Nilima Achwal

SOCAP11: Breaking Down Barriers to People Powered Capital

“Why is it illegal for me to invest even $100 in the business of my choice?”

This kick-off session on the democratization of impact investing tackled the tough questions. For example: How can we channel the massive amount of capital latent in the 98 percent of people may want to invest in a venture, but who are not “accredited investors?” Over the course of 90 minutes, the knowledgeable and determined panel outlined the current environment and how we can begin to unlock that vault of capital and engage ordinary citizens with local ventures.

This panel came just before an exciting announcement: as part of the jobs plan announced last night in the U.S., the White House and President Obama have proposed a crowdfunding exemption with the Securities and Exchange Commission. This will include “reducing the disproportionately high costs that smaller companies face when going public, as well as raising the cap on “mini” public offerings (Regulation A) from $5 million to $50 million.”

To explain the issue of people-powered capital, SOCAP hosted an all-star panel: Jenny Kassan of Cutting Edge Capital, Mike Van Patten of Mission Markets, Amy Pearl of Springboard Innovations, Dana Mauriello of ProFounder, John Katovich of Katovich Law Group, and Ari Derfel of Slow Money. Though the discussion revolved mainly around the regulatory environment in the U.S., the lessons can be applied to a global context.

To begin with, they set the stage: You are starting a smoothie business, and you need some start-up capital. However, you can’t just ask your friends to invest in your company – it’s against SEC regulations. So, you have the following options: get donations, pre-sell your smoothies, barter, or find an accredited investor. What is an accredited investor? Answer: Someone who needs less protection from the government, defined as having a net worth of at least one million US dollars or having made $200,000 each year for the last two years. Initially, these regulations were made to protect ordinary citizens from being scammed.

Because of this, we see that there exists 4 percent private equity and a whopping 96 percent of public equity (mutual funds, etc), representing capital that is not being tapped by start-ups. So, start-ups have a few paths to pursue to attempt to cut into this pie:

  • Nonsecurities-e.g. Kiva, REI (even though you get a financial return it’s considered a “discount” at the end of the year), Kickstarter, Indigogo, Pre-sold coffee card at Awaken café)
  • Public-private partnerships
  • Co-ops
  • Private offerings
  • Direct public offerings

Then, the panelists spoke about their own ways of tackling this complex issue.

Dana Mauriello, Profounder

Dana Mauriello is a co-founder (along with Jessica Jackley) of Profounder, an online crowdfunding platform. The idea started when they were in business school, and their classmate started a business. The classmate began to get investments from other classmates, but it became difficult because they were not accredited investors, since they had student debt.

Mauriello and Jackley then found Regulation D 504, a securities exemption that allowed entrepreneurs to get money from people they knew, but prohibited general solicitation. However, the number of investors they were allowed from each state varied as the number investors from a state varied, making compliance a nightmare.

So, in Profounder, they made an automatic compliance engine that takes into account the number of investors from each state. Also, the site lets entrepreneurs fill out a term sheet (with both equity and revenue sharing, which is more appropriate for SMEs) and make pitches online. However, a challenge came in the fact that Profounder was publishing the funding online, making it a broker dealer, so it soon removed that feature.

Mike Van Patten, Mission Markets

Patten believes that there is not currently sufficient infrastructure to scale social capital markets. To this end, Mission Markets works in the current regulatory infrastructure, speaking the language of the securities dealers to work toward regulatory change. Said Patten, “Unless you work in current regulatory infrastructure, there’s no way this market will scale [if we keep working in gray area].”

Amy Pearl, Springboard

Pearl’s non-profit is focused on enabling citizens to become social innovators. Now, they are launching Hatch Lab Inc., a for-profit community innovation lab that encompasses everything from very early stage ideation to the funding of start-up social enterprises. Hatch will have a direct public offering in next 6 weeks-Pearl hopes to have at least 300 investors contributing a $1000 minimum. She decided on the DPO for a number of reasons: 1. To raise money, 2. So that the community members can own the venture, allowing them to be participants in anything that Hatch creates, 3. To show that it’s doable, and that community ownership could become the next wave of funding!

Ari Derfel, Slow Money

Derfel spoke about the benefits and costs of targeting accredited investors versus community members. While it could be more difficult to get, say $5000 from a community member as compared to an accredited investor, there are a number of benefits in doing outreach to community members:

  • You spread the risk,
  • They can do local guerilla marketing for you,
  • You build the community that you can go back to for future project funding.

Some costs may be that it takes more time, there is more relationship management and sometimes too much feedback, and you can have to navigate the potential legal repercussions.

The panelists explored the issues surrounding “people-powered capital” from a number of perspectives, but all agreed that once the unaccredited investor can participate, there will be a tipping point of capital gushing into start ups.

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impact investing, venture capital