INVESTMENT-BASED FIELD GUIDE

September 2020 TABLE OF CONTENTS Many terms are used INVESTMENT-BASED interchangeably when What is community capital?...... 3 referencing investment Why is the MEDC producing a guide on community capital?...... 3 dollars collected from a CROWDFUNDING “crowd” of people, instead Donation-based crowdfunding vs. investment-based crowdfunding...... 4 of just a handful of high net worth individuals or from More information on the evolution of crowdfunding in Michigan ...... 4 FIELD GUIDE institutions: • Community capital Mechanisms that allow for investment-based crowdfunding...... 4 • Community investment The value of investment-based crowdfunding...... 5 • Local investment The purpose of the “Investment-Based Crowdfunding Field Guide” • Local financing Who is using investment-based crowdfunding?...... 5 is to provide community development organizations, including local • Direct investing units of government, downtown development authorities, Main A Step-by-Step Guide to Supporting Interested in Pursuing Investment-Based Crowdfunding • Peer-to-peer lending Step 1: The needs a solid business plan, backed by realistic financial projects...... 7 Street programs, and other economic and community development • Investment crowdfunding Step 2: Identify the business’s existing sphere of influence...... 7 organizations, with information to help support a small business • Step 3: Understand how to register a capital raise...... 8 owner interested in pursuing investment-based crowdfunding as Step 4: Decide whether using a platform is the best option...... 9 a means to access capital to start or grow a business. Step 5: Chart out the marketing plan and campaign timeline...... 11 Step 6: Create a post-launch plan...... 12

Summary...... 13 his field guide provides those the community. This type of democratized of businesses on Main Street. on the frontline working capital that yields a return for its MEDC is committed to enabling APPENDIX A: Resource sites and citations...... 14 with new and expanding can be a viable financial resource to start long-term economic opportunities for all small businesses throughout or grow a small business. This guide Michiganders. In 2019, the organization APPENDIX B: Chart of registration types...... 15 Michigan with the knowledge will use the term investment-based engaged in the creation of a five-year and resources needed to crowdfunding to describe the practice strategic plan. MEDC evolved its mission, Tnavigate investment-based crowdfunding of directing capital from investors to vision, guiding principles and strategic as a viable way to access capital for their small businesses. focus areas in pursuit of its commitment small business needs. This guide provides to enable long-term, high-wage and an overview of community capital and the WHY IS THE MEDC equitable economic growth in every opportunities under the federal Jumpstart PRODUCING A GUIDE region of the state, from rural areas to Our Business Startups Act, or JOBS Act ON COMMUNITY CAPITAL? its urban cores. One strategic focus area (2012), and the Michigan Invests Locally Many small businesses have difficulty includes the continued effort towards Exemption (MILE) legislation (2013), gaining access to capital through developing attractive places. For this that allow small businesses to raise funds traditional financing sources. For women, reason, MEDC continues to strengthen directly from the community. In addition, it people of color, those with less than perfect local communities, downtowns, and provides step-by-step action items to assist credit, or even startups, it is even harder. historic neighborhoods through technical a small business owner as they research, Investment-based crowdfunding can be assistance efforts. The organization Disclaimer consider and prepare to raise capital. a game-changer for small businesses, recognizes the importance of supporting Everyone can be a local , and all investing involves risk. The information, statements and opinions expressed in this “Investment-Based who are the cornerstone of what makes main street businesses and the role Crowdfunding Field Guide” are provided for general information only and are subject to change without notice. The information does not take into WHAT IS Michigan’s downtowns unique and they play in vibrant and sustainable account an individual’s particular investment objectives, financial situation or needs and is not intended as a recommendation to purchase or sell any COMMUNITY CAPITAL? security. It does not constitute investment advice. Individuals should consult with financial, legal, tax or accounting professionals before acting upon authentic. Investment-based crowdfunding communities. Community capital is one any information contained herein. The examples and case studies shared in this guide should in no way be considered endorsements or investment Community capital is simply money that provides an innovative financial tool to way for main street businesses to access solicitations. In no way should this guide be construed as an offer to invest or a form of marketing. comes from the community and goes to support the creation, retention and and engage the local community.

