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  • 15 Feb 2016 8:19 AM | Anonymous

    A myth has been widely adopted with regard to capital investing that “With great risk, comes great reward.”  This statement, attributed to Thomas Jefferson, has been used by many to justify placing their money into questionable ventures.

    The fact of the matter is that very few business ventures have an opportunity for great reward.  This poses a problem for any business that faces any level of risk.  These businesses will find it difficult, or even impossible, to raise capital.

    Although some banks, mostly private banks, will still make loans to businesses that bear some level of risk, the Dodd-Frank Wall Street Reform and Customer Protection Act has greatly limited the ability of any depository bank to engage in any risky activities.  The impact of this Act has been largely felt by startup businesses that are all generally viewed as high risk. It is the general perception of any new business that when it comes to bank financing that they need not apply.

    In raising capital, no rules are absolute.  Bank financing is available to any business that can show sufficient collateral to securitize the loan. 

    Very, very few businesses experience any significant rate of growth sufficient to represent an opportunity with great reward.  In a Forbes article, it was reported that Privately held companies on average ended 2013 with annual sales growth of 5.4%”.  A statistical analysis of this fact suggests that less than 1% of all businesses may attain a rate of growth high enough to attract angel investments.  A number of angel investor groups have declared their goal is to only invest in businesses that can attain “10x growth in 5 years”.  This 200% per year growth rate is a rarity in the business world.

    Fortunately, not all angel investors require high rates of return.  As has been demonstrated by the recent trends in ‘impact investing’, many investors are declaring other factors as dominant in choosing between multiple ventures in which to make an investment.

    The key to finding investment when a business is high risk and medium to low reward is to identify and offer other items or outcomes that are valued by some investors who do not limit their decisions to the amount of the reward as reflected in a return on investment (ROI).

    Investment crowdfunding, when properly structured, represents one approach to offering benefits beyond a return on investment.  It is possible to bundle one or more benefits with a classical investment structure.  These benefits may be tailored to different investor groups to better match their interests.

    Benefits may take multiple forms, limited only by the creativity of the businesses seeking investment and by the needs and interests of investors seeking to make investments:

    • Free or discounted products or services (to customers, distributors and retailers)
    • Privileges (exclusive rights to participate in sales programs, celebrations or other events)
    • Priorities (special status)
    • Opportunities (grants to participate in supply materials or components or to sell products or services)
    • Solutions to community problems (direct solutions or support of local charities)
    • Jobs within a community (economic activity and growth)

    It is anticipated that as investment crowdfunding grows to fill the gap between bank financing and angel investment, that the body of knowledge about how to offer rewards that are alternatives to return on investment will also grow.  This subject represents its own opportunity.

    The subject of investment crowdfunding, with a focus on customers as investors, is the subject of a workshop that will be presented this Thursday, February 18th by the Colorado Capital Congress at Colorado Lending Source.

  • 13 Feb 2016 9:07 AM | Anonymous

    As multiple states roll out their new intrastate crowdfunding laws and different groups scramble to build out the necessary infrastructure, the question is raised as to whether state or federal crowdfunding is better.

    This and other important related questions will be the subject of ComCap 16, a two day conference on investment crowdfunding.  The conference will be held on April 26 and 27 in Portland, Oregon.  Early bird registration ends February 18:

    Crowdfunding comes in three types: charitable, product or service pre-sale and investment.  Most people are familiar with product or service pre-sale crowdfunding that is represented by Indiegogo and Kickstarter.  However, very few people are familiar with investment crowdfunding that has been recently enabled by new federal and state legislation.  Investment crowdfunding involves the sale of securities (stocks, LLC memberships, promissory notes and revenue certificates or royalties) and is highly regulated by the government.

    The JOBS Act was passed in 2012 to make more capital accessible to entrepreneurs to boost economic recovery.  However, due to pro-longed regulation development by the U.S. Securities and Exchange Commission (SEC), it is now projected to take effect in May of this year.  While awaiting this new law, many states began passing their own versions of the JOBS Act.  In addition, the federal government approved the 506c (a modified form of the common Reg D private offering) and Reg A+ offerings.

    So which is better and does it matter?

    Each type of crowdfunding has a number of limitations and conditions that may make it a better choice for a particular business.

