Regulation A+ passes unanimously

Great news! The SEC commissioners have unanimously passed final rules for Regulation A+.

While we are reading the final rules, below is a great chart from CrowdCheck that explains the differences between Reg D and the new Reg A. In short, this is going to potentially be a game changer in the crowdfunding world. Although this won’t work for small offerings of a few hundred thousand dollars, it will change the face of financing for the companies that are looking to raise a few million.

Click to access Comparison%20of%20506,%20CF,%20Reg%20A.pdf

Startups, the SEC and what it means for crowdfunding

The following article was originally published by AZ Tech Beat.
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For most startup entrepreneurs, they go into the game knowing they will eventually need to raise money. They also know that more often than not, investors, in the form of family, friends or angel investors, will invest in exchange for shares of the company. Regardless of who actually belies up to the bar with capital, the entrepreneur needs to remember that selling of shares is tightly regulated by the Securities and Exchange Commission (SEC).

photodune-crowd-funding-yellow-roadsigncrop-500x325Back in the era of the Great Depression, the SEC was created to regulate the sale and purchase of securities. These laws were designed to protect unsuspecting people from losing all their money to cheats and swindles. The result is that the SEC created a regulatory scheme that made it very expensive and difficult to raise money, even from smart and rich people who knew what they were doing.

This all changed in 2012 when The JOBS Act became law. There are two major provisions that impact the way the companies are going to be raising money from private investors.

The first has to do with the legalization of general solicitation. In order to protect investors from stock promoters stealing money, the SEC prohibited people from raising money through advertisements. The problem is that for most companies, it really isn’t that they want to advertise in the newspaper or on TV that they are raising money. Instead the general solicitation ban prevented companies from communicating the fact that they were raising money at all. In short, the pre-JOBS Act law basically prohibited the company from telling anyone it was raising money except those that had a pre-existing business relationship. This shrunk the market a great deal. This “old” rule is contained in Rule 506(b).

The old Rule 506(b) also meant that most people raising money were unknowingly breaking the law. Things like pitch-days (where companies present their business plan to a room full of angel investors), sending along a private placement memorandum to a friend of a friend … all those actions were actually prohibited. The problem of course is that no one even knew it.

So Congress knew that this outdated and constantly ignored ban needed to be revised. Remember that the SEC only allows high net worth people to invest in most private deals. Only people with more than $200,000 in annual income or net worth (excluding their house) of more than $1,000,000 can participate. These people are called accredited investors. What this means is that most people are completely shut out from investing. However, when someone indicated an interest in investing, they simply could tell the company that they qualified as an accredited investor – they never had to prove it.

As part of the change, Congress set up a new deal where a company can generally solicit – meaning a company can advertise that they are taking investors. But in exchange for the new ability to advertise, if someone says they are accredited investor, the investor has to prove it. Of course, this has created another set of issues and problems, all of which are being worked through (including how exactly investors are verified and how advertising material gets into a company’s “permanent file” with the SEC). This new paradigm – where a company can advertise their stock offering but in exchange must verify the accredited status of the new investor – is all contained in new Rule 506(c).

In short, the change has been very significant. For startup entrepreneurs who now have the ability to communicate freely about money, the sky is the limit. Websites, television ads and social media campaigns are about to become totally commonplace to raise money.

But the next step is still coming in 2014. Then, anyone, rich or not, will be able to make investments into companies using the “crowdfunding” provision of The JOBS Act. The SEC just put out proposed rules which allow for input from the investing community about how exactly equity crowdfunding is going to work.

There are very few laws that are as complicated as securities laws. However, the good news is that things are finally changing – catching up to the real world of social media and instant communication, and a fulfilling future awaits more startups and wise investors.

Jonathan Frutkin

Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s the author of “Equity Crowdfunding: Transforming Customers into Loyal Owners” which is available in paperback, Kindle and audio book formats.

Cricca Concierge

In the world of publicly traded stock, there are companies that are known as “transfer agents”. Their purpose is to facilitate transfer of stock ownership from one shareholder to another. It is really record-keeping process, and every non-bank transfer agent must be registered with the SEC. These registration criccarequirements are meant to keep out fly-by-night operations which may disappear with important records of who owns a company.

