We here at Cutting Edge send our congratulations to Kassandra on her new position as Marketing Manager with BALLE.
Kassandra led our marketing and communications efforts in 2017 and 2018 and we are grateful for how she lifted our brand and strengthened our connections to clients and community. We look forward to collaborating with her (and BALLE) in the coming months. Let’s keep building resilient local economies together!
Thank you and best wishes to Kassandra.
— John, Brian, Kim and the whole Cutting Edge Team
P.S. See our job opening here.
Seventeen years ago a small pickling company called Real Pickles, based in Greenfield, Massachusetts, became dedicated to changing the food system. Owners Addie Rose Holland and Dan Rosenberg practice traditional fermentation using only produce sourced from local family farms. Their pickles are a representation of how they operate their mission driven business — with meticulous care.
Part of Real Pickles’ vision to change the food system included transitioning their business into a worker-owner co-operative to actively support their workers and demonstrate a working model for other food businesses to follow.
Twelve years after Real Pickles was founded, Addie and Dan began the process to worker-owned co-operative by evaluating capital raising strategies to successfully make the transition. They chose a direct public offering (DPO) strategy (that Cutting Edge Capital structured and advised on), finding that a community capital raise aligned with their mission to build up community.
After five years of settling into the success of their direct public offering, Real Pickles co-owner Addie Rose shared with us where they are now and how they got there.
What is Real Pickles?
Real Pickles is a worker-owned co-operative on a mission to build a better food system. We make traditionally fermented pickles, sauerkraut, kimchi and other vegetables that are nourishing and rich in probiotics. We source all of our vegetables from family farms in the Northeast and sell our products only within the Northeast region.
When did you begin your first raise?
We started our first direct public offering (DPO) community capital raise in the spring of 2013. The purpose of the raise was to finance our transition to a worker co-operative.
What was your goal amount and how long did it take to reach it?
Our goal was $500,000.00 and we reached it in less than 2 months!
How did you network and market to raise capital?
We started planning our networking and marketing efforts several months before the offering was approved for release. We attended many events to maintain a high awareness of our brand, and practiced a carefully-crafted message. Connections with like-minded partner organizations, including our regional Slow Money chapters and other businesses with investor connections were important for spreading the word. After twelve years in business, Real Pickles enjoyed strong community support, and we were able to leverage our years of networking and marketing to reach out to our community for this raise. See this resource for more information on our process.
What was challenging about the direct public offering process?
Initially, we were expecting to work with a local attorney that could support us through the legal process of setting up a DPO. After many discussions with local firms, it was clear that we’d need to work with someone who had specialized knowledge of the securities regulations and process, as well as the interest in working with a small business (with limited resources). We were introduced to Cutting Edge Capital and found our match!
What was your favorite aspect about the DPO process?
It was heartening to see how excited people in our community were to invest locally. Many people in our area are committed to local eating and shopping, but there aren’t many opportunities for local investing. The popularity of our raise demonstrated that there is an appetite for this kind of community investment opportunity!
What are the longstanding results of the capital raise? And what have those results allowed Real Pickles to accomplish?
Our capital raise allowed Real Pickles to transition to a worker-owned co-operative, with all of the anticipated benefits to our employees and our larger community (see here, here, and here). In addition, we gained a fantastic group of community investors, many of whom were longtime customers or suppliers, who as investors are now even more committed to our business and our mission!
Discuss the expansion of your team and the growth of your business.
Since our transition to a co-operative, we have doubled the number of worker-owners on our team (from the founding five worker-owners) and our business has continued steady growth. The new energy and ideas that new owners bring is welcomed by everyone. We feel that our business is stronger than ever, and that our team is well-prepared to guide our business into the future.
Back row, L to R: Kristin Howard, Tamara McKerchie, Heather Wernimont, Andy Van Assche, Brendan Flannelly-King. Front row, L to R: Annie Winkler, Addie Rose Holland, Lucy Kahn, Katie Korby, Dan Rosenberg.
Why did you choose the cooperative structure?
The purpose of our conversion was to demonstrate an alternative model for a growing natural foods business that keeps ownership local, supports our employees, and protects our strong social mission into the future (see here).