    Differences include:

    • Complexity (reflected in time and cost to obtain government approval and conduct raise)
    • Costs (fees, time expended in preparation to raise capital and time expended in the capital campaign by an organization leaders and any service providers)
    • Dollar limits (the maximum amount of money that may be raised)
    • Participation (the ability to and number of both accredited and non-accredited investors that may invest)
    • Escrow (requirements for holding investment dollars until a minimum goal has been reached)
    • Intermediaries (requirement of use of a licensed service provider to promote a capital raise and facilitate the investment transaction
    • Use of Proceeds (requirements on where money may be expended that is raised through a campaign)
    • All of the legal and regulatory differences may be of little importance when compared with the marketing factor of where the investors reside.  Some people believe that crowdfunding at a national level is superior because the national population is clearly larger than the population of an individual state.  State laws limit investing to residents of that state.  Other people believe that nearly all investors will come from local markets, making a state crowdfunding campaign as good as or better than a federal crowdfunding campaign.  This may be particularly true where one of the themes of the investment campaign is to ‘invest locally’ to support businesses within one’s own community.
    • In some cases, it is possible to take advantage of both state and federal crowdfunding, which may leave only the question of which one comes first.

    Karl Dakin will be a presenter at ComCap 16.

  • 11 Feb 2016 9:29 AM | Anonymous

    To celebrate its second year of operations, the Colorado Capital Congress has started this publication as the first in a series of updates that will provide information about the Colorado Capital Congress PBC, its activities and the capital industry in Colorado. 

    Invest Local

    Invest Local announced that its investment crowdfunding platform is open for business.  

    To help everyone interested in investment crowdfunding, Invest Local offers an online questionnaire.  Any organization may complete the questionnaire and receive quick feedback.

    In addition, a set of Investment Crowdfunding Common Questions & Answers has been created and is available for download.  Just send an email to

    To determine if you are ready to conduct an investment crowdfunding campaign, Invest Local is offering an Assessment service.  For a fee of $500, a representative of Invest Local will walk your organization through a punch list of information, documents and forms necessary to design, craft and complete a campaign.  You will receive a written report that includes a list of remaining tasks and a referral to service providers who can help.  To arrange an Assessment, send an email to

    Finally, Invest Local is designing a service provider referral system.  The completion of an investment crowdfunding campaign encompasses a wide range of skills and capabilities which are rarely found within a single organization.  Invest Local is vetting a list of attorneys, accountants, bankers, web developers, video producers, copyrighters, communications specialists, social media and other experts who can help with investment crowdfunding campaigns.  When ready, a directory of these service providers will be available on the Invest Local website.  Service providers interested in being selected for this directory should send an email to

    Colorado Capital Congress Crowdfunding Campaign

    The Colorado Capital Congress is now conducting an investment crowdfunding campaign.   It seeks to raise $100,000 through a limited offering.  To date it has raised $8,625 of this goal.  It you are interested in investing or you just would like to see a live crowdfunding campaign, go to  After demonstrating that you are a resident of the State of Colorado (SEC rule), you can obtain a set of documents that includes the Offering Memorandum, Form RL and a Subscription Agreement.

    The investment crowdfunding campaign of the Colorado Capital Congress is being conducted to raise funds to pay for the costs of publishing two educational programs on the topics of Customer Crowdfunding (how to conduct an investment crowdfunding campaign) and Main Street Investing (how to invest in local businesses through investment crowdfunding).  Each educational program will be presented in the form of a book, a workshop and a video webinar. 

    Within its crowdfunding campaign, the Colorado Capital Congress offers to investor candidates a benefits package as a supplement to a classical return on investment.  This creative approach to investment crowdfunding demonstrates how to gain the investment of a small dollar, non-accredited investor by offering value in the form of money savings, privileges and preferences whose value may exceed the value of any return on investment and may exceed the value of the investment itself.  

    Workshop on Customer Crowdfunding

    The Colorado Capital Congress will be presenting its next workshop on Customer Crowdfunding on the morning of February 18 at Colorado Lending Source.  This workshop, presented by Karl Dakin, will walk organization leaders through investment crowdfunding basics, key management decisions, planning and the development of a benefits package.  You can register for this workshop at

    The fee to the general public to attend this workshop is $250.  Members of the Colorado Capital Congress may attend for a price of $200.  While the Colorado Capital Congress is conducting its crowdfunding campaign, investors in the Congress of $125 will get a free pass to the workshop and 5 Units in the royalty pool.

    Book on Customer Crowdfunding

    With the first dollars from its crowdfunding campaign, the Colorado Capital Congress has started work to publish a book on Customer Crowdfunding.  Zipline Performance ( has been engaged to produce the book.  Authored by Karl Dakin, the book will include a fictional narrative about a local brew pub and its experiences in successfully completing an investment crowdfunding campaign.  All investors in the Congress at any dollar level will receive a free copy of this book.


