INVESTMENT-BASED CROWDFUNDING FIELD GUIDE

November 2020 TABLE OF CONTENTS What is community capital?...... 3

Why is the MEDC producing a guide on community capital?...... 3

Donation-based crowdfunding vs. investment-based crowdfunding...... 4

More information on the evolution of crowdfunding in Michigan ...... 4

Mechanisms that allow for investment-based crowdfunding...... 4

The value of investment-based crowdfunding...... 5

Who is using investment-based crowdfunding?...... 5

A Step-by-Step Guide to Supporting Businesses Interested in Pursuing Investment-Based Crowdfunding Step 1: The business needs a solid business plan, backed by realistic financial projects...... 7 Step 2: Identify the business’s existing sphere of influence...... 7 Step 3: Understand how to register a capital raise...... 8 Step 4: Decide whether using a platform is the best option...... 9 Step 5: Chart out the marketing plan and campaign timeline...... 11 Step 6: Create a post-launch plan...... 12

Summary...... 13

APPENDIX A: Resource sites and citations...... 14

APPENDIX B: Chart of registration types...... 15

Disclaimer Everyone can be a local investor, and all investing involves risk. The information, statements and opinions expressed in this “Investment-Based Crowdfunding Field Guide” are provided for general information only and are subject to change without notice. The information does not take into account an individual’s particular investment objectives, financial situation or needs and is not intended as a recommendation to purchase or sell any security. It does not constitute investment advice. Individuals should consult with financial, legal, tax or accounting professionals before acting upon any information contained herein. The examples and case studies shared in this guide should in no way be considered endorsements or investment solicitations. In no way should this guide be construed as an offer to invest or a form of marketing.

2 | Investment-Based Crowdfunding Field Guide Many terms are used INVESTMENT-BASED interchangeably when referencing investment dollars collected from a CROWDFUNDING “crowd” of people, instead of just a handful of high net worth individuals or from FIELD GUIDE institutions: • Community capital • Community investment • Local investment The purpose of the “Investment-Based Crowdfunding Field Guide” • Local financing is to provide community development organizations, including local • Direct investing units of government, downtown development authorities, Main • Peer-to-peer lending Street programs, and other economic and community development • Investment organizations, with information to help support a small business crowdfunding • Equity crowdfunding owner interested in pursuing investment-based crowdfunding as a means to access capital to start or grow a business.

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 investors MEDC is committed to enabling 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 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 consider and prepare to raise capital. a game-changer for small businesses, recognizes the importance of supporting who are the cornerstone of what makes main street businesses and the role WHAT IS Michigan’s downtowns unique and they play in vibrant and sustainable COMMUNITY CAPITAL? authentic. Investment-based crowdfunding communities. Community capital is one Community capital is simply money that provides an innovative financial tool to way for main street businesses to access comes from the community and goes to support the creation, retention and growth capital and engage the local community.

www.miplace.org | 3 DONATION-BASED investor anticipates receiving a financial accredited investor can invest is a CROWDFUNDING return on their investments or equity in formula based on income and net worth. VS. INVESTMENT-BASED the business. In 2013, Kyle DeWitt, co- Companies must offer the security CROWDFUNDING founder of the Tecumseh Brewing Co., through an online platform registered General awareness of websites such as utilized investment-based crowdfunding with the Securities and Exchange Kickstarter, Go-Fund-Me, and Indigogo and raised $175,000 from 21 community Commission (SEC). are much more commonplace than investors to open his brewery. U.S. Securities and Exchange they were five years ago. These websites Accredited Investor Commission (SEC) serve as examples of what donation- Meets the requirements as defined The federal agency responsible based crowdfunding is. Donation-based by the U.S. Securities and Exchange for protecting investors, maintaining fair and efficient markets and Commission (SEC), generally refers to an crowdfunding raises money through facilitating capital formation. individual donations for a specific project investor with a net worth over $1 million. or initiative. A small business could utilize Non-Accredited Investors donation-based crowdfunding to raise An investor with a net worth Michigan Invests Locally Exemption capital, but the major difference is that the under $1 million and has an income (MILE Act 2013): Meanwhile, in under $200,000 individually Michigan, former Governor Rick Snyder person donating understands there is zero (or $300,000 with a spouse). financial return on their contribution. signed the Michigan Invests Locally In Michigan, the MEDC’s Public There are two mechanisms that allow Exemption, or MILE, Act, into law in Spaces, Community Places program is an for investment-based crowdfunding. 2013. The MILE Act, which leverages example of donation-based crowdfunding. One tool is available through federal the intrastate securities exemption, allows a company to raise a maximum of That program has utilized donation- legislation and the other makes $1 million annually, or $2 million if they based crowdfunding to support public investment-based crowdfunding possible have audited financials. Non-accredited community projects that need additional through state legislation. investors can invest a maximum of capital. In addition to dollars raised from Jumpstart Our Business Startups the community, the MEDC provides a $10,000 per company under this filing. Act (JOBS Act 2012): In 2012, President grant up to $50,000 as matching funds. The company must be based in Michigan Barack Obama signed into law the Investment-based crowdfunding and solicit the raise only to Michigan Jumpstart Our Business Startups Act, allows residents, not just accredited investors. An online platform is not or JOBS Act, a bi-partisan bill that investors, to invest in local businesses. The required, so a company can register their made investment-based crowdfunding individual investor anticipates receiving raise and host events in their community a financial return on their investment. possible. The JOBS Act set out to to share information about the offering. Investment-based crowdfunding allows change five different laws, one of which, However, they do need to verify that residents, not just accredited investors, Title III, allowed anyone, regardless of everyone they are speaking with is a to invest in local businesses. These small wealth or income status, to invest in a Michigan resident. businesses may obtain capital from many private-owned business. The maximum In a partnership between the MEDC individuals who each invest relatively a company can raise is $1.07 million and the Michigan Municipal League small amounts of money. The individual annually, and the maximum a non- as well as a team of community capital activists across the state, a storytelling booklet, called “Community Investment, Community Growth: A Retrospective in Michigan Crowdfunding,” was produced in 2019. MEDC highly recommends reading the guide to learn more about the differences between donation-based and investment-based crowdfunding and read case studies about both kinds from around Michigan.