2 | Investment-Based Crowdfunding Field Guide www.miplace.org | 3 DONATION-BASED THE VALUE OF INVESTMENT- capital. In addition to dollars raised from Intrastate Securities Exemption CROWDFUNDING the community, the MEDC provides a An exemption to certain federal BASED CROWDFUNDING VS. INVESTMENT-BASED grant up to $50,000 as matching funds. rules when an offering only includes Why might a company be interested persons within a single state. CROWDFUNDING Investment-based crowdfunding allows in raising capital from its community? residents, not just accredited investors, to Investor-return crowdfunding serves General awareness of websites such as or JOBS Act, a bi-partisan bill that invest in local businesses. The individual two primary purposes for businesses: , Go-Fund-Me, and Indigogo made investment-based crowdfunding investor anticipates receiving a financial 1. Provides access to capital that may are much more commonplace than possible. The JOBS Act set out to return on their investment. otherwise be difficult for them to they were five years ago. These websites change five different laws, one of which, acquire serve as examples of what donation- MORE INFORMATION Title III, allowed anyone, regardless 2. Helps strengthen their customer based crowdfunding is. Donation-based ON THE EVOLUTION of wealth or income status, to invest base—turns customers into raving crowdfunding raises money through fans and brings in new customers OF CROWDFUNDING in a private-owned business. The individual donations for a specific project maximum a company can raise is through investing in their company IN MICHIGAN or initiative. A small business could utilize $1.07 million annually, and the maximum Companies sometimes pursue donation-based crowdfunding to raise In a partnership between the MEDC a nonaccredited investor can invest is a investor-return crowdfunding in addition to traditional funding. They see the value capital, but the major difference is that the and the Michigan Municipal League formula based on income and net worth. proposition of combining growth capital The other big value… WHO IS USING INVESTMENT- person donating understands there is zero as well as a team of community capital Companies must offer the security with marketing and sales efforts as a It is important to recognize that BASED CROWDFUNDING? financial return on their contribution. activists across the state, a storytelling through an online platform registered win-win for everyone. When company entrepreneurs and the companies they booklet, called “Community Investment, with the Securities and Exchange Investment-based crowdfunding tends and customer interests are tied together, are growing need access to capital and Accredited Investor: Community Growth: A Retrospective in to work best for businesses that: Commission (SEC). it can instigate an increase in the lifetime resources, but community members also Meets the requirements as defined Michigan Crowdfunding,” was produced • Have a supportive customer base or by the U.S. Securities and Exchange value of the company’s customer base. need more access to wealth-building community network, or in 2019. MEDC highly recommends Michigan Invests Locally Exception Revenue-sharing agreements (one form of Commission (SEC), generally refers to an opportunities. • Are based in a town that has reading the guide to learn more about Meanwhile, in an investment offering where investors are investor with a net worth over $1 million. (MILE Act 2013): Your town may have already prioritized access to capital and the differences between donation-based Non-Accredited Investors Michigan, former Governor Rick Snyder paid back through a share of the revenues) started discussing investment-based support for all types of businesses, and investment-based crowdfunding and An investor with a net worth signed the Michigan Invests Locally makes this especially true. crowdfunding not just as an opportunity not just high-growth businesses or read case studies about both kinds from under $1 million and has an income Exception, or MILE Act, into law in As a community development for small businesses to raise capital but the attraction of large businesses from under $200,000 individually around Michigan. 2013. The MILE Act, which leverages organization and small business also for citizens to build wealth. This outside the community (or $300,000 with a spouse). the intrastate securities exemption, supporter, why would you recommend a interest could look like greater integration Investment-based crowdfunding MECHANISMS THAT ALLOW allows a company to raise a maximum of company explore this path if it was not between community development can work for high-growth, but also In Michigan, the MEDC’s Public FOR INVESTMENT-BASED $1 million annually, or $2 million if they already familiar with this strategy? practices and economic development slow-growth, no growth, and nonprofit Spaces, Community Places program is an CROWDFUNDING have audited financials. Nonaccredited If you are working with an entrepreneur practices, into what is now often termed organizations as well. The size or sector who has a strong customer base already, “community economic development.” of the business is not the determining example of donation-based crowdfunding. Jumpstart Our Business Startups Act investors can invest a maximum of this form of capital raising may be a great Many local partners are excited factor of success—it is the strength of its That program has utilized donation- (JOBS Act 2012): In 2012, President $10,000 per company under this fit. Here are some other considerations about sharing this strategy due to the network or the community support for the based crowdfunding to support public Barack Obama signed into law the registration. The company must be that might lead you to identify this implications of circulating more capital method at large. The slide below, produced community projects that need additional Jumpstart Our Business Startups Act, based in Michigan and solicit the raise strategy for them: within communities and the higher social and compiled by Investibule, shows the only to Michigan investors. An online • They have access to traditional and economic justice goals this addresses. number of raises nationally split out by platform is not required, so a company resources but do not want to tap them can register their raise and host events until they need to do so. in their community to share information • They are already comfortable with about the offering. However, they do need digital platforms and have a secure to verify that everyone they are speaking connection with their community with is a Michigan resident. online. • They are looking for less than U.S. Securities and Exchange $1 million in investment. Commission (SEC) • They are a “main street” business and The federal agency responsible for protecting investors, maintaining will likely not be a target for angel or fair and efficient markets and venture funds. facilitating capital formation. • They are a startup, and they/you believe they are likely to be turned DONATION-BASED INVESTMENT-BASED down for capital elsewhere. CROWDFUNDING CROWDFUNDING