    The Colorado Capital Congress presented a briefing on the Basics of Crowdfunding to Creative Connections on February 5.  Karl Dakin joined with Stan Yan (professional comic book author) to share information about product and investment crowdfunding.  A video of the presentation may be viewed here:

    Since January 1, the Colorado Capital Congress has provided briefings to Midwest Regional Bank, Clean Tech Community and TIE Rockies.

    The Colorado Capital Congress offers to provide briefings without charge to civic, charitable, community, professional and private organizations.  To arrange a briefing for your organization, send an email to

    Upcoming Events

    The first Colorado Impact Days will be held on March 2-4th.  Foundations will participate in this unique forum where they will learn how to make ‘program related investments’ and view 60 investment opportunities from Colorado.  To buy a ticket for the finale event on March 4th, go to

    Karl Dakin will be a key note presenter at the workshop on Social Enterprise Organizations to be held on March 10 in Colorado Springs.  More information can be obtained at

    Karl Dakin has been invited to speak at ComCap 16 in Hatch, Oregon on April 26-28.  This conference presents the latest advancements in investment crowdfunding.


    Individuals and organizations can join the Colorado Capital Congress for an annual fee of $50 (students just $20).  Members in the Congress are entitled to discounts and participate in special programs.  Membership fees help the Congress in its efforts to improve Colorado’s capital ecosystem.  To join the Colorado Capital Congress, go to

    Other News

    There are lots of things going on in Colorado.  If you have an event or activity that you would like to share with our audience, please send it to

  • 01 Feb 2016 8:19 AM | Anonymous

    Investment crowdfunding may be different from classical investing.  The investor has an opportunity to not only recapture their investment and to earn a return on that investment, but they may also receive a package of benefits.  This package of benefits may have greater value than the amount of the investment and any ROI and it may serve as the primary reason for making the investment.

    To date, nearly all investment crowdfunding has involved accredited investors making investments in real estate using classical investment models.  The investor invests in a business or project with the expectation that they will get a return of their capital and share in profits generated from the success of the venture.  The focus of the investment decision is upon the projected amount of the return of the investment and the probability that the leader of the venture will successfully meet this projection.

    Investment crowdfunding may be structured differently to give the investor an added return in the form of benefits.  The use of investment benefits parallels compensation of a wage earner: the individual drawing a paycheck for their work may just draw a salary or they make also receive a benefits package.  An employment benefits package may include health insurance, vacation, education, a company car and other items of value.

    Investment benefits may take several forms:

    • ·         Availability of a previously unavailable product or service
    • ·         Discounted or free products or services
    • ·         Increased foot traffic or economic activity near a business or shopping center
    • ·         Opportunity to resell products or services
    • ·         Recognition
    • ·         Participation in events or other special privileges
    • ·         Solving a social problem
    • ·         Improving the local community
    • ·         Support of a local charity
    • ·         Creating jobs within the community, including personal employment
    • ·         Payment of taxes to local government

    Many of these benefits may be realized without making any investment.  People and businesses who belong in this group are ‘stakeholders’ in the success of the organization, whether it be a small business, a social enterprise or community project.

    An organization seeking investors through crowdfunding may simply educate investor candidates of these positive consequences that may spring from their investment.  This is the approach commonly used by social enterprises in seeking support of impact investors.

    An organization may specifically craft a package of benefits that may be available only to investors.  This package serves as a greater incentive to invest.  Depending upon the value of the package, an investor may gain greater value from the package than from the return on investment.  In fact, a well-designed benefits package may enable the organization to structure its investment offering to reduce the interest, equity or royalties that it must give up in order to gain the investment.

    The organization may craft a series of benefit packages targeted to different investor groups based upon their preferences.  Instead of an offering that is one-size-fits-all, with the return on investment being the single feature, an organization may cater to a wider range of investors with custom or semi-custom offerings.  This is important as the focus on raising money through investment crowdfunding shifts from accredited to non-accredited investors and the size of the average investment is greatly reduced.  The motive for investment will shift from getting rich to getting good value.

    This new approach to designing an investment opens up opportunities for everyone to support local businesses and invest within their own communities.  An investor may not only buy products and services from a local business, but they may participate in the success of that business in many ways. 

    Businesses should talk with their customers and members of their community in order to learn how to best craft one or more benefits packages that will assure the success of their investment offering.