Intrastate Securities Exemption DONATION-BASED INVESTMENT-BASED An exemption to certain federal rules when an offering only includes CROWDFUNDING CROWDFUNDING persons within a single state.

4 | Investment-Based Crowdfunding Field Guide VALUE OF INVESTMENT- BASED CROWDFUNDING Why might a company be interested in raising capital from its community? Investment-based crowdfunding serves two primary purposes for businesses: 1. Provides access to capital that may otherwise be difficult for them to acquire 2. Helps strengthen their customer base—turns customers into raving fans and brings in new customers through investing in their company Companies sometimes pursue Investment-based crowdfunding in addition to traditional funding. They see the value proposition of combining growth The other big value… WHO IS USING INVESTMENT- capital with marketing and sales efforts as It is important to recognize that BASED CROWDFUNDING? a win-win for everyone. When company entrepreneurs and the companies they Investment-based crowdfunding tends and customer interests are tied together, are growing need access to capital and to work best for businesses that: it can instigate an increase in the lifetime resources, but community members also • Have a supportive customer base or value of the company’s customer base. need more access to wealth-building community network, or opportunities. • Are based in a town that has As a community development Your town may have already organization and small business prioritized access to capital and started discussing investment-based support for all types of businesses, supporter, why would you recommend a crowdfunding not just as an opportunity company explore this path if it was not not just high-growth businesses or for small businesses to raise capital but the attraction of large businesses from already familiar with this strategy? also for citizens to build wealth. This outside the community If you are working with an entrepreneur interest could look like greater integration Investment-based crowdfunding who has a strong customer base already, between community development can work for high-growth, but also this form of capital raising may be a great practices and economic development steady-growth, no growth, and nonprofit fit. Here are some other considerations practices, into what is now often termed organizations as well. The size or sector that might lead you to identify this “community economic development.” of the business is not the determining strategy for them: Many local partners are excited factor of success—it is the strength of • They have access to traditional about sharing this strategy due to the its network or the community support resources but do not want to tap them implications of circulating more capital for the method at large. The slide above, until they need to do so. within communities and the higher social produced and compiled by Investibule, • They are already comfortable with and economic justice goals this addresses. digital platforms and have a secure connection with their community online. • They are looking for less than $1 million in investment. • They are a “main street” business and will likely not be a target for angel or venture funds. • They are a startup, and they/you believe they are likely to be turned down for capital elsewhere.