4 | Investment-Based Crowdfunding Field Guide www.miplace.org | 5 3 WAYS industry sector. As you can see, food and Who has used investment-based your organization beverage companies, followed by tech, crowdfunding so far? can create a culture lead the industry breakdown. Investibule, the country’s only campaign Some communities in Michigan have aggregation site, launched when the SEC A STEP-BY-STEP GUIDE TO that leads to successful become early adopters of investment- enacted the JOBS Act rules in 2016. They based crowdfunding tools. In Adrian, pull data from all live campaigns across investment-based Michigan, a new company can take a more than 30 crowdfunding platforms. SUPPORTING BUSINESSES crowdfunding in your community investment raise public and Since their launch, there have been potentially succeed without a growing about 2,000 companies that have raised community customer base or a deep network. The capital using many different registration INTERESTED IN PURSUING city of Adrian prioritized education mechanisms, not just regulation and awareness building for this form of crowdfunding (commonly called “Reg Bring together local capital circulation, creating a friendly CF”). Investibule released a report at the stakeholders to build INVESTMENT-BASED environment for aspiring entrepreneurs. National Coalition of Community Capital awareness of investment- Conference in June 2019 and now have based crowdfunding The Adrian community has already the report available online. opportunities, share stories supported several successful campaigns, CROWDFUNDING of raises in Michigan and including: Regulation Crowdfunding (Reg CF) trends nationally. Many • Three Adrian businesses participated Provides an exemption from the online platforms allow you in the MEDC’s MI Local Biz donation- registration requirements for securities- As a community development organization, you are often the first point of contact to search by state. You can based crowdfunding campaign: based crowdfunding, allowing companies also keep an eye on new Encore Dance Studio; Ghidrah’s Mind, to offer and sell up to $1.07 million of their to serve small businesses and entrepreneurs who reside in or want to locate to your information coming from Body, and Spirit shop; and Advantage securities without having to register downtown. Understanding the basics of investment-based crowdfunding is a great way the National Coalition of the offering with the SEC. Videos raised more than $5,000 Community Capital. each and received a $5,000 MEDC to grow local awareness, build public and private partnerships, increase accessibility to One notable finding from the report matching grant to support small is that 33 percent of all capital raises opportunities, and ultimately support business owners on their journey to accessing the businesses’ Covid-19 recovery efforts. Leverage other were from women-owned companies, and needed capital to start or grow their business. • The Buzz Café and Marketplace, a new 26 percent of all capital raises were from crowdfunding opportunities downtown Adrian business, sought in your community to minority-owned companies. Compare this community investors to help renovate utilize the crowd and to 12 percent of going to a historic building and build out its build familiarity, such as women in 2018, which declined 15 percent WHERE DO YOU START? undertaking a Public Spaces restaurant and candy shop. Thirty- from 2017. Community Places project, five investors from five states invested African American business owners STEP 1: The business needs a pen to paper to address their business business become familiar with what types hosting a pitch competition $118,000, and after just over two years find an even greater uphill battle when solid business plan, backed by model and how investment-based of questions a potential investor may ask. or SOUP event, or working of deconstruction and renovation, the trying to access venture funds, with less realistic financial projects crowdfunding will provide needed capital, Nearly every question you might find on a how that capital will be used and how due diligence checklist can be traced back with a platform such as shop will open in fall 2020. than 1 percent of venture capital going It may seem overly simplistic to start with that will provide zero investors will be paid back. to one of these five questions. In most towns, however, this is still a into their businesses. So far, community the idea that an entrepreneur needs a solid interest small business . In many examples of successful new and unexplored topic. Investment- investors are proving to be more inclusive business plan first, but you’d be surprised Community investors are generally raises, having a plan in mind and being based crowdfunding remains a relatively in their investment decisions, creating a at how many companies attempt to raise concerned with the following questions, able to communicate the broader points unfamiliar tool to downtown management more welcoming process for those often capital from the community only to find which are slightly different than what a by delivering this information through Connect with small organizations, small businesses and citizens. left on the sidelines. investors rejecting their offering or online banker or —those who are a short video, an executive summary, businesses and platforms not approving them to launch accredited and typically invest in high- or a pitch deck versus the traditional entrepreneurs to understand at all. Raising capital still hinges on a solid growth companies—might be looking 50-page business plan is the aim today. their capital needs, foundation—dollars coming from the to answer: The building of this plan and realistic opportunities for growth crowd doesn’t change that requirement. 1. How does the business make money? and pain points in starting financials is the most important thing Small business owners can utilize the 2. How does the business spend its up or expanding their you can do to prepare a business for local Michigan Small Business Development money? businesses. Use the “Step- investment. Center or other service providers such as 3. What’s the long-term vision for the by-Step Guide to Supporting SCORE, in order to develop and refine business? Businesses Interested in STEP 2: Identify the business’s their business plan. Its crucial for the 4. How does the business serve the Pursuing Investment-Based existing sphere of influence Crowdfunding” on page business to put the effort into this step. community’s broader interests? 7 to provide a foundation It shows potential investors that business 5. How will I get my money back? Gathering investment from the community for investor-return owners understand all aspects of their Community investors may utilize a requires access to a community. You want crowdfunding education. business from management to marketing. due diligence checklist to vet the business’ to help the business determine if they It also requires that business owners put offering. It is a great idea to have the could potentially gather 80 percent of their