Investor relations firms also occupy the post-investment space. Rather than acting merely as a conduit for the transfer of securities, investor relations firm focus on communicating with investors. The communication can be something as simple as sending a proxy forms, or something as complex is putting together annual reports are other items for investors.

Crowdfunding is different. With respect to our clients, we’re talking about consumer-facing businesses, which have thousands of customers. These are the companies that successfully raise money using crowdfunding. As a result of those efforts, they all of a sudden have hundreds of shareholders. The fact is that these relatively small companies now have an extra operational hurdle. Plus they still need to activate these new owners as part of their marketing strategy. Even more than during the funding campaign itself, the period post-crowdfunding creates both traps and opportunity. These crowdfunded companies can’t be relegated to choose between a company that merely acts as a transfer agent or produces annual reports.

That is why we introduced Cricca Concierge. We enhance the power of your crowd – the owners of your business – and turn them into something much more than just owners. We turn them into high-frequency, high spending, and evangelical customers. These are the type of people that you want to communicate with often, ensure that they are receiving answers to all the questions, and are encouraged to use their social networks to promote the business. These are also the same people that you want to plan special events around and provide perks that are a natural part of the business. Cricca Concierge provides exactly that service.

We also help navigate secondary markets, transfers of shares, and other things that a traditional transfer agent would do. We also work with you to produce annual reports for your new owners. We do this all through one of the funding portal partners or through a branded website that is only accessible to your owners. We also have live support, both online chat, email and live person via Skype or telephone. Depending on the type of business you have, this type of concierge service is necessary for you to get the true “bang for your buck” that crowdfunding promises.

Our services are primarily directed toward the companies after we’ve helped them raise money, but we also accept a select number of companies that have been crowdfunded without our help. Do not hesitate to contact us regarding your specific needs. Our services are both powerful and flexible.

Jonathan Frutkin
Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.

It is All About Access

Traveling the country and meeting with business owners (and those who advise them), I ask a simple question. What does a business investor expect that is different than what a customer expects? I almost always get the same answer: discounts. Most people think that owners are expecting to get lower prices on the products they buy. That’s actually not very important to investors at all.

Owners primarily expect two things when they participate in crowdfunding campaigns. The first thing that they expect is access. That means that they’re able to talk to the manager, and business leaders, and give their feedback. They like to be included. Now obviously, that doesn’t mean that each time you want to hire or fire someone, you’re going to be contacting your crowdfunding investors. But it doesn’t hurt to let them know that their opinion matters. Surveys and other feedback loops help reinforce that the investor has access. Having owner loyalty cards is important, just like having actual physical stock certificates. People want to be recognized as owners. That is true when they walk into the business. And it is also true that that people want their ownership status displayed on their social media page and on their physical wall in their home or office.

This leads to the second thing that owners really want. Investors want to be part of something bigger. They want to be involved with their community. Just like people are interested to see themselves on the roll of people were involved in a particular nonprofit charitable fundraising campaign, these investors also want to be recognized and included in the community of people who added to a local business. This creates a huge advantage to the crowdfunded company. Not only do you have a lot of investors who are going to talk about your business, the investors are also letting you speak directly to their followers about how grateful you are to have them as part of your team. It is a double-win. The business brand gets the benefit of a larger network, and the investor’s personal brand is enhanced because of their connection to a local business in the community.

Remember the crowdfunding isn’t just about discounts. It is about access and community. Companies that embrace crowdfunding will be far ahead of their competitors, saving hundreds of thousands on old economy marketing strategies that are less and less effective – strategies like providing coupons and discounts to entice people through the doors.

Jonathan Frutkin
Jonathan Frutkin is an attorney at The Frutkin Law Firm, PLC in Phoenix, AZ. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.

Three Reasons Why Owners are Better Customers

Every company needs customers. Our job is to help profitable locally owned businesses take their customer base and transform those people into owners through the power of crowdfunding.

Customers are the engine that creates value to a business. First, they spend money in the business. Obviously step one toward profitability is sales! Second, customers are service and quality (and value) sensitive. These customers help business managers shape their service offering to respond to the market; successful adjustments create more and more customers. Third, customers spread good experiences through word of mouth (and social media), generating additional customers. Of course, a dissatisfied customer can also sound off to the world about a bad experience, costing the business customers in the future with a bad Yelp review or Facebook post.