www.miplace.org | 5 3 WAYS shows the number of raises nationally split unfamiliar tool to downtown management your organization out by industry sector. As you can see, organizations, small businesses and citizens. can create a culture food and beverage companies, followed by tech, lead the industry breakdown. Who has used investment-based that leads to successful Some communities in Michigan have crowdfunding so far? become early adopters of investment- Investibule, the country’s only campaign investment-based based crowdfunding tools. In Adrian, aggregation site, launched when the SEC crowdfunding in your Michigan, a new company can take a enacted the JOBS Act rules in 2016. They community investment raise public and pull data from all live campaigns across community potentially succeed without a growing more than 30 crowdfunding platforms. customer base or a deep network. City Since their launch, there have been of Adrian prioritized education and about 2,000 companies that have raised Bring together local awareness building for this form of capital using many different strategies, stakeholders to build capital circulation, creating a friendly not just regulation crowdfunding awareness of investment- environment for aspiring entrepreneurs. (commonly called “Reg CF”). Investibule based crowdfunding released a report at the National Coalition opportunities, share stories The Adrian community has already of Community Capital Conference in of raises in Michigan and supported several successful campaigns, June 2019 and now have the report trends nationally. Many including: available online. online platforms allow you • Three Adrian businesses participated to search by state. You can in the MEDC’s MI Local Biz donation- Regulation Crowdfunding (Reg CF) also keep an eye on new based crowdfunding campaign: Provides an exemption from the information coming from Encore Dance Studio; Ghidrah’s Mind, registration requirements for securities- the National Coalition of Body, and Spirit shop; and Advantage based crowdfunding, allowing companies Community Capital. Videos raised more than $5,000 to offer and sell up to $1.07 million of their securities without having to register each and received a $5,000 MEDC the offering with the SEC. matching grant to support small Leverage other businesses’ Covid-19 recovery efforts. One notable finding from the report crowdfunding opportunities • The Buzz Café and Marketplace, a new in your community to is that 33 percent of all capital raises downtown Adrian business, sought were from women-owned companies, and utilize the crowd and community investors to help renovate build familiarity, such as 26 percent of all capital raises were from a historic building and build out its undertaking a Public Spaces minority-owned companies. restaurant and candy shop. Forty-three Community Places project, African American business owners hosting a pitch competition investors from seven states invested find an even greater uphill battle when or SOUP event, or working $118,000, and after just over two years trying to access venture funds. So far, with a platform such as of deconstruction and renovation, the community investors are proving to KIVA that will provide zero shop will open in fall 2020. be more inclusive in their investment interest small business loans. In most towns, however, this is still a decisions, creating a more welcoming new and unexplored topic. Investment- process for those often left on the based crowdfunding remains a relatively sidelines. Connect with small businesses and entrepreneurs to understand their capital needs, opportunities for growth and pain points in starting up or expanding their businesses. Use the “Step- by-Step Guide to Supporting Businesses Interested in Pursuing Investment-Based Crowdfunding” on page 7 to provide a foundation for investor-return crowdfunding education.

6 | Investment-Based Crowdfunding Field Guide A STEP-BY-STEP GUIDE TO SUPPORTING BUSINESSES INTERESTED IN PURSUING INVESTMENT-BASED CROWDFUNDING

As a community development organization, you are often the first point of contact to serve small businesses and entrepreneurs who reside in or want to locate to your downtown. Understanding the basics of investment-based crowdfunding is a great way to grow local awareness, build public and private partnerships, increase accessibility to opportunities, and ultimately support business owners on their journey to accessing the needed capital to start or grow their business.

WHERE DO YOU START? STEP 1: The business needs a pen to paper to address their business business become familiar with what types solid business plan, backed by model and how investment-based of questions a potential investor may ask. realistic financial projections 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 It may seem overly simplistic to start with investors will be paid back. to one of these five questions. the idea that an entrepreneur needs a solid Community investors are generally In many examples of successful business plan first, but you’d be surprised concerned with the following questions, raises, having a plan in mind and being at how many companies attempt to raise able to communicate the broader points capital from the community only to find which are slightly different than what a by delivering this information through investors rejecting their offering or online banker or angel investor—those who are a short video, an executive summary, platforms not approving them to launch accredited and typically invest in high- or a pitch deck versus the traditional at all. Raising capital still hinges on a solid growth companies—might be looking 50-page business plan is the aim today. foundation—dollars coming from the to answer: The building of this plan and realistic crowd doesn’t change that requirement. 1. How does the business make money? financials is the most important thing Small business owners can utilize the 2. How does the business spend its you can do to prepare a business for local Michigan Small Business Development money? investment. Center or other service providers such as 3. What’s the long-term vision for SCORE, in order to develop and refine the business? STEP 2: Identify the business’s their business plan. It’s crucial for the 4. How does the business serve the business to put the effort into this step. community’s broader interests? existing sphere of influence It shows potential investors that business 5. How will I get my money back? Gathering investment from the community owners understand all aspects of their Community investors may utilize a requires access to a community. You want 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