6 | Investment-Based Crowdfunding Field Guide www.miplace.org | 7 funding goal from within their network. each ring. You may be wondering how to finish, what registrations they are essential to know the differences between Still Successful 2 DO NOT MAKE GUARANTEES: Why 80 percent? Because generally many people the entrepreneur needs to active most comfortable with given the As confident as the entrepreneur different versions of what a website can 10% raises speaking, that’s the amount that comes identify? Investibule has some data to help makeup of the company (its legal is about the future, they cannot do for an entrepreneur, however. from within an entrepreneur’s direct and gage how many investors may be needed. $134,000 (avg) status, ownership interests, existing guarantee that investors will A platform that does the following is Not active range: $5K–$12M extended network, with the remaining 20 As an average, consider one 24% debt), and what types of registrations not lose money or that they will required to register as a broker-dealer: percent coming from investors who are on community investor being worth a Funded! 131 investors they would recommend. receive 10 times their original • Offers investment advice or 66% (avg) the online platform, heard about it from far potential $1,000. If the business wants range: 1–3,515 2. Access legal guidance as a client investment. They must recognize recommendations away, or who are interested in supporting to raise $200,000, then they’re likely of an incubator or accelerator: if the risks involved and disclose them • Finds investors on behalf of the issuer an attribute the entrepreneur hits (sector, looking for 200 people to invest. If we a or accelerator accordingly. • Compensates employees, agents, or LGBTQ, minority- or women-owned, etc.). know that, on average, 80 percent of the And yes, businesses are getting serves your community, the For further clarification and best other persons to solicit the offering For entrepreneurs, the idea of investors come from their own immediate funded. 66% of offerings reach or business owner may be able to take practices on how to raise capital in or pays them based on a success fee connecting with potential investors or extended network, that is 160 people. surpass their minimum target. While advantage of technical assistance Michigan, visit LARA’s MILE page. For of a successful capital raise (usually a may seem overwhelming. Oftentimes, If you assume at least half of the people ranging widely, typical raises attract offered, including legal guidance. It further clarification and best practices percentage of the raise) 100–200 community investors. they may not have a wide network of pitched say no, then in this scenario, the is possible that not all legal networks on how to raise capital using federal • Holds, manages, possesses, or family and friends to lean on to raise entrepreneur needs to identify 320 people. are familiar with investment-based registrations, visit the SEC’s dedicated otherwise handles investor funds or crowdfunding through the MILE Act web page on the topic. securities capital. Therefore, entrepreneurs may be Indeed, some investors come in for a diversified capital stack. It is still worth or JOBS Act. inclined to skip over this step, and then more than the average, and in many cases, going through this exercise with them. 3. Call the platforms: Online Diversified Capital Stack Example they launch a campaign only for it to sit that is the goal of this exercise altogether— Start with their inner circle, while they platforms that facilitate investment- and languish for six months. Once an figure out how to raise the$200,000 with dictate the names, you may want to write WHAT IS based crowdfunding typically make SBA entrepreneur has launched a campaign 50 investors instead of 200. There are them down in a spreadsheet for use later in (purchase building: their money through fees on capital and it’s languished, it makes it harder for many case studies about companies that the business’s marketing work. Note that A CAPITAL $100,000) raises that hit their target. Some also them to raise capital in the future. planned to do a community investment at this stage, there is no need to restrict the Owner Equity Help your small businesses walk raise, only to register the security and hit charge upfront flat fees to evaluate a list to Michigan residents only—you can STACK? ($20,000) through their spheres of influence using their fundraising goal without ever having company and onboard them to their note in the spreadsheet if the individual or The small business owner the concentric circles method from Jeff to take the raise public. platform. This upfront fee covers Award from network lives outside of Michigan. should get comfortable with thinking Aronoff, a Detroit, Michigan, attorney If after reviewing these averages with the legal costs for putting their term business pitch about the capital they need to competition who helped entrepreneurs in the early the business owner they are immediately STEP 3: Understand how sheets in order and registering their start up or grow in a stack. “Stack” ($5,000) days of the MILE Act: overwhelmed by the thought of finding to register a capital raise capital raise. If the entrepreneur already is a term often used in the angel As the small business owner goes 320 people to talk to, that is a signal that Once the small business owner has Pre-sales campaign knows what registration or platform investing and venture capital world, ($10,000) through each of these rings, have community investment may not be the best a robust business model with sound they want