers to buy securities will not be accepted; and
    • Indications of interest are non-binding.
  • The issuer must keep a copy of testing-the-waters materials, and any such materials that are made publicly available (or otherwise used in general solicitation) must be included with a subsequent filing under Reg A or Reg CF.

There are some important differences, which we’ll break down in the table below, to make it easy to compare them. But first, we’ll add one more: Rule 506(c) under Regulation D is not designed as a testing-the-waters strategy, but rather as a strategy for raising capital from accredited investors (with verification). But it can be advertised, and that opens the door for its use as a public testing-the-waters strategy.

Comparison of Testing-the-Waters Strategies

With four testing-the-waters options now, it can get a little confusing.  So here’s how we break them down:

TTW StrategyRule 255Rule 206Rule 241Rule 506(c)
Subsequent offering strategyReg A Tier 2 onlyReg CF onlyAnyPotentially any
State preemptionYesYesNoYes
Requires standard TTW disclosuresYesYesYesNo
Can take investment moneyNoNoNoYes, but only from investors verified as accredited
Other key elementsMay do TTW before or after filing Form 1-AMay not do TTW after filing Form CMay not use Rule 241 after deciding on a strategyRequires 30-day waiting period after TTW to avoid integration with any subsequent offering

We’ll draw attention to one critical differentiator among these rules: preemption of state laws. Most testing-the-waters rules preempt state laws, which means that an organization can safely test the waters under those strategies, even publicly on the organization’s website, without worrying about violating state laws. 

But Rule 241, the testing-the-waters rule for organizations that have not decided on an offering strategy, does not preempt state law. Many (and perhaps most) states’ securities laws do not permit testing-the-waters publicly, or allow it under only limited circumstances. So an organization should be very cautious in planning a Rule 241 testing-the-waters campaign so as to ensure it does not inadvertently violate state laws. As a practical matter, Rule 241 may not be very usable for this reason. Instead, organizations who want to test the waters but have not yet settled on either Reg A or Reg CF as their intended offering strategy may be better off using Rule 506(c).

With all of these strategies, there are some important nuances, and no organization should test the waters without first getting legal advice. Naturally, this discussion should be regarded as informational only and not as legal advice. If you’d like to talk with us about testing the waters or other securities strategies, don’t hesitate to reach out to us.

Community Investment Funds: A Change is Gonna Come

Community Investment Funds: A Change is Gonna Come

Community Investment Funds

In the aftermath of the protests and marches of the past year or so, community wealth building has emerged as an often-discussed strategy of economic justice. Community wealth building is really another term for community capital, and it’s been at the core of our work at Cutting Edge Counsel since our firm’s founding. It’s also the focus of the National Coalition for Community Capital (NC3), where I’m on the board.

In particular, there is a growing interest in community investment funds as a tool for community wealth building – something we’ve been writing and talking about in recent years. In this blog, we wrote about why these vehicles represent the ultimate impact investment – in short, because instead of seeking to remedy the harmful impacts of the prevailing system, they represents a systemic change in who invests and where profits go.

In the conventional system, only the wealthy can participate in the most profitable investments, which means the wealthy can grow their wealth at a rapid clip. The rest of us are generally stuck with investment options that, on a risk-adjusted basis, pay less than inflation. So instead of growing wealth, these options tend to erode wealth, which means the non-wealthy are effectively penalized for investing while the wealthy are generously rewarded. Naturally, this system contributes to a widening wealth gap.

But community capital (and community investment funds in particular) represents an entirely different approach to moving capital that decentralizes it, democratizes it, and recognizes that wherever your investors are, that’s where your profits go. If you want to get profits into the hands of non-wealthy people in your own community, you need to source capital from those same people.

However, community investment funds must be structured to comply with the Investment Company Act of 1940 – a rather restrictive federal securities law that hasn’t been updated significantly in a very long time. Previously, we wrote about four ways of building a community investment fund under current law. These included a charitable loan fund, a real estate fund, a supplemental fund (aka diversified business fund), and a business development company. Then, in this blog, we added another to that mix, a pooled income fund – which is generally considered a planned giving device, but can also serve as a type of community investment fund.

Then last year, the National Coalition for Community Capital published this handbook on community investment funds, which I co-authored along with Michael Shuman, Amy Cortese, and fellow NC3 board member Janice Shade. The handbook covers a lot of territory that would be useful for anyone who is thinking about launching a fund in their own community. In the chapter on legal strategies, we dug into a number of ways it can be done – again, right now, under existing law – including those mentioned above and a few more.

And yet, despite all the legal strategies that are currently available, there is still a big gap, which we discussed in this blog. What’s still missing is a way to build a simple community-scale equity fund – meaning a for-profit fund that can take investment from the community (including, of course, non-accredited investors) and deploy it in debt, equity, or revenue share investments into local companies, with the profits distributed among community investors – and all this in a cost-effective vehicle with a minimal compliance burden under the securities laws.

NC3 has recently taken the lead on an initiative to expand the investment fund options under the 1940 Act – advocating both a legislative change by Congress and rulemaking by the SEC. We have already had discussions with key people in the SEC about this. While securities regulators will, of course, apply a healthy dose of skepticism to any new ways of doing things (that’s their job!), the SEC specifically reminded us that they have created new exemptions for new types of investment vehicles in the past and could do so again. The door was left open for us, and NC3 is continuing to push on this front.

In the meantime, if you want to launch a community investment fund as a wealth-building tool in your own community, there are great options available now. There’s no need to wait, though we hope the menu of options will expand soon. Don’t hesitate to reach out to us at Cutting Edge if you’d like to talk about what might work for you.

Finally, I want to give credit to the late Sam Cooke, who penned the song referenced in the title above. And if you haven’t seen the movie One Night in Miami, I recommend it. You’ll see the connection. The struggle for equal opportunities for all Americans clearly didn’t end in the 1960s. I see our work to expand community wealth building options as within the arc of change that Mr. Cooke foresaw all those years ago. It’s been a long time coming. But a change is gonna come.