www.miplace.org | 7 funding goal from within their network. them make a list of specific people and Still Why 80 percent? Because generally networks of people that would fit into active Successful speaking, that’s the amount that comes each ring. You may be wondering how 10% raises from within an entrepreneur’s direct and many people the entrepreneur needs to $134,000 (avg) extended network, with the remaining identify? Investibule has some data to help Not active range: $5K–$12M 24% 20 percent coming from investors who gauge how many investors may be needed. Funded! 131 investors are on the online platform, heard about As an average, consider one 66% (avg) range: 1–3,515 it from far away, or who are interested in community investor being worth a supporting an attribute the entrepreneur potential $1,000. If the business wants hits (sector, LGBTQ, minority- or women- to raise $200,000, then they’re likely And yes, businesses are getting owned, etc.). looking for 200 people to invest. If we funded. 66% of offerings reach or For entrepreneurs, the idea of know that, on average, 80 percent of the surpass their minimum target. While connecting with potential investors investors come from their own immediate ranging widely, typical raises attract may seem overwhelming. Oftentimes, or extended network, that is 160 people. 100–200 community investors. they may not have a wide network of If you assume at least half of the people Source: Investibule’s 2019 report presented family and friends to lean on to raise pitched say no, then in this scenario, the at the National Coalition of Community Capital conference capital. Therefore, entrepreneurs may be entrepreneur needs to identify 320 people. inclined to skip over this step, and then Indeed, some investors come in they launch a campaign only for it to sit for more than the average, and in many 320 people to talk to, that is a signal that and languish for six months. Once an cases, that is the goal of this exercise community investment may not be the entrepreneur has launched a campaign altogether—figure out how to raise best route for them, or they could lower and it’s languished, it makes it harder for the $200,000 with 50 investors instead their investment target and consider it them to raise capital in the future. of 200. There are many case studies part of a diversified capital stack. It is still Help your small businesses walk about companies that planned to do worth going through this exercise with through their spheres of influence using a community investment raise, only them. Start with their inner circle, while the concentric circles method from Jeff to register the security and hit their they dictate the names, you may want to Aronoff, a Detroit, Michigan, attorney fundraising goal without ever having to write them down in a spreadsheet for use who helped entrepreneurs in the early take the raise public. later in the business’s marketing work. days of the MILE Act: If after reviewing these averages with Note that at this stage, there is no need As the small business owner goes the business owner they are immediately to restrict the list to Michigan residents through each of these rings, have overwhelmed by the thought of finding only—you can note in the spreadsheet if the individual or network lives outside of Michigan. COMMUNITY SUPPORTERS: STEP 3: Understand how donors, volunteers, to register a capital raise other business owners Once the small business owner has a robust business model with sound financials and a potential investor target list, it is worth directing them to legal counsel. ACQUAINTANCES: A business that wants to solicit people you may funds from community investors and know around town or in your networks is offering a return on that investment YOUR must file their offering (or “security”) KEY LEADER under the JOBS Act (federal) or MILE TABLE: Act (Michigan). There are many things to the 4–8 people that ADVOCATES: keep in mind and pitfalls to avoid prior are your “go to” people that to using investment-based crowdfunding supporters have taken an as a mechanism to access capital. If the interest in your life business owner violates either the federal and work over the or state regulations, there may be serious last 3–5 years consequences (See the chart in Appendix B on page 15 for the various types of filings.)