to use, then they could and it is becoming even more them make a list of specific people and route for them, or they could lower their financials and a potential investor Community go directly to the platform to get relevant in the investment-based networks of people that would fit into investment target and consider it part of target list, it is worth directing them investors the legal work done. The downside crowdfunding world also. A stack to legal counsel. ($65,000) to this is that the platform is refers to various types of capital Funding A business that wants to solicit incentivized to onboard them “stacked” upon each other to form needed: COMMUNITY funds from community investors and according to their preferences, the company’s total funding needs. $200,000 SUPPORTERS: is offering a return on that investment donors, volunteers, not what’s necessarily best for the must register their offering (or “security”) other business business. If the platform doesn’t under the JOBS Act (federal) or MILE owners specialize in Reg A+, for instance, STEP 4: Decide whether using • Engages in any other activities Act (Michigan). There are many things to then they’re less likely to suggest it a platform is the best option that the SEC determines to be keep in mind and pitfalls to avoid prior even if it may be in the best interest appropriate to using investment-based crowdfunding First, what is a platform? of the business. The costs of registering and ACQUAINTANCES: as a mechanism to access capital. If the A platform is a website that connects Remember, it is important to follow managing a broker-dealer are high, people you may business owner violates either the federal investors with offerings—the amount of state and/or federal requirements for which has pushed many companies to know around town or state regulations, there may be serious money that businesses are trying to raise securities registrations. move “upstream” and only work with or in your networks consequences (See the chart in Appendix and what investors are anticipated to entrepreneurs who are raising $1 million B on page 15 for the various types of 1 REGISTER THE SECURITY: receive in return. Businesses, sometimes YOUR or more. For this reason, funding portals registrations.) Having general legal Do not violate securities laws and referred to as the issuer of the offering, will KEY LEADER go renegade with raising capital. have found their entry in the marketplace. TABLE: ADVOCATES: counsel on the business’s side of the table create a profile, input relevant pitch data, is the ideal situation. It is harmful to the company, to and promote their offering. People use the 4–8 people that people that Broker-dealer have taken an There are three ways the business can investors, and to the ecosystem many different terms when talking about are your “go to” A brokerage firm that buys and sells interest in your life supporters do this: when businesses cut corners and this aspect of the community investing securities on its own account as a principal and work over the 1. Pay out of pocket for an initial try to raise capital without running movement, but for the sake of this field before selling the securities to customers. last 3–5 years consult to fact find:determine what it through the proper channels. guide, we will use the term “platform.” It is the attorney fees will be from start

8 | Investment-Based Crowdfunding Field Guide www.miplace.org | 9 If the online platform just lists a on Tableau Public,” which covers through platform is a requirement or only a best communications to potential With an investment raise, there are of understanding has led more than a company’s pitch deck, if it uses a third the end of 2019. Here are the tabs you will practice. The MILE Act does not require a investors, perhaps creating a website three significant considerations that few entrepreneurs to have unrealistic party to manage the transfer of both cash want to review: company to use a platform. or page on their existing site for the entrepreneurs must keep in mind as they expectations of when capital will hit their and stock (including the establishment of • Campaigns/portal: Total campaigns For more information about the offering set out their plan: company’s financial statements. This escrow accounts for the investors while by top 10 portals pros and cons of using a platform, here • Legal: paying the full legal bill for 1. Know what can and cannot be misunderstanding can set them up for an they wait for the raise to conclude), or it • Industry $: Industry appeal by # of is a great article that details industry the registration of the securities, said publicly. An attorney (and eventual cash crunch during or right after offers general support services that don’t campaigns, # of backers, and capital opinions: “Pros and cons of crowdfunding finalization of the investor the platform the entrepreneur is the raise. As the saying goes, the best time fall into these categories of activities, it • Platforms by industry: Industry platforms for business owners,” package, and guidance on the working with) can guide them. to look for capital is when you have capital can register as a funding portal. These specialty by portal JustCoded, June 2019. investor relations and marketing 2. Divide the marketing plan into three (not after you run out). platforms are more likely to accept smaller The next resource you’ll want to check responsibilities tranches: pre-launch, launch, and As in nonprofit capital campaigns, the Going old school capital raises. While funding portals do out is the top eight platform comparison • Reporting: this includes the reports post-launch. There is a set of critical entrepreneur needs to “fill the pipeline,” not have to register as broker-dealers, article from www.crowdwise.org, which Before the days of the Internet and required per the registration type(s) activities in each of these periods. so there is traction on day one of the raise they do still have to register as a portal details fee ranges, security types offered, new regulations, businesses might chosen by the company, as well as 3. Plan to make a great video. Most launch. This involves gathering interest, with the SEC. See this reference book for whether a platform is a broker-dealer have raised capital only with individual tax statements to the investors if people make decisions about people and soft commitments from investors more information about how to tell the or not, and whether they perform due investors (usually angels or friends and required based on the first10 seconds of (once they are legally able to do so) before difference between the