    The Colorado Capital Congress will be presenting the inaugural workshop on Main Street Investing this Thursday morning on February 4 at Colorado Lending Source.  The workshop will explain how to evaluate an investment crowdfunding offering.  Admission is free for this first workshop.  To register, go to

  • 08 Dec 2015 9:30 AM | Anonymous

    Investment crowdfunding offers a benefit beyond simply raising capital.  It can also be used to create brand awareness and to generate sales.  Over the life of a business, these benefits may outweigh the value of money raised through the campaign.

     One example is the establishment of a product or service as an incentive to invest.  The product or service is packaged or bundled together with an investment of a set dollar amount.  The result is that an investor receives the investment and the product or service for a single price.  Depending upon how this bundle is designed, it may create substantially higher benefit to the investor than the investment standing alone.  It may cause a sense of urgency to invest if there are a limited number of bundles available.  It will expose the investor to the value of the product or service, making the investor a customer.  It will set the table for the customer/investor to promote the products and services of the business within his or her personal and business networks.

     As an illustration, the Colorado Capital Congress offers as one of its products and services an educational workshop entitled Customer Crowdfunding - four hours of densely packed experience and knowledge about how to strategize a successful investment crowdfunding campaign.  The next presentation will be this Thursday on December 10 at Colorado Lending Source.

    From a marketing perspective, promoting and selling the workshop presents many challenges.  These challenges include identification of prospective attendees, conveying the message of value to be gained from attending the workshop and in closing a sale.  Additional challenges exist because of the distractions of the holiday season and the high volume of information being circulated about crowdfunding.   

     By including the workshop as an incentive within an investment crowdfunding bundle, the workshop will be brought to the attention of prospective investors who are not already customers.  All of the time and money invested in obtaining investors is also directed to creating new customers.  Every press release, email, luncheon, pitch event and the website used to raise capital can serve the dual purpose of creating customers.

     When a qualified (in this illustration a resident of Colorado) reaches the shopping cart on the investment platform, they will be presented with a variety of incentives that are associated with different levels of investment.  In many cases, the same level of investment may have more than one choice of incentive.

     As a further illustration, an investment of $125 will qualify to receive a free pass to the workshop on Customer Crowdfunding.  The price of the workshop pass, standing alone and not bundled with the investment, is $250.  The prospective investor is now focused on the service – the workshop – and must consider its value both independently and in the context of making an investment. 

     If the prospective investor assigns no value to the workshop for any reason (already knows everything about investment crowdfunding, has already completed his or her crowdfunding campaign or is just looking to invest and never intends to conduct a crowdfunding campaign and does not know anyone who could use the pass) then the investor will look at the investment solely on its merits – the potential return on investment and the associated risk.

     If, however, the prospective investor assigns any value to the workshop pass, then the value of the investment bundle is increased.  If the investor had intended to attend the workshop and was prepared to spend the $250 workshop fee, then the investor may see the investment as a way to immediately save $125 off of the workshop price and get the investment for free.  Alternatively, the investor may view the price of the investment as $125 and consider the $250 pass to the workshop as free.

     Any value assigned by an investor to an incentive serves as an immediate gratification to the investor and an immediate return on investment.  The investor does not have to wait for the business to perform and succeed in order to get paid back his or her investment. 

     In the example of the Colorado Capital Congress, the investor has already experienced a 100% return on investment (ROI) – receiving a $250 dollar value on a $125 investment.  Any future distribution related to the investment will only serve to increase the amount of the ROI.

     From the perspective of the investor candidate, the investment proposition may be so great that the investor candidate must seriously consider the deal and may have great difficulty making a decision not to invest.

     From the perspective of the business, it gains an investor and a customer for the equivalent of a discount off the sales price of the product or service.  This outcome may be viewed as an extra benefit of a properly planned crowdfunding campaign or reducing the net cost of raising capital by sharing the costs of the campaign with the sales department.

  • 01 Dec 2015 8:40 AM | Anonymous

    Karl Dakin


    Invest Local LLC

    Main: 720-296-0372

    Invest Local LLC Opens First Investment Crowdfunding Platform in Colorado

    Non-accredited investment crowdfunding arrives in Colorado as Invest Local LLC offers crowdfunding platform services.  

    DENVER, CO—December 1, 2015—Access to capital remains a key challenge to starting and growing businesses, social enterprises and community projects in Colorado. Without capital there is less innovation, fewer new products and services and fewer jobs – all important factors in strong, sustained economic growth. 

    A new company, Invest Local LLC, is the first to offer crowdfunding platform services in Colorado that are targeted to investors that make up the 97% of the population who are non-accredited investors.    