8 | Investment-Based Crowdfunding Field Guide Having legal counsel on the business’s side For further clarification and best A platform that does the following is of the table with knowledge of securities practices on how to raise capital in required to register as a broker-dealer: law is the ideal situation. Michigan, visit LARA’s MILE page. For • Offers investment advice or There are three ways the business can further clarification and best practices on recommendations do this: how to raise capital using federal filings, • Finds investors on behalf of the issuer 1. Pay out of pocket for an initial visit the SEC’s dedicated web page on • Compensates employees, agents, or consult to fact find: determine what the topic. other persons to solicit the offering the attorney fees will be from start or pays them based on a success fee to finish, what filing they are most STEP 4: Decide whether using of a successful capital raise (usually a comfortable with given the makeup a platform is the best option percentage of the raise) of the company (its legal status, • Holds, manages, possesses, or ownership interests, existing debt), First, what is a platform? otherwise handles investor funds and what offering strategies they A platform is a website that connects or securities would recommend. 2. Access legal guidance as a client Diversified Capital Stack Example of an incubator or accelerator: if WHAT IS a business incubator or accelerator SBA Loan serves your community, the (purchase building: business owner may be able to take A CAPITAL $100,000) advantage of technical assistance offered, including legal guidance. It STACK? Owner Equity is possible that not all legal networks The small business owner ($20,000) are familiar with investment-based should get comfortable with Award from crowdfunding through the MILE Act thinking about the capital they or JOBS Act. business pitch need to start up or grow in a 3. Call the platforms: Online competition stack. “Stack” is a term often platforms that facilitate investment- ($5,000) used in the angel investing based crowdfunding typically make Pre-sales campaign their money through fees on capital and venture capital world, ($10,000) raises that hit their target. Some also and it is becoming even more charge upfront flat fees to evaluate a relevant in the investment- Community company and onboard them to their based crowdfunding world investors platform. also. A stack refers to various ($65,000) Remember, it is important to follow types of capital “stacked” Funding state and/or federal requirements for upon each other to form needed: securities filings. the company’s total funding $200,000 1. FILE THE SECURITY: Do not needs. violate securities laws and go renegade with raising capital. It investors with offerings—the amount of • Engages in any other activities is harmful to the company, to money that businesses are trying to raise that the SEC determines to be investors, and to the ecosystem and what investors are anticipated to appropriate when businesses cut corners and Finding and manging the capital try to raise capital without running receive in return. Businesses, sometimes raise take time, effort, and money, it through the proper channels. referred to as the issuer of the offering, will which has pushed many companies to 2. DO NOT MAKE GUARANTEES: create a profile, input relevant pitch data, more “upstream” and only work with As confident as the entrepreneur and promote their offering. People use entrepreneurs who are raising $1 million is about the future, they cannot many different terms when talking about or more. For this reason, funding portals guarantee that investors will not this aspect of the community investing have found their entry in the marketplace. lose money or that they will receive movement, but for the sake of this field 10 times their original investment. guide, we will use the term “platform.” It is Dealer They must recognize the risks essential to know the differences between A brokerage firm that buys and sells securities on its own account as a principal involved and disclose them different versions of what a website can before selling the securities to customers. accordingly. do for an entrepreneur, however.

www.miplace.org | 9 If the online platform just lists a whether a platform is a broker-dealer pitch events, small dinner parties and company’s pitch deck, if it uses a third or not, and whether they perform due gatherings, and sending communications party to manage the transfer of both cash diligence or not. out to the company’s customer base. and stock (including the establishment of Which platform an entrepreneur Companies do not have to give up a escrow accounts for the investors while chooses to work with depends on several success fee to a platform when doing it they wait for the raise to conclude), or it factors: this way; however, they might benefit from offers general support services that don’t • Business’s industry the support, guidance and experience a fall into these categories of activities, it • Characteristics of what the business’s platform brings to the table. There are a can register as a funding portal. These legal team has charted with them number of responsibilities required when platforms are more likely to accept smaller • How much hand-holding the raising capital, such as: capital raises. While funding portals do entrepreneur needs • Investor relations: gathering not have to register a dealer, they do still • How comfortable the entrepreneur interest, converting those to have to register as a portal with the SEC. feels about the team members they commitments, gathering investment Regardless of what type of platform a interact with from the company. funds into escrow accounts, and website is, it must abide by the same set Keep in mind that companies planning managing ongoing questions and of critical requirements, including: to use Reg CF are required to use a answers with the investor base. In • Conducting background checks on platform for their raise. If the company addition, determine on the front officers, directors, and 20 percent is planning to use other filings, their end how involved investors will be equity holders of each issuer, to legal team can inform them of whether a in the management of the business. reduce the risk of fraud platform is a requirement or only a best This may mean that investors • Disqualifying an issuer if one of its practice. The MILE Act does not require a have a silent role in running the officers, directors, or “participants” company to use a platform.. business or a company may want to (such as promoters) in the offering is utilize investor expertise to provide a “bad actor,” as defined by the SEC Going old school guidance on business operations. (i.e., a convicted felon; person subject Before the days of the Internet and This may effect how you file the to a finance-related injunction or new regulations, businesses might security. restraining order; person subject to have raised capital only with individual • Marketing: sending out SEC disciplinary action) investors (usually angels or friends and communications to potential • Being subject to anti-fraud and anti- family). They would have done it the “old investors, perhaps creating a website manipulation provisions of federal school way,” with paper across the table. or page on their existing site for the securities laws and regulations Today, this takes the shape of investor offering.

