How Community and Community Capital Can Influence Historic Preservation Projects

How Community and Community Capital Can Influence Historic Preservation Projects

Historic preservation projects are designed to protect a community’s heritage often through the expansion and enhancement of historic properties for public use. Community capital is designed to empower a community’s investment in itself through public offerings that are structured to engage a variety of investors. Preservation projects could meet their goals faster and gain additional political and monetary support through the use of community capital raising strategies.

Community investment strategies differ from typical private strategies as they allow investment broadly from community members rather than restricting investment only to the highest net worth individuals or institutions. Community capital does not have to be the only source of capital for a project, but it can have an impact beyond the funds raised.

Community members can be great allies (or in some cases, strong adversaries) to real estate development projects. Restoring or repurposing a historic building is made easier if a developer has both capital and community support. Why not combine the two?

Including community members as investors in projects not only affects the project’s bottom line, but also impacts the level of community acceptance of the proposed purpose and use of the property. With a community capital approach, community members share in the potential return on investment and can become great ambassadors for the project as it wends its way through any approval process, and later as the property opens for its new or improved purpose.

At Cutting Edge, we work to identify, design and build capital raise strategies that meet client goals and strive to involve community stakeholders. Depending on the purpose and scope of the project, community capital raise strategies might include single, or multi-state, direct public offerings, Title III Regulation Crowdfund offerings or larger Regulation A campaigns. Or, a developer or manager can put together a community investment fund that can support various enterprises or projects. These approaches work not only for real estate projects but across a wide range of industries.

We will be highlighting these capital raising options in greater detail in a webinar (Crowdfunding Historic Preservation: Direct Public Offerings and Other Ways to Raise Funds) with the National Trust for Historic Preservation hosted by the California Preservation Foundation on Tuesday April 17th from 12:00 PM to 1:00 PM PT. To learn more and register, visit here.

For a free consultation with Cutting Edge Capital, visit here. Questions? Email info@cuttingedgecapital.com.

Direct Public Offerings Now Available For Up To $5M

Direct Public Offerings Now Available For Up To $5M

The SEC yesterday issued final rules that increase the aggregate amount of money that may be offered and sold for Direct Public Offerings using the federal exemption from $1 million to $5 million. In conjunction with those rules, the SEC also introduced additional investor protections with rules designed to disqualify “bad actors.

Highlights of the Amendments to Rule 504

The new SEC amendments to Rule 504 of Regulation D increase the aggregate amount of securities that may be offered and sold under Rule 504 in any 12-month period from $1 million to $5 million, and disqualifies certain bad actors from participation in Rule 504 offerings.

 

“These changes are huge” says John Katovich, founder and President of Cutting Edge Capital and Cutting Edge Counsel. “Up until today, we have only been able to help companies with raises smaller than $1 million per year when utilizing the Regulation 504 exemption” said Katovich. “Today, however, we can now use these new rules to help companies raise up to $5 million every year, from residents in more than one state, and regardless of where the company is located or what their in-state activities might be. This is going to be a game-changer for many companies that were previously constrained with the old $1 million limits. With companies now able to raise $5 million each year and offer securities to everyone, not just wealthy accredited investors, the entire landscape will change and we are now much better equipped to democratize capital and to help all individuals to begin to build wealth by investing in their communities of choice.”

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About Cutting Edge Capital

Cutting Edge Capital—based in Oakland, CA—provides social ventures with capital raising strategies open to accredited and non-accredited investors. CEC also develops capital market tools, as well as tools for aggregating community capital. Cutting Edge Capital’s mission is to democratize capital and to engage more people as investors, to the new economy — an economy that is resilient, just, and sustainable.

 

 

Wealthier Investors Are an Essential Part of Community Capital Markets

Wealthier Investors Are an Essential Part of Community Capital Markets

The Securities and Exchange Commission has recently estimated that approximately 10% of all U.S. Households are now in the “Accredited Investor“ category (for individuals, that means $1m in net worth not counting primary residence, or $200k of income). Assuming that’s accurate, there are now over 12 million households in the U.S. that meet the definition of Accredited Investor (“AI”).