However, we know three things about owners which make them so much more valuable as customers:

1)      They spend more money.

Even if an owner has a very small percentage stake in the business, they feel more comfortable buying just a little bit extra. And all those little bit extras can really add up. Do you want fries with that? Owners do.

2)      They visit more frequently.

An owner, when faced with a choice between visiting their own business and a competitor will almost invariably choose their own business even if that means waiting until later to make a purchase. Or they may deal with inconvenience, going out of their way to make a purchase. Increasing the frequency of customer visits is a key component to increased profitability.

 3)      They become evangelicals for the business.

Instead of passively sharing information about their purchasing habits as part of a conversation with their friends, owners go out of their way to preach about the great products and services provided by their company. Great Yelp reviews and glowing social media posts become commonplace.

But perhaps the most powerful part is that the occasional bad customer experience is much less likely to make it out to the public square. While a customer may want to blast the shortcomings of a failed experience, an owner wants to make sure that management fixes the problem. So while a poor sales clerk may receive extra skills training, that issue won’t make its way onto social media. And while a good review is worthwhile in this social media age, a bad review is like kryptonite. A crowd of owners protects a business when things go wrong.

Crowdfunding is about a lot more than “funding”. It is really about the crowd. And having the crowd own your business is soon going to become the key component to a successful marketing strategy.  

Jonathan Frutkin
Jonathan Frutkin is an attorney at The Frutkin Law Firm, PLC in Phoenix, AZ. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.

REI – The Power of Crowdfunding

REI: the Great American Co-operative
REI: the Great American Co-operative

The following is an excerpt from “Equity Crowdfunding: Transforming Customers into Loyal Owners”:

In 1902, newlywed immigrants gave life to a baby boy. Little Lloyd Anderson was born in rural Roy, Washington, outside of Tacoma. At the time, Roy was a prosperous boom town that served as a major stop on the train line (Roy is now a small community with a population of less than 1,000 after a Depression-era fire wiped out the entire downtown area). As a child, Lloyd enjoyed playing outside with his friends, and he took an early interest in climbing small mountains around his home town.

In 1932, he married Mary Gaiser, a girl from the Yakima Valley, Washington, about 100 miles away. Mary grew up in a family that enjoyed spending time taking long hikes. Their shared love of the outdoors was the centerpiece of their relationship.

In the early years of their marriage, the Andersons joined a climbing group where they could spend time with other couples while enjoying the outdoors. During the cold winter of 1938, the climbing group attempted to scale a snowy peak in Washington State, but were unsuccessful because of lousy equipment.

It was not exactly a common recreational activity to climb mountains in the United States. But in Washington, a number of the people who had made the trek to the Pacific Northwest were second and third generation immigrants from areas of Europe where climbing was a common activity. Countries like Germany, Austria and Switzerland have a long history of climbing, as it was often the only way to travel across the Alps.

Scaling mountains requires particular specialty climbing equipment. One of the basic multi-purpose tools used by every climber is an ice axe. Not only does the ice axe cut the footholds that are used while scaling the mountain, climbers also use it to assist during the descent by burying it in the ice. Even when used as a mere walking stick, the ice axe is a critical piece of climbing equipment.

Not surprisingly, the members of the Anderson’s Pacific Northwest climbing club were dissatisfied with both the workmanship and pricing provided by the few stores that produced ice axes in the United States. To find an ice axe that would impress these experienced climbers, Lloyd Anderson took it upon himself to look through every store in Seattle for a high-quality European-made ice axe. Having no luck, he began scouring European sports catalogs. He found a $3.50 (shipping included!) ice axe from Austria. It was called an Akadem Pickel Ice Axe.

The Anderson climbing group banded together, 23 strong, to purchase 23 Akadem Pickel Ice Axes – at a discount because Anderson bought in volume. Anderson then organized this collective group into what would become Recreational Equipment Inc., known as REI.  Born of necessity because there was no European-quality climbing equipment in the Pacific Northwest, REI became the largest privately held American consumer co-operative selling outdoor recreational gear. REI sells about $2 billion worth of equipment each and every year across its 125 stores in 31 states, and it employs 11,000 people. The company continues to grow, doubling in size since 2000.