two. diligence or not. family). They would have done it the “old The challenge of keeping track of all interaction with them. In many the campaign goes live to the public. Regardless of what type of platform a Which platform an entrepreneur school way,” with paper across the table. these things has created a market niche cases, the campaign video is their The business is asking investors to log in website is, it must abide by the same set chooses to work with depends on several Today, this takes the shape of investor for platforms to use technology and legal introduction, so entrepreneurs need to the site on day one to indicate their of critical requirements, including: factors: pitch events, small dinner parties and templates as a leverage point in the service to be wise about how they present commitment. Nonprofits often gather 80 • Conducting background checks on • Business’s industry gatherings, and sending communications of entrepreneurs. Some companies, themselves and the story they tell. percent of their raise goal quietly before officers, directors, and20 percent • Characteristics of what the business’s out to the company’s customer base. however, still feel confident about their announcing the raise so there is a good equity holders of each issuer, to legal team has charted with them While companies do not have to give ability to do it without the help of a Set expectations on the timeline chance of getting the rest of the way there reduce the risk of fraud • How much hand-holding the up a success fee to a platform when doing platform. When the investor pool is less The average successful campaign runs for once it is public. • Disqualifying an issuer if one of its entrepreneur needs it this way, they may not be prepared to than 20–30 people, going “old school” about 45 days. Some get their investment Most businesses do not go that far, officers, directors, or “participants” • How comfortable the entrepreneur take on additional responsibilities, such as: could potentially be a wise move. commitments in 30 days, some in 90 days. but they often stack 20–40 percent of the (such as promoters) in the offering is feels about the team members they • Investor relations: gathering interest, Most registrations allow businesses up raise into their pipeline before going live a “bad actor,” as defined by the SEC interact with from the company. converting those to commitments, STEP 5: Chart out to 12 months or the end of the calendar to the public. How long this process takes (i.e., a convicted felon; person subject Keep in mind that companies planning gathering investment funds into the marketing plan year to raise their funds. However, is what ultimately dictates the timeline. to a finance-related injunction or to use Reg CF are required to use a escrow accounts, and managing and campaign timeline investors often view campaigns that have Here is an example of a timeline that a restraining order; person subject to platform for their raise. If the company is ongoing questions and answers with Just like in a donation-based been live for more than three months as business could experience, assuming they SEC disciplinary action) planning to use other registrations, their the investor base crowdfunding campaign or a nonprofit “dying on the vine,” which can turn them have already completed Step 1 (solid plan, • Being subject to anti-fraud and anti- legal team can inform them of whether a • Marketing: sending out capital campaign like Public Spaces away. While average campaigns have a realistic financials): manipulation provisions of federal Community Places, an investment capital relatively short lifespan, the work involved In this ideal scenario, you can see that securities laws and regulations Volume of Reg CF capital raised: Inception to date (Aug. 2019) raise follows similar best practices. in the campaign is much longer. A lack the capital raise—while only live to the If the entrepreneur is unsure if the $ in millions USD platform they’re thinking of approaching is a broker-dealer by reviewing their NextSeed 1.4% “About Us” page, direct them to Netcapital $9.36 Sample Business Campaign Timeline the Financial Industry Regulatory 4.2% Authority’s (FINRA) BrokerCheck 6.5% $14.29 PRE-LAUNCH ACTIVITIES LAUNCH ACTIVITIES POST-LAUNCH ACTIVITIES system (incidentally, this is also where Trucrowd MONTHS 2–3 MONTH 10 1.5% WeFunder consumers can do a background check of 35.1% Conduct legal MONTHS 6–7 Close the campaign, communicate Republic meetings, evaluate Meet with early with secured investors, conduct any investment professional that they may 9.2% $20.26 $77.56 platforms, settle investors to fill the team meetings with accounting consider working with.) on the regulatory investor pipeline and staff, provide promised follow plan for launch day up benefits (if any) to investors How to choose a platform There are nearly50 platforms on the market today, making it difficult for $42.62 entrepreneurs to choose which one Seedinvest MONTH 1 MONTHS 4–5 MONTHS 8–9 ONGOING 19.3% is right for them. Fortunately, several Identify their Put together the Run the campaign, Conduct investor organizations have been collecting data $46.97 network and investor package answer questions, relations, stay on Reg CF campaigns since the rules were prospect list and marketing plan, meet with investors connected, fulfill StartEngine register securities, reporting and issued. Your first resource site to visit is 21.3% get approval payment obligations “Crowdfund Capital Advisor’s Dashboard

10 | Investment-Based Crowdfunding Field Guide www.miplace.org | 11 public for 60 days—can be a 10-month • Organize a series of investor pitch because the prospects have changed enterprise movement—where Priorities: Even if an investor’s priorities SUMMARY endeavor, plus add on the ongoing gatherings, which the entrepreneur after the raise or pivots were a business desires to maximize align with the mission and vision of the Each of the topic areas covered in this investor relations and payback work. Most uses to engage the inner rings of required that change the financial its benefit to a specific social or business, set out to engage them in their “Investment-Based Crowdfunding Field business owners who have attempted to their network. projections, have a proactive environmental objective. The most capital raise. There are still a number Guide” could easily comprise an entire raise angel or venture funds are aware » It is best to host these gatherings communications plan with investors common areas of impact are: of other factors that investors need to book. However, this guide is meant of how time-intensive