    The company is acting as a value added reseller of services from FundPaas ( - a California business.  “We searched out a crowdfunding platform that is adaptable to different types of crowdfunding, compliant with federal and state laws and regulations and which can keep the costs of crowdfunding affordable to the small business.  FundPaas met all of these criteria.  We look forward to working together with FundPaas in supporting thousands of Colorado businesses, social enterprises and community projects in raising the money they need,” stated Karl Dakin, President of Invest Local LLC.

    Under the new Colorado Crowdfunding Act, organizations raising money are required to use a registered intermediary such as Invest Local LLC to manage the large number of investors who invest in small dollar amounts. 

    Investment crowdfunding is a revolution within the capital industry as new laws and regulations at the federal and state level have removed restrictions on how money can be raised and on who can invest.  Investment crowdfunding fills the large gap in the capital industry for those organizations that cannot qualify for bank financing or meet the high performance requirements of angel investors.  These organizations are no longer limited to financial institutions and wealthy individuals, but can seek money from friends, family, associates, customers, employees and other members of their community.

    “The potential of investment crowdfunding in providing capital needed by Colorado small businesses is tremendous.  There are an estimated 4.3 million non-accredited individuals and over 700,000 businesses that may now invest through crowdfunding.  If each of these individuals and businesses were to invest only $1, they could fund five businesses up to the $1 million limit (unaudited financials) under the Colorado Crowdfunding Act.  That’s $5 million new dollars invested in Colorado.  If each of these same investors invest $100 each year - $1 each in 100 different Colorado businesses, that’s half a billion new dollars invested in Colorado – each year.  The positive impact upon Colorado’s economy is immeasurable”, said Karl Dakin.

    Invest Local LLC will soon begin listing crowdfunding opportunities on its website -  Invest Local LLC will also begin supporting Colorado businesses who are directly raising capital through Limited Registration offerings.  Securities laws prohibit Invest Local from promoting individual crowdfunding campaigns, however Invest Local LLC will be active in general efforts to encourage citizens of Colorado to ‘Invest in Colorado’.  Organizations interested in raising capital through investment crowdfunding may complete a free survey on the website.

    Initially, the company will support intrastate crowdfunding campaigns under Colorado’s Limited Offering statute and the new Colorado Crowdfunding Act.  It will soon support federal 506c and Reg A+ crowdfunding campaigns.  And, it expects to support the JOBS Act, also called Series III, crowdfunding campaigns when they are authorized in 2016.  The platform can also support large scale product crowdfunding campaigns and charitable fundraisers.

    Invest Local LLC will act as a reseller of educational programs developed by the Colorado Capital Congress PBC (, a social enterprise working to improve the capital ecosystem in Colorado.  Programs include how to run a crowdfunding campaign and how to invest through crowdfunding.  The next program on raising capital – Customer Crowdfunding – will be presented on December 10th at Colorado Lending Source.  The next program on investing through crowdfunding – Main Street Investing – will be presented on December 17th.  A limited number of free passes to each workshop are available to community leaders.

    Invest Local LLC is developing programs to help economic development agencies, community organizations and professional associations in promoting investment in Colorado businesses.  These programs will focus on the advantages of investing in ‘Main Street’ Colorado over Wall Street.



  • 25 Nov 2015 7:12 AM | Anonymous

    Designing an investment crowdfunding campaign is a special form of marketing.  The ordinary goal of a capital raise is to secure an investment.  However, the goal of an investment crowdfunding campaign is to secure and investment AND create a new customer – a two for one special.  To achieve this outcome, it is necessary to consider the benefits of investing and the benefits of buying a product or service from the perspective of the investor.  Offering an incentive package that offers just one or the other may fail.  The incentives must be stacked.

     Ordinarily, an investor is looking for a rate of return – the ability of the business to pay back the investment and something more.  Everyone would like to hit that home run where the investment pays back a huge multiple of the investment.  However, everyone just wants to get their money back over the alternative of losing any money.  High probability of success will often win out over high rewards.

     When an investor is seeking to make an ‘impact’ – the desired outcome changes.  The investor still would like to get their money back, but is willing to waive any kind of profit on their investment if the social enterprise is 'doing good' in their community.  This is the model used by Kiva, a great organization, in making non-interest loans around the world. 

     Still other investors go even further.  They will put their money at risk provided that the use of the money goes to a good cause.  This type of investment looks more like a charitable contribution.  It represents the new growing trend of foundations to make ‘program related investments’ or PRI’s in organizations with a common mission.  In these situations, the term ‘investment’ becomes more of financial support for a sustainable business model.