When first attempting to find a way to purchase additional equipment, Lloyd Anderson eagerly researched a wide variety of topics. He was an engineer by trade, and his training would not permit him to act without disciplined thought. Anderson’s research brought him to the Rochdale Equitable Partners Society, a 19th century organization that was the beginning of the co-operative movement. Rochdale was an organization of 30 English weavers and other tradespeople who decided that they would pool their resources to purchase basic food staples like sugar, flour and oatmeal. The food co-operative exploded into nearly 1,000 physical store locations within ten years of its creation. The leaders at Rochdale laid out certain principles which have formed the bedrock of co-operatives even to this day. The principles include voluntary membership, no racial or religious discrimination for membership and democratic member control. These same principles were adopted by the International Co-operative Alliance.

There were several Rochdale principles that guided Anderson’s thinking. From its beginning, REI is a co-operative that follows these three guiding ideals:

1) A modest one-time membership fee is paid by customers to become owners of the co-operative. To this day, the REI membership fee is a mere $20 per member.

2) Every active REI member receives one vote.

3) Annual dividends are paid out in proportion to patronage. The theory is that customers that contribute more to the sales should receive more of the profit in return.

This socialist approach to business organization resulted in REI’s eventual success. But the success was anything but the quick acceptance found by the Rochdale Society (which had exploded into 1,000 stores within ten years of its creation). Of course quick growth wasn’t Anderson’s idea at all – he just wanted to find a way to give climbers in the Pacific Northwest a good deal on outdoor equipment.

Initially, the co-op operated out of the Anderson’s house in Seattle. But eventually interest in European-style equipment began to grow, likely as the result of young soldiers returning from the European front lines of World War II. The youthful vets experienced the winters in Europe, and they appreciated what reliable equipment could do in those circumstances. So by 1944, Anderson moved the growing operation from the back of his house into the back of a gas station in downtown Seattle. This was REI’s first store.

The slow growth continued. REI finally hired a full-time employee to manage the store in 1953. Jim Whittaker was a regular to the Pacific Northwest climbing scene. Nearly a decade after beginning his career as store manager, Whittaker would draw serious attention to REI when he became the first American to reach the summit of Mount Everest. Whittaker stayed with REI for a quarter of a century after his climb, generating interest for this sleepy company from Seattle among a growing number of outdoor enthusiasts.

By 1971, Anderson was ready to retire. At that time, REI still had only one store. But there were some small improvements – in 1962 the store was moved from the back of the gas station to a storefront. It was time for Whittaker to become president and expand the company.

In 1975, the Berkeley California REI store was opened. It was 31 short years after the first store had opened its doors and nearly 40 years after the company was founded. A year later, another store opened in Oregon. And from there, REI began its transformation into an evolutionary company, bringing top-quality outdoor equipment across the country, while still maintaining its co-operative approach. But Whittaker’s expansion plans caused him to lock horns with a number of the co-operative members who felt that REI should remain a small, socialistic experiment in the Pacific Northwest.

By 1979, Whittaker had given up. “A lot of board members were against growth; they wanted it to be the same little store,” Whittaker said. But despite his resignation from the company, Whittaker’s vision won out. REI hired Jerry Horn, a former senior executive from Sears who specialized in merchandise sales. From there, Horn’s expansion led to an increase in the co-op dividends from 5% to 12%. It has since stabilized at 10%.

REI memberships are $20 for a full lifetime. REI issues its annual dividend check based on the previous year’s profits. The dividend check is proportional to the member’s purchase amount, and it expires two years from the date of issue. The dividend can be exchanged for further purchases, or the member can elect to receive cash during the last six months of the year that the dividend was issued. REI members also get discounts on rentals, free shipping, shop services, and they get to use the rock walls of locations with indoor climbing. Members also receive periodic coupons.

The initial concept of the co-op structure was to receive volume discounts and reduced prices on shipping by purchasing mass quantities at once. However, now REI has become a large corporation that utilizes its purchasing power to increase profit margins. Despite its unsurprising corporate-profit motivation, REI continues to donate to environmental groups and coordinates their employees to serve as volunteers for these groups. In addition, REI offers meeting space free of charge to nonprofit organizations – a clever way to get people into the store, where it is hard not to buy something.