Have you noticed more interest or response to direct public offerings in general in your own community after Real Pickles’ success with a DPO?
There has been a lot of interest in community capital raising since our DPO. In fact, our neighbor Artisan Beverage Co-operative made a similar raise within a couple of years after ours – as well as CERO in Boston. Many other business owners have reached out to discuss possibilities. It is great to see that this method of community investment is gaining momentum.
Share three key pieces of advice you have for business owners looking to go the direct public offering route.
- Partner with your community to build a strong network and campaign. Make sure you are tapping into any existing “buy local” or Slow Money organizations.
- Take time to prepare before your raise. Be sure to craft your messages carefully and have your materials ready to go, so that you can focus on needed networking and communication with investors.
- Carefully consider the minimum share price to make it accessible (the most exciting part of a DPO!!) and yet maintain your investor pool at a manageable size (we ended up with 77 investors, which feels just right for us!).
What are you most excited about for the future of Real Pickles?
I’m excited for more and more workers to become owners at Real Pickles, and I love to see our workers practicing the art of ownership. Our business is in good hands for a future of smart growth, meaningful jobs, and partnering with our community to build a better food system!
If you’re interested in direct public offerings or transitioning your business into a worker-owned co-operative, fill out our contact form here or email us at email@example.com.
Since 2015, a bipartisan coalition of lawmakers has advocated for tax incentives for those who invest in low-income communities, recognizing that the benefits from the economic recovery have largely bypassed those communities. Their efforts were rewarded when their proposed opportunity zone program was included as Subchapter Z of the 2017 tax law overhaul that was passed in December. While Subchapter Z wasn’t specifically tailored to community capital, it offers tax incentives that will apply to some kinds of community investment funds.
First, here’s how the new law works: A taxpayer with capital gains can defer capital gains tax if they sell their appreciated assets and, within six months, roll over the profits into a “qualified opportunity fund.”
But it gets better. Investors in the qualified opportunity fund who hold their investment for at least 5 years will have their basis bumped up by 10% of the deferred gain (thus reducing their capital gains tax), and by another 5% if they hold it for 7 years. In 2026, there will be a realization event (in which investors are taxed on the other 85% of the original profit invested in the fund, assuming the investment has been held for 7 years). But if they continue to hold their investment for at least 10 years, their basis is bumped up to the market value of their investment, which means any further capital gains tax is eliminated completely.
A qualified opportunity fund is a partnership or corporation with at least 90% of its assets consisting of qualified opportunity zone property (and acquired after 12/31/2017), which can include:
- Equity interests in a corporation or partnership that is an opportunity zone business (and issued directly by the corporation or partnership, not acquired in secondary sales); or
- Tangible property (real or personal) located in the opportunity zone that is either first used by the fund or is substantially improved by the fund (the latter meaning that additions to its basis exceed its original basis).
A business is an opportunity zone business if:
- Substantially all of its tangible property is located in the opportunity zone;
- At least 50% of its gross income is derived from operations in the opportunity zone;
- A substantial portion of its intangible property is used in its operations in the opportunity zone; and
- Securities comprise less than 5% of its total assets by tax basis.
While this new law provides tax incentives to invest in funds that serve low-income communities, it does not provide any new strategies under the securities laws. It is probably inevitable that the vast majority of qualified opportunity funds will be open to accredited investors only, like nearly all private funds.
However, there are at least three strategies that allow a qualified opportunity fund to be open to its entire community, including non-accredited investors:
- Real estate fund: A fund whose primary business is investing in real estate and 90% of whose assets consist of real estate in an opportunity zone will be a qualified opportunity fund and will be exempt from the burdensome regulations of the Investment Company Act of 1940 (the “1940 Act”), which paves the way for the fund to raise capital via a direct public offering – making it a true community investment fund.
- Small business holding company: This type of fund is exempt from the 1940 Act if most of its assets comprise controlled or majority-owned subsidiaries – the idea being that the fund is in whatever business its subsidiaries are in, rather than in the securities investment business. Again, if 90% of its holdings are businesses in opportunity zones, it will also be a qualified opportunity fund.
