Sarah Kaplan has joined the partnership at Cutting Edge Counsel. Sarah first affiliated with the firm in 2015 and joined as an Associate in 2021. Sarah has 10 years of experience serving a wide range of cooperatives, including worker, consumer, agricultural, platform, investment, and multi-stakeholder cooperatives, including limited cooperative associations. Her focus also includes securities law, helping clients raise capital from their private networks, their stakeholders, or the public. Sarah also regularly handles legal structuring issues for businesses, general small business matters, and trademarks.
“We are thrilled that Sarah has accepted Cutting Edge’s partnership invitation. She is a key member of our leadership team and demonstrates the commitment to impact and innovation we so highly value in our attorneys,” said Kim Arnone, managing partner. “Adding her as partner strengthens our firm and reinforces our commitment to providing exceptional legal services to cooperatives and other impact enterprises.”
Sarah has been a Fellow of the Sustainable Economies Law Center since 2013. Sarah graduated magna cum laude from Chicago Kent College of Law. Sarah has her A.B. from Princeton University. She has previously lived in Chicago and the East Bay Area of California, and now lives and gardens in St. Louis, Missouri. She is licensed to practice law in Illinois and California.
The SEC made a splash in October 2020 when it proposed a new set of rules that would allow finders to receive transaction-based compensation for introducing investors to issuers even though they are not licensed as a securities broker-dealer.
This proposal represented a dramatic departure from the traditional rules, and it was driven, at least in part, by concerns about equity: If the success of entrepreneurs depends more on who they know than on what they can do, then the traditional rules serve to entrench class distinctions. Those who come from money and therefore have connections to wealth become successful entrepreneurs because they can raise the needed funds. Those who lack those connections may fail for lack of capital, despite their ability and innovations.
The role of a finder is most relevant in private offerings. In such an offering, no advertising or “general solicitation” is permitted. As a practical matter, that means the entrepreneur can only pitch the investment opportunity to investors that the entrepreneur personally knows, or those introduced to the entrepreneur by someone the entrepreneur personally knows. An entrepreneur who does not personally know any investors able to write big checks will have to rely on these introductions – which then raises the question of whether the entrepreneur can incentivize these introductions by paying some sort of compensation to finders.
And it went… nowhere
But those who hoped the SEC’s new rules would usher in a new paradigm for capital-raising have reason to be disappointed: The proposed rules have not been finalized; and with recent changes in leadership at the SEC, it now appears unlikely that the SEC will ever adopt the proposed rules.
To underscore this, in an annual report published in December 2021 by the SEC’s Office of the Advocate for Small Business Capital Formation, there is a reference to the proposed finder rules along with a statement that “the Commission has not taken further action on the proposal, and providing regulatory clarity for finders is not in the Commission’s current regulatory agenda.”
However, the concept is not entirely dead yet. Senator Kevin Cramer of North Dakota has introduced a bill in the Senate (S. 3922) that would exempt finders from registration as a broker-dealer. That bill has been picked up for inclusion in a Republican-backed “JOBS Act 4.0” package of legislation. At this point it’s too early to tell whether Senator Cramer’s bill will survive the legislative process.
So where does that leave us? For now, we’re right where we’ve been all along.
The current law
Unfortunately, the current law for finders is a bit murky. The rule for securities broker-dealers basically says that someone may not help facilitate securities transactions for compensation without having a broker-dealer license. But keep in mind two things:
1. The idea of “facilitating” an investment is very broad and may cover any activity intended to induce or bring about a transaction between an issuer (the organization raising capital) and an investor. A finder who attends meetings with an investor or who delivers documents will likely fall within its scope. A finder who does nothing more than make an introduction may not; but SEC no-action letters have gone both ways in that situation – sometimes finding that broker-dealer laws apply, and other times finding that they do not.
2. Similarly, the idea of “compensation” is also broad. It can include not just transaction-based cash compensation but just about any other kind of quid pro quo benefits a finder may receive from an issuer. And the closer the nexus is between a finder’s compensation and the success of the investment transaction, the more likely the finder would need to be licensed.
But there are alternatives
So what is an entrepreneur to do?
First, there may still be ways of paying finders without violating the broker-dealer rules. For example, a finder could be paid a flat fee for providing a list of potential investors, without any further involvement in the investment process.
But perhaps better yet, there are several capital-raising strategies that do allow for general solicitation and advertising, which largely eliminates the need for a finder. These include:
Regulation A, a nation-wide offering involving a mini-registration with the SEC.