This model has been successfully duplicated in Canada by a company called Mountain Equipment Co-op. According to the company’s website, the co-op was founded by the Varsity Outdoor Club, a group of student climbers from Vancouver who had to travel across the border to Seattle to buy items from REI. Tired of being hassled by immigration officials and demands to pay import taxes whenever they traveled to buy equipment from the United States, in 1971 this group of climbers decided to emulate REI’s model. A familiar story later, by 2011 Mountain Equipment Co-op had reached $261 million in annual sales with 3.3 million members throughout Canada.

So what can be learned from this little sleepy co-op from the Pacific Northwest? Well, if you know an REI member, you already know the answer. The co-op members are unfailingly committed to REI. First of all, the company sells great products made by great manufacturers. Their customers demand the sort of quality that can’t be easily found at Walmart. The co-op members are the ones who vote on the Board of Directors, so the Board has a strong motivation to provide consistently high-quality products.

Unlike an Internet e-commerce shopper who navigates the Amazon marketplace, you won’t see an REI member purchasing outdoor equipment from anyone but REI. And that’s true regardless of the price. The REI members are an evangelical crowd, promoting the virtues of REI to everyone who will listen. And, as you can imagine, conversations occur frequently between members of this community. Remember, these enthusiasts are used to taking a break on the trail, popping a granola bar, and having a conversation with the person coming up the trail from behind. Even a simple “hey” would be normal; but much more often, fellow enthusiasts create new friendships and relationships based on their shared interests.

In fact, those relationships are one of the great benefits of becoming an outdoor enthusiast. This network of people share stories about the best trails, the best activities, and, of course, the best equipment. Long before people were using the Internet to connect, outdoor enthusiasts used bulletin boards at the local REI to communicate where the next “meet up” would be. This is an important element of any successful business – finding people with common interests, who appreciate and admire your product.

In the case of REI, this relationship is enhanced by the fact that the customers are more than customers. They are co-op members. They’re owners. And REI reminds them of this every year. In January, shortly after you’ve done all your Christmas shopping, something shows up in your mailbox. Yes  – it is a catalog. But there’s also something else inside: a check. A dividend check. Something that only members receive. Outside of a co-op, we call members “owners”. And there is only one thing more loyal than an owner – an owner with a dividend check in their hand.

Jonathan Frutkin
Jonathan Frutkin is an attorney at The Frutkin Law Firm, PLC in Phoenix, AZ. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.

Crowdfunding for Small Business

I have heard a consistent criticism of JOBS Act compliant equity crowdfunding. The argument is that for most businesses, the ability to merely raise one million dollars over the course of 12 months is insufficient for a business to meet its growth goals. There could be nothing further from the truth.

There are two targets for crowdfunding. The first is the one that is promoted by people far and wide. That belief is that crowdfunding is for startup companies. In my opinion, crowdfunding is, generally speaking, the worst way that a startup company can raise money. I’m sure that will be the subject of a future blog or two. There are so many things that come from the mentorship a startup receives when money comes from an angel investor or venture capital firm, and the increases in awareness and presales of products are not sufficient to overcome this advantage.

However, the other target for the crowdfunded business model is the small business. You know, the one that has somewhere between 5 to 50 employees. It does between one million to ten million dollars in revenue a year. And it needs additional capital in order to support business growth. The hundreds of thousands in profit a year is more than sufficient to satisfy the needs of Crowdfunded investors to receive a return on their investment.

The idea that there aren’t that many of these types of companies is absolutely absurd. In fact, most of the new jobs in this country are created by exactly this type of company. According to the Small Business Administration, already half the American private sector workforce works for these companies, and they are now creating 65% of all new jobs. There are a host of people who run these businesses, and they would be delighted to learn that there will soon be a new way to them to raise capital.

It would be a large mistake to discount the people who run these types of businesses. They are the ones that are going to truly improve the American economy. And crowdfunding is a great opportunity for them.

 

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Jonathan Frutkin is an attorney at The Frutkin Law Firm, PLC in Phoenix, AZ. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which will be published in May, 2013.

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