The SEC defines the AI to determine their eligibility to invest in Private Placement offerings (i.e. funding rounds of securities that are sold not through a public offering (IPO), but rather through a private offering, and mostly to a small number of chosen investors). And as the private placement market edges toward $60 billion of deals a year, that may seem to most people as a sizable amount to participate in, with lots of opportunities to get in on the next big home run deal.

Some of those AIs, however, have begun to look for more than just a company swinging for the fences, but rather companies that look out for profits, people andthe planet. The rise of socially responsible or impact investing has now begun to take hold. And there are now more financial advisors becoming familiar with these kinds of investments, and helping their clients to find such deals.

Unfortunately, financial advisors feels constrained (for good reasons) to only show their clients deal opportunities of a certain size and nature. Many even limit their scope to only companies traded on public markets so that they reduce the risk of breaching their fiduciary duty to their clients. Other more adventurous advisors will brave the private investment landscape, where, with the right amount of due diligence, they can recommend impact deals to their clients that will also provide something close to market returns (whatever that really means).

But there’s another opportunity for AIs to make a significant impact. They can invest AND play an essential role in the stabilization, growth and resilience of the communities they live in or relate to. They can do this by participating alongside of the rest of the non-accredited investor community into investments offered by community entrepreneurs.

The kinds of investments I refer to here are Direct Public Offerings and certain state securities crowdfunding opportunities, both of which allow for investors to directly interact and engage with the entrepreneur/issuer. I wrote recently about this in previous blogs here, and also earlier today in a Locavesting article. As these crowdfunding offerings and the platforms they list on become more populated, investors will begin to find it easier to find offerings. Also, as we help clients obtain their approvals for DPOs, we post the offerings up on our CEX site so that investors can more easily find the issues and link to their sites.

The role AIs can play to support these much needed community enterprises cannot be emphasized enough. For one thing, as companies begin to turn more to using tools like DPOs to raise their funds, the size of the raise is going to increase well above the $1 million limit that the state or federal crowdfunding laws impose. DPOs, if done via the Intrastate exemption, are typically unlimited, as long as the state regulators approve them, and we are starting to see many more offerings in the $5-10 million range. Companies offering stock will want to limit the number of non-accredited investors to 500, and the total number of investors to 2,000, or face becoming “publicly reporting,” which is expensive to maintain. This means the offerings truly need the AIs to meet their targets.

Another key reason is the experience AIs may be bringing to these offerings. Clearly just because one is an AI does not mean one has the financial expertise of a typical VC or Angel who do this for a living or hobby. But there is no doubt that many AIs have some experience with investments, and likely more than their non-accredited counterparts. This can be very important when a company is even considering how to structure their offering, if they can learn beforehand what an AI will want to see before they participate.

And then there is, of course, the leverage an AI can bring to the offering, just by signing on and showing up. Some AIs provide the “prime to the pump“ so that the offering can take hold. Some even offer a matching approach. It can be an important signal to the non-accredited investors that they don’t have to shoulder the offering alone. Also, regardless of the wealth divide that exists, every member of the community can come together to make an offering successful. AIs can be an important kind of hero to this movement, while still obtaining enough of a return. Their participation can also lend the right kind of pressure to the entrepreneur to keep them on their toes, and striving to meet their mark.

AIs might do their own homework (due diligence), as they look at these investments, or they may be able to find a new breed of financial advisor who are willing to help analyze the offering, even if they stop short of making recommendations and risk their duty. And there are also new pioneers, like Marco Vangelisti, who has taken it upon himself to begin offering daylong workshops for community investors.

Marco is a veteran of global finance who walked away from the industry in 2009 after a 25-year career, and is now helping communities around the country understand the role investors can play in support of community. He created Essential Knowledge for Transition – an initiative to empower communities with a basic understanding of the large systems affecting our lives. Marco’s next workshop will be in Irvine CA the 7th of May, and after that, we intend to try cloning him so that we can help ALL kinds of investors, AIs and non-accrediteds alike, everywhere, to align their investments with their values, and create the world we want, and need.