How to choose a platform There are nearly 50 platforms on the Volume of Reg CF capital raised: Inception to date (Aug. 2019) market today, making it difficult for $ in millions USD entrepreneurs to choose which one is right for them. Fortunately, several NextSeed 1.4% organizations have been collecting data Netcapital $9.36 on Reg CF campaigns since the rules were 4.2% Microventures issued. Your first resource site to visit is 6.5% $14.29 “Crowdfund Capital Advisor’s Dashboard Trucrowd WeFunder on Tableau Public,” which covers through 1.5% Republic 35.1% the end of 2019. Here are the tabs you will 9.2% $20.26 want to review: $77.56 • Campaigns/portal: Total campaigns by top 10 portals • Industry $: Industry appeal by # of campaigns, # of backers, and capital $42.62 • Platforms by industry: Industry Seedinvest specialty by portal 19.3% The next resource you’ll want to check $46.97 out is the top eight platform comparison StartEngine article from www.crowdwise.org, which 21.3% details fee ranges, security types offered,

10 | Investment-Based Crowdfunding Field Guide • Legal: paying the full legal bill for the 1. Know what can and cannot be misunderstanding can set them up for an filing of the securities, finalization of said publicly. An attorney (and eventual cash crunch during or right after the investor package, and guidance the platform the entrepreneur is the raise. As the saying goes, the best time on the investor relations and working with) can guide them. to look for capital is when you have capital marketing responsibilities. 2. Divide the marketing plan into three (not after you run out). • Reporting: this includes the reports phases: pre-launch, launch, and As in nonprofit capital campaigns, the required per the filing type(s) post-launch. There is a set of critical entrepreneur needs to “fill the pipeline,” chosen by the company, as well activities in each of these periods. so there is traction on day one of the raise as tax statements to the investors 3. Plan to make a great video. Most launch. This involves gathering interest, if required. people make decisions about people and soft commitments from investors The challenge of keeping track of all based on the first 10 seconds of (once they are legally able to do so) before these things has created a market niche interaction with them. In many the campaign goes live to the public. for platforms to use technology and legal cases, the campaign video is their The business is asking investors to log in templates as a leverage point in the service introduction, so entrepreneurs need to the site on day one to indicate their of entrepreneurs. Some companies, to be wise about how they present commitment. Nonprofits often gather however, still feel confident about their themselves and the story they tell. 80 percent of their raise goal quietly ability to do it without the help of a before announcing the raise so there is a Set expectations on the timeline platform. When the investor pool is less good chance of getting the rest of the way than 20–30 people, going “old school” The average successful campaign runs for there once it is public. could potentially be a wise move. about 45 days. Some get their investment Most businesses do not go that far, commitments in 30 days, some in 90 but they often stack 20–40 percent of the STEP 5: Chart out days. Most filings allow businesses up raise into their pipeline before going live the marketing plan to 12 months or the end of the calendar to the public. How long this process takes year to raise their funds. However, is what ultimately dictates the timeline. and campaign timeline investors often view campaigns that have Below is an example of a timeline that a Just like in a donation-based been live for more than three months as business could experience, assuming they crowdfunding campaign or a nonprofit “dying on the vine,” which can turn them have already completed Step 1 (solid plan, capital campaign like Public Spaces away. While average campaigns have a realistic financials): Community Places, an investment capital relatively short lifespan, the work involved In this ideal scenario, you can see that raise follows similar best practices. in the campaign is much longer. A lack the capital raise—while only live to the With an investment raise, there are of understanding has led more than a public for 60 days—can be a 10-month three significant considerations that few entrepreneurs to have unrealistic endeavor, plus add on the ongoing entrepreneurs must keep in mind as they expectations of when capital will hit investor relations and payback work. Most set out their plan: their company’s bank account. This business owners who have attempted to

Sample Business Campaign Timeline

PRE-LAUNCH POST-LAUNCH POST-OFFERING ACTIVITIES ACTIVITIES ACTIVITIES MONTHS 4–5 MONTH 10 Put together the Close the campaign, communicate MONTH 1 investor package with secured investors, conduct Identify their and marketing plan, MONTH 7 team meetings with accounting network and register securities, Campaign and staff, provide promised follow prospect list get approval activates up benefits (if any) to investors

MONTHS 2–3 MONTHS 6–7 MONTHS 8–9 ONGOING Conduct legal Meet with early Run the Conduct investor meetings, evaluate investors to fill campaign, relations, stay platforms, settle the pipeline prior answer connected, fulfill on the regulatory to the campaign questions, reporting and plan activating meet with payment obligations investors

