James Militzer

The Best-Kept Secret in Impact Investing: A little-known legal tool lets businesses tap mainstream investor capital – so why don’t more social enterprises use it?

A common complaint in impact investing is the lack of investment options for non-accredited (ie: non-wealthy) investors. As Jenny Kassan, CEO of Cutting Edge Capital, describes it, “Under existing law, if you’re not an accredited investor, which means you have at least $1 million in assets (not including your home) or $200,000 in annual income, you don’t generally have a lot of options. So even if you want to be an impact investor, you may not really be able to figure out how to make that happen.” Many feel that this limitation hamstrings both socially focused “mom and pop” investors and the social enterprises that could benefit from tapping this investor market.

But Kassan, whose company helps social enterprises try to raise capital in a way that’s aligned with their mission, says regular folks – and the businesses that could benefit from their capital – actually have more options than most people think. For instance, she describes Cutting Edge Capital’s main tool: a little-known method called the direct public offering, which allows a business to sell securities directly to mainstream investors.

“The direct public offering is a tool where you do a registration at the state level, with the state securities regulators, and that allows you to offer an investment opportunity of whatever kind you want – it could be equity, debt, revenue share – to the general public,” she says. “You can accept accredited and unaccredited investors. And our clients … have had some really good success with it. We find that when regular folks have the opportunity to invest in a social enterprise in their own community, people are really excited to do that. So for example, we have a client that’s going to be building a new grocery store in a low-income community in Oakland, and that company was able to raise $1.2 million dollars from California residents, mostly focused in the Bay area. And people were just really excited to support something that’s going to be helping a low-income community – and they’re also going to be making a decent return on their investment.”

According to Kassan, every state has laws that make this possible – though few companies realize it. “We have clients all over the country – we’ve done this in New York, Connecticut, Massachusetts, Oregon, Washington, Utah – so every state actually has the legal framework that allows companies to register their offering and be able to accept both wealthy and non-wealthy investors. [But] we’re really surprised by how few people are aware that this is possible. There’s been a lot of hype around this new law called the Crowdfund Act, which is part of the JOBS Act. And a lot of people who are talking about it are saying ’Wow, for the first time regular folks will be allowed to invest in whatever they want!’ Actually, this has been legal for decades, but it is still not very well-known, and not very commonly used.”

So with all the complaints about the lack of impact options for mainstream investors, is it fair to say that the fault lies with the social enterprises who fail to take advantage of existing opportunities? “I would blame … a few different parties,” Kassan says with a laugh. “I would say that a lot of lawyers and financial professionals haven’t educated themselves about all the different options that are available. So when small businesses come to them asking about how to raise money, they usually just tell them the mainstream way to do it. They either aren’t aware of, or don’t want to go to the hassle, of doing something that would allow them to accept investment from a larger piece of the population.

“Nobody really knows about it – and we find that when social enterprises find out about it, they’re often really excited about doing it. Now it’s not the easiest thing in the world to do. You do have to do a registration process with the state, and there are fees that have to be paid, and you have to create a prospectus. So I don’t blame businesses that decide that it’s not the right way for them to go. But I do wish that more people knew that it was an option.”

In the video below – Part 4 of our Impact Investing Insights series – Kassan also discusses the JOBS Act and how it changes the landscape for impact investing (hint: she’s skeptical about some aspects of the bill), how other state and federal regulatory changes could affect impact investing and crowdfunding, and whether the impact sector will truly go mainstream in the coming years.

You can view the other parts of the series here:

Part 1: A Small Drop in a Large Bucket: The World Economic Forum’s Abigail Noble, on why impact investing needs to go mainstream

Part 2: Pay for Success: Can social impact bonds provide the fabled “win-win-win”?

Part 3: Start Small, Stay Small: Can better finance help Latin America’s microenterprises take the next step?

Social Enterprise
impact investing, social enterprise