Invest in Who You Know – Part 1

Invest in Who You Know – Part 1

There’s an old saying that you should “invest in what you know,” but what’s far more valuable is when you can “invest in who you know” as well.  The new crowdfunding laws are not designed to nurture this; they are meant to prohibit investment conversations with the company insiders when the opposite has historically been the case.

Wealthy individual investors and funds (angels and VCs), will often do both, and it makes a lot of sense, when you have the time and the wherewithal to afford due diligence, apply your previous experiences, and meet with the founders or senior management to determine whether an investment is a good one.  A secondary benefit to this approach is that you often get to insert your previous knowledge (i.e. what you know) into the equation, because you have invested enough to have a voice.

Aside from reading the company’s reports, the other main component to making an investment decision is the ability to get to know who you are investing in.  This is arguably the more important component, especially for those with limited amounts to apply toward investing.  But does this mean that all of the new opportunities to make investing available to everyone via crowdfunding helps us in this regard?

The last few years have been exciting ones for those following new crowdfunding laws at both the state and the national level. I am not speaking to donation-based crowdfunding here (such as Kickstarter, Indiegogo and the rest) but rather investment crowdfunding (that involves actual return on investment).

When the JOBS Act was passed and as we watched and waited to see what rules our federal government would create, the states took earlier actions to implement their own forms of state-based securities crowdfunding.  However, many of the new rules are going in the exact opposite direction of how investing has historically been done, and those rules have created more barriers, not fewer, in terms of getting to know who you might invest in.  For examples, the JOBS Act rules (and those of many states) that require a company to only post their offering onto a third-party “intermediary” platform, and that limit what a company can say directly to its potential investors, creates such a barrier.

Investing has almost always been more interaction than any reaction to data before a transaction is completed, where the personal aspects of the interaction weigh heavily in favor of any successful transaction.  How many times have we used, heard or relied on the old adage that you need to look someone in the eye before you can do a deal with them? In this modern age of SEO, and the multitudes of interweb communications, there are still many dealmakers that need to meet, and should be able to meet, the other person first before any deal gets done.  The same has held true for our investing in other businesses since the dawn of investments began, and still holds true today.

Consider most companies that raise funds privately, through a broker-dealer, or even those that go public via a IPO.  In each and every case, the company or its representatives sell those offerings, and the investors only buy (invest) if they can get to know the team.  With private offerings, the company goes directly out to the accredited investors that already know them, or to whom they have been introduced.  Broker-dealers help companies with their offerings by introducing them to investors they know, and those investors then get to know the company.  And broker-dealers are supposed to ensure that the deal is suitable for every investor they bring in.  Even IPOs have a personal connection component. The main underwriter will take the company team out on a roadshow, and introduce the team to its potential syndicate of other dealers to bring them in to an IPO.  Those potential dealers put a lot of weight into meeting that team, and likely would not consider investing without a chance to get to know them personally.

But not all securities crowdfunding takes the unfortunate approach that you need to separate the company from the investor and utilize technology platforms in the place of that person interaction.  In addition to the Direct Public Offerings (DPO) that have been around for decades, there is also, for example, the new Oregon Community Public Offering (CPO).  DPOs are federally exempt offerings that must be filed with any state in which the offering is conducted, either using a federal exemption that currently limits the raise to $1m (but allows you to file in multiple states), or what is known as the Intrastate Exemption that typically has no dollar limit but requires the company and all investors to be in just one state.  The Oregon CPO, which was championed by Amy Pearl and Hatch Innovation, was designed to be a community capital raising tool, and companies are actually encouraged, not discouraged from raising those funds directly from their communities via meet-ups that actually allows people to look the CEOs in the eye.