www.miplace.org | 11 raise angel or venture funds are aware » It is best to host these gatherings communications plan with investors of how time-intensive and long the at their business location or to ask for a renegotiation. Legal fundraising process can be, however, most collaborate with a strategic counsel can guide the negotiations, Main Street entrepreneurs have never partner (could be a supplier so the company is staying within the experienced a capital raise before, so they or vendor). boundaries of the regulations. are more likely to be blindsided by the » Oftentimes businesses host just • Identify who on the team is amount of effort involved. one investor pitch gathering and responsible for creating the investor do not see success. Plan three to reports and handling questions from Engage the network six opportunities in case potential the investor pool going forward. Now is the time to pull out that investor investors cannot make the first • Companies inevitably need more prospect list from Step 2 and have the couple of dates. capital as they grow. Identify 10–20 business begin activating their network. • Have the investor package ready investors from the initial investor pool that may have the capacity Here are a few ideas business owners to go, either on a platform or in a for additional growth capital in the can use to begin communicating the Dropbox or Google Drive folder, so future. Cultivate these relationships. capital raise, using solicitation guidelines the link is easy to access. Many email provided by legal counsel and the servers or cybersecurity protocols Understanding the platform: flag emails with attachments, community investor climate • Create a series of social media posts especially large ones—it is best to What makes individuals want to invest as on the platforms where the target have the package hosted in the cloud part of an investment-based crowdfunding investor spends their time (for most and send that secure link to potential raise? There are generally three factors that businesses, the target investor is investors. influence an individual’s decision to invest also their target customer). Plan to • To prepare for investor engagement, in a business: the investors’ values; personal intensify the campaign in the last the entrepreneur should think priorities; and expectation of a return. week of the campaign, which is the through the most common second most highly trafficked time objections or challenges to the Values: People who turn their attention to during the campaign (the first week business model, deal terms and other their own backyard for inclusion in their being the peak traffic period). materials provided to investors. investment portfolio have a common set • Get marketing help. Some Write the questions out and have of values that drive their interest. entrepreneurs retain a marketing answers prepared for each of them. Figuring out how a business’s mission agency to help with the creation and vision align with those investor of the pitch video and other STEP 6: Create a sentiments is the key to compelling them investor materials, but it is not post-offering plan to give attention to the capital raise. Here required. Any marketing firm with A common issue that technical assistance are some anecdotal responses as to why a quality track record can create a providers across Michigan have highlighted people choose to invest locally: compelling video. is that businesses launch their campaigns • They are interested in businesses • Write a press release and circulate without a post-offering plan. that hire locally, spend revenue it to local media outlets. Have a Businesses encounter a host of with local vendors and suppliers media kit ready to go with highlights problems in the post-offering days of their and are committed to staying local suitable for the press about the campaigns. To avoid these pain points, as they grow. campaign, a picture of the business organizations can help entrepreneurs create • They are especially interested in owners, a couple of pictures of the a post-offering plan before launching their the impact story. Many community business, and a bio on the owners. campaign. Here are the components of a investors are motivated by what is • Apply to pitch your capital raise at post-offering plan that need attention: now commonly called the social pitch clubs, investor clubs, demo • Establish the business’s technical team enterprise movement—where days, or entrepreneur meetups with to help troubleshoot issues as they a business desires to maximize pitch components, in the area (send arise—include business consulting, its benefit to a specific social or in applications three to six months legal, accounting, tax, strategic environmental objective. The most prior to the campaign live date so the advising, marketing and sales. common areas of impact are: entrepreneur is scheduled to pitch • If the terms the investors agreed to » Whom the company hires: during the live campaign). will no longer work for the company disenfranchised populations, • Organize a series of investor pitch because the prospects have changed returning citizens (formerly gatherings, which the entrepreneur after the raise or pivots were incarcerated), veterans, people uses to engage the inner rings of required that change the financial with disabilities, people who their network. projections, have a proactive experience homelessness