We at CEC will keep an eye on developments in the Senate or at the SEC for finders and will provide an update to our community if things change. But entrepreneurs need not let the SEC’s inaction here stop them from raising capital.
Naturally, this discussion should be regarded as informational only and not as legal advice. If you’d like to talk with us about capital raising strategies, don’t hesitate to reach out to us.
Cutting Edge is pleased to occasionally present a guest blog in our monthly newsletter. The following is contributed by CoPeace, a Cutting Edge Client since 2017. Short for “Companies of Peace,” CoPeace is currently conducting a Regulation Crowdfunding offering on WeFunder as well as a Rule 506(c) offering on our sister portal SVX.US.com.
CoPeace is a unique impact-focused holding company that evolved from a simple question:
Why not create a Berkshire Hathaway-type investment vehicle composed solely of companies committed to putting as much emphasis on social and environmental impact as financial performance?
Why not indeed.
CoPeace’s marketing strategy has focused on positioning two primary product differentiators in the minds of potential investors:
An investment option that allows investors to align their values with their investments; and
A vehicle that democratizes the investment process, so people from all demographic groups, not just wealthy accredited investors, can invest directly in impact companies.
“The dominant system prioritizes profits over people and planet. That’s not working for the vast majority of the world’s population, or the planet itself,” says CoPeace founder and CEO Craig Jonas. “Our idea was to take the Berkshire Hathaway approach, put the environment and society on equal footing with profits, and provide inclusive access across all demographic groups.”
CoPeace believes everyone should have the opportunity to build wealth while positively impacting society and the environment. Hence, the Certified B-Corp and Public Benefit Corporation’s push to democratize investing. No matter what demographic group one may fall in, CoPeace wants to help people grow their money for good.
This philosophy has led CoPeace to take what they call a bifurcated approach to capital raises. The company utilizes dual raises in order to reach both retail and accredited investors. The company conducts Regulation CF equity crowdfunding offerings that are attractive and accessible for younger and non-traditional investors. The current crowdfunding campaign allows the company to sell up to $5 million worth of shares to the public. Shares are priced at $14.00 USD each with a minimum investment of $140 (10 shares). Moreover, CoPeace delivers crowdfunding investors actual company shares, not a SAFE or other contingent right to acquire shares in the future, as many companies in the crowdfunding space do.
For more traditional and accredited investors, CoPeace has a concurrent Reg D 506(c) raise and is planning a Reg A raise for later this year.
Mission-driven investors are looking for return on impact along with financial return on investment. To that end, today’s investors are no longer content with funds that support fossil fuels, tobacco, guns, and companies with unfair labor or trade practices. CoPeace’s impact investing model allows mission-driven investors to put their money toward causes they care about, while still having the opportunity to earn competitive financial returns.
It’s important to note that impact investing is far from a fad. According to the US SIF Foundation, sustainable investing in the U.S. continues to expand at a healthy pace. U.S.-domiciled assets under management using sustainable investing strategies increased to $17.1 trillion at the beginning of 2020, up from $12 trillion at the start of 2018, a 42 percent rise.
And given that Millennials and GenZers are huge drivers of the move toward impact investing, the coming “Great Wealth Transfer” from Baby Boomers to Millennials suggests that the potential for exponential growth in the impact investing sector over the next decade is significant.
To that point, a study by Coldwell Banker Global Luxury concludes that by 2030, Millennials will hold five times as much wealth as they have today and are expected to inherit over $68 trillion from Baby Boomers over the next 30 years.
Years ago, Warren Buffet said, “Good profits are simply not inconsistent with good behavior.”
He was right then and he’s right today.
Craig Jonas is the founder and CEO of CoPeace, a “modernized Berkshire Hathaway” holding company that creates inclusive, socially and environmentally impactful wealth for all people. A lifelong entrepreneur with a history of success across the fields of business, academics, and athletics; Craig has over 30 years of experience in management with a passion for team-building and drawing individuals with big ideas together. Craig founded CoPeace in 2018, put together a highly-talented team and board, and quickly helped CoPeace achieve Certified B Corp. and Public Benefit Corporation (PBC) status.