     A customer is making a different type of investment.  They are buying a product or service.  The product or service is expected to solve a problem of the customer.  Food will remove hunger.  A beauty product will make the customer look better.  A car will get the customer to work.  They don’t receive a benefit from the purchase unless the product works.  However, like an investor, a customer is looking for a good deal – a lower price, a discount, more features, etc.  Where two products are alike, they will pick the one on sale.

     If investors in a crowdfunding campaign can get all of the above outcomes by stacking incentives, a point will be reached where it is almost impossible for the investor to say ‘no’.  The organization seeking to raise capital will study their existing or prospective customers and design a package that will:

    • ·         Provide a product or service that works (a benefit)
    • ·         Makes the product or service available for free (a premium) or below market prices (a bargain)
    • ·         Demonstrates a strong business model that creates a high probability of pay back of the investment (stability)
    • ·         Addresses a problem in the community that affects people known to the investor (taking care of those around them)
    • ·         Collaborates with other individuals and organizations (part of a team)
    • ·         Creates job opportunities for the customer/investor or a member of their family or friends (integrity of working)
    • ·         Supports a charity or faith organization (taking care of the needy)
    • ·         Engages the customer/investor in the organization (social belonging)
    • ·         Demonstrates appreciation for the customer/investor (feel good)
    • ·         Rewards customer/investors who help the organization succeed (recognition)

     If an organization can create an investment package that can achieve all of these things, then investment should follow. Many successful established businesses do all of these things.  A study of your favorite business may serve as a guide in designing your investment package.

     The topic of stacking incentives will be included within a half day workshop on Customer Crowdfunding presented by the Colorado Capital Congress on December 10 and a half day workshop on Main Street Investing on December 17.

  • 24 Nov 2015 6:59 AM | Anonymous

    One of the most common stated concerns about investment crowdfunding is the challenge of managing a large number of investors.  In speaking, writing and teaching on the framing of a crowdfunding campaign, small business and social enterprise owners and community project leaders repeatedly raise this question. 

    One of the concerns is the amount of time that it will take to complete the investment transaction, setup up a system to distribute payments and reports and handle communications.  A related issue is the challenge of dealing with advice, questions or demands of investors who have an ownership voice in the management of the business.

     Each investor should be recognized, treated as an asset of the business and effort made to realize the full potential of that asset.  Investors should be encouraged to voice their opinions about how to improve the business and its products and services as part of a large advisory board.  Investors have contacts within their business and personal networks that can help the business and open doors.  Investors have skills and experience that can solve problems.  Investors can be customers.  Investors can help the sales efforts of the business by acting as an advocate for the business and communicating its merits to their friends, family, associates and anyone they meet in their day to day activities.

     It is recommended every investor be handled just like the business should be handling every one of its customers.  A relationship should be formed.  The person or business should be engaged in the activities of the business.  When offering this advice, it has been learned that many, if not most, businesses do not manage their customers.  This issue is the subject of many books and educational programs that point out the obvious benefits from working with the customer instead of just accepting their money.  There are a great number of parallels to managing investors and managing customers in terms of what the business can gain from building and establishing this relationship.

     The volume of investors strongly recommends use of software that automates back office operations.  Our current analysis projects that the average investment crowdfunding campaign featuring participation by non-accredited investors will have a goal of $500,000 and investments will be made by an average of 1,000 investors.  Smaller dollar or smaller number of investor crowdfunding campaigns may get by with manual or partly automated systems.  We have set as our current benchmark to automate any campaign that will generate over 200 investors.

     For each investor, it may be necessary to verify they are an adult, their address, their residency within a state, and their digital signature on investment documents.  In addition, payment must be conveyed from the investor to the business or an escrow account (and then back to the business after attaining minimum investment goals).  Each investor will receive multiple communications, some form of recognition of ownership (an email, stock certificate, note, or revenue certificate) and periodic reports over the life time of the investment.  In those cases where a business has offered an incentive to invest, the investor may receive a product, service, coupon or other item of value that may require physical shipping and delivery.

     There is a broad array of software available from a broader array of businesses that can be used to manage investors.  It is called customer relation management or CRM software.  It is typically used in sales activities, but it can also serve the purpose of acting as a database with all contact information, tracking each communication and managing projects or calendars for actions to be taken.  This software ranges from the very inexpensive to expensive and the different options may include a minimum set of features or more tools than you will ever need.  Some of the investment activities may be completed by crowdfunding platforms or intermediaries.  Data captured from the transaction can be ported into a CRM system for managing the relationship with the investor after sale.