and long the at their business location or to ask for a renegotiation. Legal » Whom the company hires: consider before they are willing and able to provide community organizations fundraising process can be, however, most collaborate with a strategic counsel can guide the negotiations, disenfranchised populations, to say yes or no. with an overview of investment-based Main Street entrepreneurs have never partner (could be a supplier or so the company is staying within the returning citizens (formerly The most pressing of those concerns, crowdfunding so that you can assist experienced a capital raise before, so they vendor). boundaries of the regulations. incarcerated), veterans, people such as the investors tolerance for businesses looking for guidance and are more likely to be blindsided by the » Oftentimes businesses host just • Identify who on the team is with disabilities, people who risk, can be heard in a four-part short information. amount of effort involved. one investor pitch gathering and responsible for creating the investor experience homelessness educational series on YouTube specifically As the community capital movement do not see success. Plan three to reports and handling questions from » Who the company’s owners are: for investors, which can be very insightful gains traction, each of us has a role to Engage the network six opportunities in case potential the investor pool going forward. people who have a harder time for businesses looking to court them. play—which carries with it a certain Now is the time to pull out that investor investors cannot make the first • Companies inevitably need more accessing capital (women, These videos are accessible through the level of responsibility. Community prospect list from Step 2 and have the couple of dates. capital as they grow. Identify 10–20 people of color, LGBTQ, those MEDC’s website here. development organizations should share • Have the investor package ready business begin activating their network. investors from the initial investor who were formerly incarcerated, Expectations: Individuals that have been this field guide with their colleagues, to go, either on a platform or in a Here are a few ideas business owners pool that may have the capacity people climbing out of investing in businesses in the last five inform business owners in their Dropbox or Drive folder, so can use to begin communicating the for additional growth capital in the intergenerational poverty) years have come to expect deal terms and community, and add value to the larger capital raise, using solicitation guidelines the link is easy to access. Many email future. Cultivate these relationships. » What the company makes or does: return projections based on offerings they conversation and ecosystem around the provided by legal counsel and the servers or cybersecurity protocols • Determine how involved investors products or services that solve have seen in the past. They may be open state by sharing their expertise, asking platform: flag emails with attachments, will be. This may mean investors a problem in the world, or that to considering something that is outside thoughtful questions and telling the • Create a series of social media posts especially large ones—it is best to have a silent role in running the make the world a genuinely better of these parameters, but this is at least stories of success and lessons learned. on the platforms where the target have the package hosted in the cloud business or utilize investor expertise place; interest is exceptionally what their starting point might be. Note investor spends their time (for most and send that secure link to potential to provide guidance on business high in the following categories: that this list of attributes may not resonate businesses, the target investor is investors. operations. • Clean energy: community- with angel investors. also their target customer). Plan to • To prepare for investor engagement, owned power, solar Furthermore, people in the community intensify the campaign in the last the entrepreneur should think Understanding the installations, woody who have never invested locally or who week of the campaign, which is the through the most common community investor climate biomass production have never invested at all may have second most highly trafficked time objections or challenges to the What makes individuals want to invest as • Food systems: farmers, expectations that are wildly different. during the campaign (the first week business model, deal terms and other part of an investment-based crowdfunding makers, organically grown These investor differences make it critical being the peak traffic period). materials provided to investors. raise? There are generally three factors that staple crops for entrepreneurs to know what type of • Get marketing help. Some Write the questions out and have influence an individual’s decision to invest • Health: cannabis, mental person they are talking with from the entrepreneurs retain a marketing answers prepared for each of them. in a business: the investors’ values; personal health service providers, onset, so they can help identify whether agency to help with the creation priorities; and expectation of a return. direct care medical practices, there may be a mismatch of expectations. of the pitch video and other STEP 6: Create a yoga studios, devices that Here are some examples of the kinds investor materials, but it is not post-launch plan Values: People who turn their attention to improve safety of offerings community investors typically • Environment: reuse required. Any marketing firm with A common issue that technical assistance their own backyard for inclusion in their consider: products, non-motorized a quality track record can create a providers across Michigan have investment portfolio have a common set • Five percent monthly revenue share transportation supports compelling video. highlighted is that businesses launch their of values that drive their interest. agreements with 1.5 times payback • Real estate: workforce • Write a press release and circulate campaigns without a post-launch plan. Figuring out how a business’s mission in a maximum of eight years housing, mixed-income it to local media outlets. Have a Businesses encounter a host of and vision align with those investor • Equity investment with an exit of developments, mixed- media kit ready to go with highlights problems in the post-launch days of their sentiments is the key to compelling them 1.4 times after five years use developments that suitable for the press about the campaigns. To avoid these pain points, to give attention to