Two bombshell articles landed recently. First a Bloomberg Businessweek piece titled The ESG Mirage, on how companies are rated (or maybe not) for their performances tied to Environmental, Social and Governance (ESG) factors. The article leads with the bold pronouncement that, “MSCI, the largest ESG rating company, doesn’t even try to measure the impact of a corporation on the world. It’s all about whether the world might mess with the bottom line.” The second article from Bloomberg reports that one of the largest rating companies – Morningstar – has just removed ESG tags from over 1,200 funds that it found were not delivering on those goals.
Why ESG is Important
ESG may have had its origins in a landmark 2005 study instigated by the United Nations and developed by 18 of the largest financial institutions entitled Who Cares Who Wins and delivered at a conference that included the financial sector, consultants, governments, and their regulators, all examining the role of the key value drivers in asset management and financial research.
Out of that study, the UN sponsored the development of 17 Sustainable Development Goals – now commonly referred to as the 17 SDGs – to help categorize the environmental and social impacts of investments. SDGs are now being used all over the world (albeit still too lightly in the U.S.) to help develop scoring systems for socially responsible investors who want to more clearly incorporate their societal values into investment decisions. For instance, most investors with ESG strategies view municipal bonds as inherently positive when it comes to environmental or social benefits, but until recently there has been little in the way of meaningful data to support their decision-making. But even with meaningful data available, it is the validity of the scoring systems that will now properly link that data to ESG elements for use in financial research, asset management, and brokerage/advisor services.
Real ESG or Real BS?
Starting as a “bland” company that helped develop indexes for the markets, the CEO and Chairman of MSCI, Henry Fernandez, had a supposed “epiphany” a few years back, deciding that his company’s new mission was going to “help global investors build better portfolios for a better world.” That sounds so nice! But as the Bloomberg article points out, the way that MSCI rates companies for its ESG scores may be mostly a greenwashing effect for a better financialized economy than anything to do with saving the planet or designing a better workplace.
And as a recent article in the Guardian points out, many companies central to the financialized economy are still boldly deceptive. After signing up to the U.N.-backed Net-Zero Banking Alliance a year ago, the largest of the European banks have since provided almost $33 Billion to oil and gas companies wanting to expand production. While similar data is still to be found in the U.S., my guess is we would find the same. Though these companies seemed to have had good intentions by making that pledge, the resistance from shareholders and prospective investors led them to continue funding these climate-damaging actions. It seems clear that many making pledges and promises to appear as “friends of the earth” are still willing to fall back to a shareholder primacy-driven mindset as friends to only profit.
Data to the Rescue
Asking companies to get real about their true impact on ESG is like playing whack-a-mole at an arcade. Imagine 17 holes where the Sustainable Development Goals pop up, and where the industry-manufactured “green-labeled” mallets smash them down, again and again, while issuing PR statements about how much they care. And though the number of socially responsible investors keeps growing at ever accelerating rates today, the number of ways businesses try to obfuscate their true impacts with almost meaningless green branding has kept pace. So far.
The good news is that the data behind how business and government organizations function, and how that impacts the 17 SDGs and other ESG metrics, is beginning to be captured and analyzed for transparency purposes in much more robust ways. For example, the women-owned and led Kestrel ESG (a Cutting Edge client), now offers a powerful ESG data product with both quantitative and qualitative insights on fixed income investments. And as Sara Olson – founder of SVT Group – points out in her recent article, other Impact standards such as Social Value International, Capitals Coalition, Impact Management Project and Science-Based Targets, are also providing better tools to understand what a “company’s risk to the world” may be. And now Morningstar has thrown down its own gauntlet of sorts, using better data to understand when asset managers’ claims about doing the planet or people any good are simply misleading and wrong.
These new ways of evaluating and scoring ESG are going to make the approach used by companies like MSCI, as described in the Bloomberg article, look irrelevant soon enough, and businesses will have far fewer ways of hiding behind their thinning greenwashed veils. And it won’t be only in the municipal bond world that these improvements happen. As more data today gets uploaded to the blockchain as a way of verifying all manner of content and actions, entities like municipal governments will need to up their game when it comes to transparency of bond-financed activities and intentional alignment with climate action and sustainability plans; and soon enough, these same scoring methods using better data on distributed ledgers will be available to rate and score all manner of companies, including private ones as well.
As the global climate catastrophe continues unabated, causing more unnatural disasters, as the data showing the ever-widening income and wealth gap becomes more transparent, and as we better connect, store and validate these data-dots to show the way companies are organized and governed, public outcries will grow louder and stronger as transparency increases. Behaviors that were once lionized purely for their focus on profitability will become vilified in the future; and if we are to make progress toward a safer planet and working environment, laws will need to be rewritten to acknowledge their detrimental impacts, or even making those actions and behaviors criminal.