Whether it’s a DPO, CPO, or another kind of offering that provides for and encourages direct and interpersonal connections, an investor is provided with a very valuable opportunity to meet the people behind the veil and to use their own personal assessments in addition to what a company states in its materials or ratings it’s received.  And those personal connections then make a significant impact on those inside the company who are taking investments from people they now know.  The decisions companies make are likely highly informed by how connected the investors are to them.  And while we have not experienced DPO investors who have abused that personal connection, what we have seen is a deeper, richer and more connected community as a result – a community of investors and companies who actually know each other

It’s the DPO Digest!

It’s the DPO Digest!

Baah baah almost there!

baahThe Economic Development and Financing Corporation is at 90% of its goal in its Direct Public Offering. California investors can help them reach their target by investing before February 9th.

Through a community-based Local Social Impact Investment Note, EDFC offers investors an opportunity for California residents to launch the Mendocino Wool Mill project – and shift their money from Wall Street to “Main Street.”

Learn more here.

Mission: Cheese.

mc tickerSan Francisco’s Mission Cheese is almost halfway to their goal of opening their new restaurant, Makers Common. With some of the most creative marketing out there, they literally put the investment opportunity on the menu with a  $1,000 “founders special.”

In the words of one of their investors:

“I couldn’t pass up the opportunity to support local makers. By supporting Maker’s Common you’re also supporting all the small food producers they source from. Maker’s Common has created an opportunity for me to invest in my local community, and that’s an opportunity that doesn’t come by very often.”  – Buck Lucas, SF, CA

Want to learn more? Mission cheese is hosting a Happy Hour for potential investors on February 8th @ 6:30 p.m. RSVP directly on their website.

Blazing the Trail

mt logoMy Trail was born in Boulder, Colorado, out of a passion for the outdoors and a desire to bring to market the very best lightweight and functional outdoor clothing and equipment. T heir merchandise will be available on their website, and they eventually plan to open retail locations in Colorado.
After completing the DPO Lab (then known as the “DPO Boot Camp”), My Trail Company has raised $294,100 of its $800,000 goal, with 150 days to go! The 1st $200,000 they brought in funded production of their best-selling styles, an e-commerce launch, the opening of a new distribution center, and the hiring of core staff.

In their offering, investors purchase preferred shares directly from the company, earning 10% annual dividends, which will either be paid in cash or accrue from year to year and be paid upon a liquidation or certain types of redemption. Investors will receive a 20% discount on product purchases.

Investors in Colorado can find more about the opportunity on Cutting Edge X, the Direct Offering Marketplace. Learn more about My Trail.

Composting Pays

cero pictureFounded in 2012, CERO Cooperative is more than just a compost hauler in Massachusetts. They are built on the mission of improving their communities while doing right by the environment. Plus, as a worker-owned cooperative all their employees are deeply vested in their success. Turns out, their community is too!  Unique as a bilingual, multicultural co-op, CERO completed a year long  Direct Public Offering , raising capital by selling shares of dividend-paying stock to regular community people. Lenders who were initially hesitant to take a chance on lower income entrepreneurs in the green economy are now on board, and CERO is growing, providing the jobs it promised to workers who own the company. In one year, they raised over $350,000 from their community using our Online Investment Tool and CuttingEdgeX listing site. You can learn more about their story and growth in a short video on their website.

Investing in the Silver City

murray pictureA graduate of our DPO Lab, (formerly known as “DPO Boot Camp”) the  Murray Hotel has received regulatory approval to conduct a DPO in New Mexico. In the heart of Silver City, the Murray Hotel is a 1938 Art Deco hotel that celebrated the 75th anniversary of its original opening in 2013. The Murray Hotel is raising $600,000 by selling membership interests in the business through a DPO. Investors may earn up to 5% return per year. The funds raised in its DPO will be used for renovations of the hotel, including guest rooms and food facilities, and for marketing the hotel and its proximate location to amazing wilderness and cultural areas. On January 21, 2016, they held their first meeting with potential investors. Read more about the Murray Hotel in this article. Stay tuned for updates on their offering!