     If a business is already managing the relationship between it and each of its customers and the customers are the primary focus of a crowdfunding campaign, the additional costs of upgrading a customer to an investor and management of the investor relationship will be very small.

     Another issue is the ability of investors to dictate the strategy of the business by electing the board of directors.  This issue only exists where the form of the investment is equity and as shareholders or members of the business, the investor has a right to vote their position.  In such cases, the collective vote of the investors can only change the board if it holds a majority position.  It is anticipated that in many crowdfunding campaigns, investors will be offered promissory notes for debt financing or royalties for revenue sharing.  In each of these situations, the investors have no voting rights.

     Although every investor should be treated as an asset, there will always be a few investors who are not.  Or, at least, these investors will attempt to assert their ownership position in a way that is not helpful and may be distracting to management of the business.  Policies and communications systems should be put in place to gain the upside of the relationship with the investor without being impacted by the downside.  Direct, one on one communications, should be avoided or prohibited.  Investors should be communicated with as a group, unless there is a benefit to the business.  Educational programs on being ‘the best investor’ may contribute to beneficial behavior.

     The challenge of the business is to gain the most value from each investor and to minimize the time and effort necessary to gain that value – a basic skill in asset management.

  • 23 Nov 2015 7:37 AM | Anonymous

    One of the most important features of investment crowdfunding is the ability to encourage an investor to invest by offering incentives.  An incentive may take the form of a premium, a free or discounted product or service, or an opportunity to upgrade an investment at a later time.

    Incentives are of particular importance to those businesses, social enterprises and community projects that may never earn big profits or attain high share values.  These capital seekers will never compare favorably with ‘gazelles’ and ‘unicorns’ – terms given to high growth, high profit businesses, that can offer investors a high rate of return on their investments.  When comparing the ROI on different investments, the capital industry is like any other commodity.  The highest price will go to those businesses that can pay the highest rewards.  All ‘average’ businesses, or those that put a social outcome ahead of profits, must offer alternative benefits or value to attract investors.

    Incentives are also important to business owners who need money to grow, but do not intend to ‘flip’ their business and sell it off after all of the hard work to get it started.  Instead of selling a startup at the end of 3, 4 or 5 years, the owners desire to operate the business to fulfill its mission (which is not to make the owners rich).  Without a sale, it is difficult to create a ‘cash exit’ and payback investors.  These businesses must also offer alternative benefits or value to attract investors.

    If the business is able to offer large enough incentives, it will change the focus of the investor away from the future, unknown rate of return on the investment to an immediate, tangible gratification.  By shifting this focus, the business may not only be able to gain the investment, but it may also be able to reduce the price of the money received through the crowdfunding campaign.  It may offer less stock for the same price, a lower interest rate on a promissory note and/or a lower royalty rate on revenue sharing.  The tradeoff between the total aggregate costs of all incentives and the reduction in price of money deserves significant consideration by the business.

    Incentives are not new.  One of the most common is a convertible note.  An investor is offered a promissory note as the investment.  However, if the business performs well and its stock value goes up, the investor may convert from the note, a debt instrument, to a stock, an equity position, that can appreciate with the success of the business.  Similar incentives may include warrants to buy more stock in later offerings, which warrants may be discounted from later offering prices.

    It is anticipated that most investment crowdfunding incentives will be centered on the products or services of the business.  This concentration is due to the fact that the customers of the business will likely be the single largest group or crowd that will benefit from the success of the business.  Customers, having the most to gain, are the best candidates to become investors.

    The design of an investment incentive tracks with the design of a new product or service.  Will it achieve the primary objective of obtaining an investment?  Is the benefit obvious?  Will there be a net benefit to the business in that the cost of the incentive does not exceed the amount of the investment?  Can the incentives be matched to different types of investors with different reasons to invest?  Are there incentives that can be matched with different levels of investment – small dollars as well as large dollars?

    There is a cost to every incentive.  Like a bank giving away a new toaster for opening a new account, the bank has to front the cost of the toaster.  If the incentive is purchased from a third party, each investment will require an outlay of cash.  If the incentive is a product or service of the business raising money, each investment will impact the bottom line of future operations.  Discounts on products or services up to the gross or net margin, will create a ‘push’ where the business neither makes nor loses money.  Lesser discounts actually serve as a form of a sale with the business making money at lower margins in addition to the investment.  The impact of incentives on current or future cash flow should be taken into consideration.