You Might Run, but Can You Hide?
Which brings me to the role that law firms also play in all of this. Just as businesses will find it harder to hide behind the veneer of “responsibility” while continuing to honor shareholder primacy as their raison d’etre, the same will hold true for those who support the bad actors, with law firms at the top of the list. I predict that Big Law, and those striving to become ones, will begin to have their “McKinsey Moment” soon enough.
Employees at McKinsey & Co. have spoken up via 1,100 signatures calling their employer out for representing the largest polluters, and the giant PR firm, Edelmen has also been in the news, weakly trying to justify representing Big Oil while at the same time making bold statements about how much they believe in the environmental sustainability movement. And a recent NPR article provides more evidence of the failure of the major oil companies to live up to their own pledges to transition to clean energy. Companies like MSCI, McKinsey, Edelmen, multinational banks, big oil, and too many others that continue to practice strategic hypocrisy appear to believe that PR statements, pledges and a casual support of ESG will keep them safe, while they continue to pursue their shareholder-driven pursuit of maximum profitability. And it would be very naive to believe that these actions are taken without their lawyers’ blessings; they take great care to pass everything by them to ensure they don’t get sued. Meanwhile, the temperature gauge keeps rising; and the time we have left to fix things rapidly decreases every day. Open letters from your employees may be today’s approach, but if things don’t change soon, more radical actions will surely follow.
At a minimum, law firms will need to encourage their clients to assess and disclose their material impacts of environmental and social conditions, and on a client’s ability to meet those obligations. Those material impacts will require disclosure much like financial reporting is required today. Law firms should also be supporting their client’s positive steps required to decarbonize and improve social equity, as those will show improved valuations over longer terms.. But that will only be the beginning.
Have you Hugged Your Non-ESG Client Today?
Law firms provide an enormous role for clients – far beyond the transactional work of drafting agreements or supplying legal documents. They are counselors, advisors, and sometimes therapists to the C-Levels as the sea levels continue to rise. They are an integral part of almost all major decisions made, and they will fight to the finish on a company’s behalf – all in the name of their duty of loyalty they owe to clients.
But most importantly, law firms choose who they will represent. And (spoiler alert) it typically has to do with how much money they can make by battling to win and keep those gi-normous fees they charge. However, the unique expertise lawyers develop should not provide them a pass on being rated and called out for who they represent, or who they continue to help actually avoid the difficult and expensive work to make conforming ESG changes. Today they continue these practices all the while burnishing their “ESG creds” by the one or two good companies they may represent, or by the pro bono work they hand to their associates. But any help they may provide by doing some good ESG work is largely negated when they are still helping others who avoid it.
As ESG ratings and scoring continue to improve, and as transparency becomes not only the norm but someday baked into law (perhaps ever so slowly, thanks to those crafting such laws while pocketing donations from the same crowd), firms of all stripes will have a much greater challenge justifying their continued representation of companies that are causing us to drown, or burn, or suffer in so many other ways. Today, firms might brag about the light bulbs they’ve replaced, or the one woman or person of color they’ve added to their management team, but soon enough, they will be seen for what they really do, which is aiding and abetting non-ESG behaviors.
Every law firm must do a “conflicts check” before onboarding a client. Perhaps companies who truly care about ESG should start asking for their own kind of conflicts check from law firms. “We may hire you, but we first need to see your list of clients to be sure your work doesn’t conflict with and detract from the need to save this planet.” Law firms of all sizes may want to do their own internal ESG analysis to begin removing non-ESG clients before they too begin getting called out in ways that begin to damage their business and reputation interests. And for those firms that have already begun to take these actions, we commend you.
Following the recent successful TechSoup Regulation A+ offering, SVX.US is now introducing its new cohort of impact capital campaigns, including Medwave Software Solutions and Shared Capital Cooperative, with additional listings soon to follow. This seems a good time to reflect on why this platform is different, and why we partnered with SVX Canada to create a U.S. version.