12 | Investment-Based Crowdfunding Field Guide » Who the company’s owners are: Priorities: Even if an investor’s priorities • Preferred equity with a base dividend people who have a harder time align with the mission and vision of the of 5 percent, and a vesting schedule accessing capital (women, business, set out to engage them in their of 60 percent, 80 percent, and 100 people of color, LGBTQ, those capital raise. There are still a number percent after three, four, and five who were formerly incarcerated, of other factors that investors need to years, respectively people climbing out of consider before they are willing and able • Promissory note of three years with intergenerational poverty) to say yes or no. 3 percent annual interest, five years » What the company makes or does: The most pressing of those concerns, with 5 percent interest, or 10 years products or services that solve such as the investor’s tolerance for with 7 percent interest a problem in the world, or that risk, can be heard in a four-part short • Equity investment with no stated exit make the world a genuinely better educational series on YouTube specifically (usually a small investment, or an place; interest is exceptionally for investors, which can be very insightful investment in their own business) high in the following categories: for businesses looking to court them. • Clean energy: community- These videos are accessible through the SUMMARY owned power, solar MEDC’s website here. Each of the topic areas covered in this installations, woody “Investment-Based Crowdfunding Field Expectations: Individuals that have been biomass production Guide” could easily comprise an entire investing in businesses in the last five • Food systems: farmers, book. However, this guide is meant years have come to expect deal terms and makers, organically grown to provide community development return projections based on offerings they staple crops organizations with an overview of have seen in the past. They may be open • Health: cannabis, mental investment-based crowdfunding so that to considering something that is outside health service providers, you can assist businesses looking for of these parameters, but this is at least direct care medical practices, guidance and information. what their starting point might be. Note yoga studios, devices that As the community capital movement that this list of attributes may not resonate improve safety gains traction, each of us has a role to with angel investors. • Environment: reuse play—which carries with it a certain Furthermore, people in the community products, non-motorized level of responsibility. Community who have never invested locally or who transportation supports development organizations should share have never invested at all may have • Real estate: workforce this field guide with their colleagues, expectations that are wildly different. housing, mixed-income inform business owners in their These investor differences make it critical developments, mixed- community, and add value to the larger for entrepreneurs to know what type of use developments that conversation and ecosystem around the person they are talking with from the have a commitment to state by sharing their expertise, asking onset, so they can help identify whether energy efficiency or staying thoughtful questions and telling the there may be a mismatch of expectations. affordable for new stories of success and lessons learned. Here are some examples of the Main Street businesses kinds of offerings community investors • Democratization of typically consider: power and wealth: co-ops, • Five percent monthly revenue share democratically controlled agreements with 1.5 times payback organizations, or those in a maximum of eight years spurring the creation of • Equity investment with an exit of other similarly minded 1.4 times after five years entrepreneurs

www.miplace.org | 13 APPENDIX A: Resource Sites and Citations Regulation resources Michigan registered portals LARA’s handout on registration options in Michigan FINRA registered portals

Offering resources Cutting Edge Counsel DPO (direct public offering) field guide KISS (keep it simple security) template legal documents SAFE (simple agreement for future equity) template legal documents Series Seed template legal documents Explanation of SAFT (simple agreements for future tokens)

Platform information List of platforms and what registrations they specialize in Crowdwise article: Top 8 platform comparison

Sector data Reg CF deals to date 2017 vs. 2018 Reg CF raise amounts Reg CF turns 3: What’s working, what’s not Investibule: CommunityCapital2000 report World Bank $93 billion direct investing market estimate report Crowditz weekly Reg CF activity reports

Community resources Washington State University local investing field guide (published Sept 2019) MSU storytelling video on Revalue/Angela Barbash MML Michigan Crowdfunding Retrospective storytelling report MML local capital resource site

Investor resources TD Ameritrade: DPO vs. IPO Financial Poise: Articles for investors Grubstake: Resources for Michigan local investors FINRA’s BrokerCheck system

Other topics for entrepreneurs Locavesting: How to raise local capital, national news aggregation site 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 APPENDIX B: Chart of Offering Strategies P2P Lending MILE Act Reg CF Reg D Reg A+ Seed through Microenterprises, Seed through Series Mature companies Early stage through Series A, 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 based customer base revenues, top-line, businesses passionate fans active audience or user growth Michigan Crowdfunding, Common names Microlending JOBS Act, Title III 504, 506(b), 506(c) Mini-IPO, Tier 1, Tier 2 Intrastate Securities Exemption $1 million (no audit) $5 million (504) $20 million (Tier 1) Annual raise limit Limited by platforms $1.07 million $2 million (audit) No limit (506) $50 million (Tier 2 Accredited, (b) Accredited + 35 Non-accredited, Both Both Both Non-accredited; Both Both (c) Accredited only Income/NW is below Tier 1: None $100,000 Tier 2: 10% of $10,000 Investment limit is the greater of the Non-accredited the greater of $2,000 person’s, alone or 5% of annual or together with Investor No limit for a spouse, annual None income/net worth. None limits Accreditation income or net worth (excluding the value of If the investor’s Michigan investors the person’s primary income/NW is above only residence and any $100,000, 10% of loans secured by the income/NW up to residence (up to the $100,000. value of the residence) Not for first-time For the higher raise No (Tier 1) Audit required No smaller reg CF No limit Yes (Tier 2) offerings. SEC, with LARA review Filing entity None LARA SEC SEC for Tier 2 Cost 0–5% 5–10% 5–10% 5–10% 5–10% Platform Kiva NextSeed NetCapital Localstake StartEngine example Platform No No Yes No No required? Tier 1: 30 days after ending an offering Reporting The platform may Quarterly Annually None requirements have requirements Tier 2: Annually, semi-annually, and special events Yes, but restrictions apply when soliciting (b) No Public solicitation Yes Yes Yes outside of the (c) Yes platform

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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