the capital raise. Here • Preferred equity with a base dividend have a commitment to campaign, a picture of the business organizations can help entrepreneurs are some anecdotal responses as to why of 5 percent, and a vesting schedule energy efficiency or staying of 60 percent, 80 percent, and 100 owners, a couple of pictures of the create a post-launch plan before launching people choose to invest locally: affordable for new percent after three, four, and five business, and a bio on the owners. their campaign. Here are the components • They are interested in businesses Main Street businesses years, respectively • Apply to pitch your capital raise at of a post-launch plan that need attention: that hire locally, spend revenue • Democratization of • Promissory note of three years with pitch clubs, investor clubs, demo • Establish the business’s technical team with local vendors and suppliers and power and wealth: co-ops, 3 percent annual interest, five years days, or entrepreneur meetups with to help troubleshoot issues as they are committed to staying local as democratically controlled with 5 percent interest, or 10 years pitch components, in the area (send arise—include business consulting, they grow. organizations, or those with 7 percent interest in applications three to six months legal, accounting, tax, strategic • They are especially interested in spurring the creation of • Equity investment with no stated exit prior to the campaign live date so the advising, marketing and sales. the impact story. Many community other similarly minded (usually a small investment, or an entrepreneur is scheduled to pitch • If the terms the investors agreed to investors are motivated by what is entrepreneurs investment in their own business) during the live campaign). will no longer work for the company now commonly called the social

12 | Investment-Based Crowdfunding Field Guide www.miplace.org | 13 APPENDIX A: Resource Sites and Citations APPENDIX B: Chart of Registration Types Regulation resources Michigan registered portals P2P Lending MILE Act Reg CF Reg D Reg A+ Seed through LARA’s handout on registration options in Michigan Microenterprises, Seed through Series Mature companies Early stage through Series A, LARA webinars on raising capital in Michigan early stage, A, MVP is out, early on a steeper growth Best suited for growth, Michigan- substantial community-based customer feedback, curve with a broad FINRA registered portals based customer base revenues, top-line, businesses passionate fans active audience or user growth Offering resources Michigan Crowdfunding, JOBS Act, Title III, Cutting Edge Capital DPO (direct public offering) field guide Common names Microlending 504, 506(b), 506(c) Mini-IPO, Tier 1, Tier 2 Intrastate Securities True Crowdfunding KISS (keep it simple security) template legal documents Exemption SAFE (simple agreement for future equity) template legal documents $1 million (no audit) $5 million (504) $20 million (Tier 1) $50 Annual raise limit Limited by platforms $1.07 million Series Seed template legal documents $2 million (audit) No limit (506) million (Tier 2 Explanation of SAFT (simple agreements for future tokens) Accredited, (b) Accredited + 35 Nonaccredited, Both Both Both Nonaccredited; Both Platform information Both (c) Accredited only List of platforms and what registrations they specialize in Income/NW is below Tier 1: None JustCoded article: Pros and cons of crowdfunding platforms for business owners $100K Tier 2: 10% of Crowdwise article: Top 8 platform comparison $10,000 Investment limit is the greater of the Nonaccredited the greater of $2,000 person’s, alone Sector data or 5% of annual or together with No limit for a spouse, annual Investor limits None income/net worth. None Reg CF deals to date Accreditation income or net worth (excluding the value of 2017 vs. 2018 Reg CF raise amounts If the investor’s Michigan investors the person’s primary Reg CF turns 3: What’s working, what’s not income/NW is above only residence and any Investibule: CommunityCapital2000 report $100K, 10% of loans secured by the income/NW up to residence (up to the World Bank $93 billion direct investing market estimate report $100K. value of the residence) Crowditz weekly Reg CF activity reports For the higher raise No (Tier 1) Audit required No Yes No limit Yes (Tier 2) Community resources SEC, with LARA review Filing entity None LARA SEC SEC Washington State University local investing field guide (published Sept2019) for Tier 2 MSU storytelling video on Revalue/Angela Barbash Cost 0–5% 5–10% 5–10% 5–10% 5–10% MML Michigan Crowdfunding Retrospective storytelling report Platform example Kiva NextSeed NetCapital Localstake StartEngine MML local capital resource site Platform No No Yes No Yes Michigan Community Resources: Legal guides required?

Investor resources Tier 1: 30 days after ending an offering TD Ameritrade: DPO vs. IPO Reporting The platform may Quarterly Annually None Financial Poise: Articles for investors requirements have requirements Tier 2: Annually, semi- annually, and special Grubstake: Resources for Michigan local investors events FINRA’s BrokerCheck system Resale restrictions Not available 9 months 1 year 1 year None Other topics for entrepreneurs Yes, but restrictions apply when soliciting (b) No Public Solicitation Yes Yes Yes Locavesting: How to raise local capital, national news aggregation site outside of the (c) Yes Cutting Edge Capital typical DPO investor guide platform SCORE Business plan templates Entrepreneur Magazine article: What to include in a pitch video Microventures article: General information about solicitation rules

14 | Investment-Based Crowdfunding Field Guide www.miplace.org | 15 The MEDC is the state’s marketing arm and lead advocate for business development, job awareness and community development with the focus on growing Michigan’s economy. For more information on the MEDC and its initiatives, visit www.michiganbusiness.org.

About the authors The “Investment-Based Crowdfunding Field Guide” is published in collaboration with the Michigan Economic Development Corporation and Revalue, a registered investment advisor (RIA), located in Ypsilanti, Michigan.

Revalue is a home for people passionate about cultivating an abundance mindset in service of community resilience and future generations. The company’s mission is to be financial navigators, connecting people to their purpose by crafting values-aligned financial plans and creative educational programming in partnership with those they serve. Learn more about Revalue at www.revalueinvesting.com.

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