    The value of the incentive may be viewed as an immediate return on investment to the investor.  If the investors invests $100 and gets $10 in products, the investor is realizing a partial payback on the investment.  The net investment is only $90.  Future distributions to the investor will cause the investor to reach a breakeven on their investment earlier and start realizing returns.

    Where the value of the incentive is indirect, the impact of the incentive may be substantially reduced.  If an urban farmer commits to give away 10 pounds of produce to a local charity for each investment, the farmer must track and publicize the gift to the investor.  This might take the form of making the gift to the charity in the name of the investor with a photo of the event.

    When offering incentives, the business must be clear as to its ability to deliver the incentive and when that delivery may be completed.  If the business is dependent upon raising money from the crowdfunding campaign in order to be capable of manufacturing the product, this fact should be stated in the crowdfunding offering documents. 

    The design and offering of investment incentives will be one of the topics in the upcoming half day workshop on Customer Crowdfunding presented by the Colorado Capital Congress at Colorado Lending Source on December 10.

  • 20 Nov 2015 10:51 AM | Anonymous

    Most intrastate crowdfunding laws and the pending JOBS Act set the maximum capital raise at $1 million to $2 million.  Some states, like Colorado, have options for crowdfunding up to $5 million and the Reg A+ allows for crowdfunding up to $50 million.  Federal 506c offerings do not have this limitation. 

    In some cases, a business will need more money than can be raised through investment crowdfunding.

    One option to overcoming this limitation is to use the money raised through investment crowdfunding as a down payment.

    Whenever purchasing certain assets, a business may borrow a percentage of the total purchase price.  This may include certain real estate, equipment and vehicles.  The lender views the item purchased as collateral and will take a security interest in the item.  If there is a default on the loan, then the lender will sell the asset and apply the proceeds to pay off the balance of the loan.

    Depending upon the relative ease with which a lender believes they can sell off collateral and the associated costs of the sale, lenders may loan 95%, 90%, 80%, 75%, 60%, 50% or less of the total purchase price.

    This means that money raised through a capital campaign may make up the difference between the purchase price and the amount of money that may be borrowed – the down payment.

    Using two or more types of capital to make an acquisition is sometimes called a ‘capital stack’.

    By using crowdfunding money as a down payment, a business may acquire assets that are 2 times (2x) to 20 times (20x) the amount of money raised through crowdfunding.  So, a $1 million crowdfunding raise matched 80/20 with debt financing. , may allow a business to buy a $5 million asset.

    If a business plans to raise money through crowdfunding and leverage it with debt financing, it will be necessary for the business to be VERY CLEAR in the sales documents for the crowdfunding campaign.    The possibility of not obtaining debt financing after raising crowdfunding money is a risk that must be disclosed to prospective investors.

    A good business practice would be to obtain a loan commitment from a lender in advance of raising money through a crowdfunding campaign.  However, the lender will make the loan dependent upon successfully raising a set dollar amount before it will make the loan.

    Finding lenders who will make a ‘conditional’ loan commitment based upon the future successful completion of an investment crowdfunding campaign is difficult.  Nearly all lenders contacted by me on this opportunity have declined to provide the commitment, even though it represents a significant source of new loans.  It is expected that this will change over time as lenders become more familiar with crowdfunding.

    Even though a business has successfully completed a crowdfunding campaign and may be authorized by state or federal law to disburse money from escrow, a good business practice would be not to disburse any money from the crowdfunding campaign until the loan is closed and the money is disbursed from the lender.   This may be accomplished through a concurrent closing.

    Also, lenders may decline to loan money on a crowd funding down payment if the investment takes the form of a loan from investors or revenue share (royalty payment to investors).  This refusal is based upon the fact that any payments to investors may reduce the amount of money available from the business to repay the loan. 

    One way to address this issue may be to issue stock to investors that allow the business to buy back the stock and replace it with a promissory note or a revenue certificate at a date in the future.  (This might be considered an ‘inverted convertible note’ or ‘reverse convertible note’). The date of the conversion may be tied to a milestone or other performance achievement where the business has demonstrated sufficient success that the lender may no longer be worried about repayment. 

    Some businesses and their advisors follow the guideline that one should never give up equity for debt money.  However, the business needs to look at the total cost of money – the price paid over time for the investment in the form of interest payments, revenue distributions, profit distributions or dividends.  If converting equity to debt will substantially reduce pay outs over time, conversion from equity to debt may be the better choice.

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