Years in the Making
Cutting Edge Capital (CEC) has a long history of experience with alternative securities offering marketplaces, both at the national exchange level and for private or exempt public offerings. As GC at the Pacific Stock Exchange, I was an early advocate for alternative market structures, including the creation of Alternative Trading Systems for securities broker-dealers. Since then, CEC has advised some of the earliest alt markets, such as Mission Markets. Along the way, we became familiar with, and a strong supporter of, the SVX trading platform in Canada, which is focused exclusively on Impact. They in turn expressed a desire to work with CEC, due to our leadership role in advising and supporting community capital raises. As Rick says to Louis at the end of the movie Casablanca, it was “the start of a beautiful friendship.”
What we’ve learned is that, while issuers always need to find the right investors and vice versa, this is even more of a challenge for those in the “Impact” space where the focus is less on the highest returns and more on supporting companies who care deeply about environment, social and governance (ESG) issues – and who actually walk that talk. For impact-focused investors who don’t see true ESG/Impact choices in the national markets, it’s not easy to find issuers like TechSoup without already knowing about them. And though there are many more ways issuers and investors can find each other outside of the national markets, (e.g. broker-dealers, crowdfunding platforms, matchmaking platforms for Accredited Investors, or even an issuer’s own website), these other platforms neither curate nor limit their offerings to Impact/ESG. But we know there is a growing body of investors who want to see a company’s ‘return on impact’ to be as important as financial returns on investments (ROI) if not more so.
Why the Focus on Impact and ESG?
SVX.US was never meant to be in competition with these other sites that are agnostic to Impact and that focus on the chance for significant profits (whether that ever happens), or sites that embody a shareholder primacy approach that continues to scorch the earth in their wake. It does not search for the mythical unicorn or, like most all VCs, seek IPO objectives while discarding and shuttering 90% of those that can’t attain it.
Instead SVX.US is all about Impact – where companies with sound financials who have committed to doing things right for people, planet and environment can easily find support from an investor community that understands the importance and need. SVX.US offers a place for all kinds of organizations doing Impact capital offerings, whether for-profit, nonprofit, place-based funds, holding companies, CDFIs or hybrid entities. Whether conducting a Reg D 506(c) private offering with general solicitation, or a qualified direct offering (such as the Reg A+ done by TechSoup), we welcome any issuer that understands these critical issues.
Impact-focused investors have already shown their willingness to invest on SVX.US, and have expressed a strong interest in returning to find more like-minded issuers, such as a technology company like Medwave, which is saving lives by improving healthcare delivery globally, or Shared Capital Cooperative, which finances the formation and expansion of other cooperatives, and in turn helps communities build more just, inclusive and equitable local economies. SVX.US is a “social venture” platform where investors can find issuers focused in areas such as Energy and the Environment, Community Economic Development, Sustainable Food & Agriculture, Health and Wellness, Clean Water, Sanitation and Hygiene, Community Real Estate, Education, and digital technologies in support of those categories. We’ve created an Impact meeting place, for a wide range of offerings, such as a private raise of equity or debt, a qualified direct public offering, community and impact investment funds, cooperative capital, impact loan funds, or nonprofit capital raises.
What Should the Role of a Marketplace Be?
When we partnered with the SVX team, we made a conscious decision to avoid any funding that was not mission aligned, in order to specifically avoid external pressures contrary to its purpose. Up until 20 years ago, the national markets were not-for-profit organizations with no shareholders, only members. Today it should not be a surprise that our major markets have the same shareholder primacy pressures as the companies they list, all of which have little room for Impact oriented companies. Our intent is for this platform to instead mirror the kinds of issuers represented, and to show investors that these curated and listed companies have met stringent Impact tests. We witnessed firsthand the mistakes that were previously made in attempts at building alternative markets with a primary profit objective, and we’ve now created a safer place for Impact, where we can keep issuer costs to a minimum and allow the companies we serve to use their resources where they are most needed. We help issuers manage their raise, from their conversion of potential investors, to communications and tracking. The platform handles impact capital articulation, strategies of offerings to consider, all aspects of comprehensive KYC and investor information collection, deal room prep, document review, digital subscription agreements, and a streamlined transaction process in a secure and compliant way. Finally, we help issuers with the referral services they may need, including marketing and legal support.
For impact focused investors, we offer a curated list of Impact companies, along with the information and support they may seek to understand this space better, even including referrals to investment advisors who are mission aligned. Without ROI pressures, or the heavy burden of paying transaction compensation, SVX.US issuers have more freedom to shine the light on their ESG actions and toward a community of investors who care about the same. A beautiful friendship indeed.
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.