- Intrastate fund: A closed-end fund of up to $10 million, all of whose investors reside in the same state, is eligible to seek an exemptive order from the SEC that allows it to raise community capital via a direct public offering and while avoiding all or most of the 1940 Act’s regulations. Such a fund could invest in either business or real estate in opportunity zones and thereby also become a qualified opportunity fund.
With any of these strategies, a community-scale fund can open up the opportunity for community ownership of community assets, with everyone able to participate on a level playing field, and everyone able to reap the profits from local ventures.
It should be noted that governors of each state had until late March to designate low-income census tracts as opportunity zones, but some have asked for a 30-day extension. However, only 25% of the low-income communities in each state may actually be designated as opportunity zones. It remains to be seen which communities will actually win that designation.
But community investment funds can be offered to the public in any community anywhere in the U.S. At Cutting Edge Capital we believe community investment funds are an effective way to significantly move the needle toward a more inclusive, democratic and decentralized economy.
If you would like to see this happen in your community, here are some steps you can take:
- Look at this map, which shows the census tracts that may be eligible for designation as an opportunity zone.
- If your community includes eligible census tracts, write to your governor, asking him or her to designate those tracts in your community as an opportunity zone.
- If you would like to see community investment funds serve your community, fill out our intake form to make an appointment with us to explore the kinds of funds that can be offered in your community.
On January 4, 2018, U.S. Attorney General Jeff Sessions issued a memorandum rescinding the Cole Memorandum and Department of Justice memoranda articulating nationwide guidance for marijuana enforcement. The Cole Memo provided a path for states to have a thriving legal and regulated cannabis industry because it articulated a hands-off approach to enforcement in states with robust medicinal cannabis laws and regulations. Lawmakers from both sides of the aisle have rejected Sessions’ action as a reversion to the failed war on drugs policies that led to mass incarceration of primarily people of color. Sessions’ memo shifted enforcement to individual U.S. attorneys who will decide whether or not to prosecute cannabis businesses, which is likely to result in uncertainty and a patchwork of prosecution priorities between states.
States with legal cannabis businesses may continue to operate within their regulated scheme despite Sessions’ memo. First, the Cole Memo and Sessions’ memo are not law. Both memos provide guidance to the Department of Justice on its enforcement policy but never remove the threat of prosecution. Second, the Cole Memo directed its stance to states with legal medicinal cannabis. The DOJ’s stance on recreational adult use remained the same despite the Cole Memo. Finally, protection for the cannabis industry remains with the Rohrabacher-Blumenauer amendment that prohibits the DOJ from using federal funds to crack down on states with legal medicinal use. The amendment, however, does not provide any protection for recreational adult use. Also, the amendment is a spending provision that congress renews annually. Currently, it is up for renewal and does not expire until January 19, 2018.
What does this mean for California? Lori Ajax, the Chief of the Bureau of Cannabis Control who is in charge of regulating the cannabis industry in California, issued a statement that the state will continue to move forward with the implementation of the regulatory scheme. The statement is a positive sign for the California cannabis industry. Backing by the state regulators reinforces the cannabis industry, which is poised to add billions of dollars to the state economy while creating thousands of jobs. The main concern is how U.S. attorneys in California’s four districts respond to Sessions’ memo. The U.S. Attorney for the Northern District of California, Brian Stretch, recently retired and Alex G. Tse was named as the interim U.S. attorney for the Northern District. It is unclear how he or any of California’s U.S. attorneys will respond. California’s U.S. attorneys could follow the footsteps of Robert Troyer, U.S. Attorney for the District of Colorado, whose response to Sessions’ memo stated that he does not expect enforcement to change for the state. This is a good sign because California’s U.S. attorneys, should they decide not to enforce, would not stand alone. Colorado’s successful implementation of a regulated scheme and decision not to enforce cannabis is a model for the rest of the states, including California.
Sessions’ memo is not the end of the cannabis industry, but it does inject additional uncertainty. Beyond DOJ guidance, there are movements in state legislatures and even the U.S. congress to either legalize or reschedule cannabis (remove it as a Schedule I substance). The uncertainty and variance that might be seen from differing state enforcement as a result of Sessions’ memo may mobilize further action to solidify the place cannabis might hold nationally in what is becoming a thriving industry that is accepting safety regulations and generating significant taxes.