Naomi - click here and write a clever title
Transcription of interview with Jason Best and Sherwood Neiss on September 10, 2012.
Douglas Goldstein, CFPÆ, Financial Planner & Investment Advisor
Jason Best and Sherwood Neiss are partners of a company called Crowdfund Capital Advisors.
They are bringing a new concept to raising money to people who are at the very early
startup stage.
Douglas Goldstein, financial planner & investment advisor, interviewed Best on Arutz Sheva Radio.
Douglas Goldstein: Can you just give us a little summary of what crowd funding is all
about?
Jason Best: Crowd funding is where a large group of people take small dollar amounts
and they help fund the person with an idea.
In general, this has been used for mainly charity-related events, or walks for cures
for breast cancer, and that type of thing.
Itís used for political donations, and now, most recently itís been used for art-related
campaigns on websites like RocketHub, and what weíve done is weíve translated that
into the business sphere to allow people to invest money into businesses for a small piece
of the pie.
Sherwood Neiss: It allows small private companies or entrepreneurs to be able to raise capital
so they can either grow their businesses, if they have an existing business, or to be
able to start to build a business if they are an entrepreneur with an idea and a business
plan.
With the financial crisis, itís much harder to get access to capital through banks or
other traditional places, and what this allows you to do is leverage your social networking
via LinkedIn, Twitter, and Facebook, to be able to raise this money to allow you to build
your business and hire people and create innovation.
Douglas Goldstein: Itís basically people who maybe are not quite ready for primetime
on Wall Street, but still need to raise capital for their business?
Jason Best: This definitely fits a funding gap that is out there.
Traditionally, businesses that need zero to $250,000 in capital have to go to their own
pocketbooks, their credit cards, their home equity lines, their traditional sources for
capital.
That money has dried up since the collapse of the financial markets in 2008 so itís
been a lot harder to get that capital, so this allows you to go to your social network
and say to them, ìHey, I got an idea for our business.
Hereís the business model.
Hereís how to make money, and hereís what I think is a good investment opportunity,î
and it allows them to decide, are you worthy of an investment?
Are you a trustworthy person that can communicate and live up to what you say you are going
to do and for them, is it a good investment opportunity for them to make?
Douglas Goldstein: What sort of companies would this be appropriate for?
Is this from the zero to 250-level or could it be bigger companies as well?
Sherwood Neiss: Whatís interesting is this is really gaining a lot of appeal with small
to medium-sized businesses and so in the U.S., the legislation allows us to raise up to $1
million per year through this capital-raising facility, through crowd fund investing.
We definitely see this as being very, very appropriate for mainstreet businesses because
there are many mainstreet businesses like the dry cleaner and the restaurant that may
be profitable, successful long-time businesses, but may have a very hard time getting working
capital loans or ability for capital to expand their businesses from banks or other financial
institutions.
This allows people to use their customers and to engage their customers to become investors
and passionate brand supporters to be able to raise the capital and grow those businesses.
It also has a lot of appeal for high-growth businesses, so a typical tech startup that
people tend to think about when they think about entrepreneurs and in this case, when
people go to Angel Investors or Venture Capitalist, the response that those groups give to entrepreneurs
about 99% of the time is no, and for a range of reasons.
Sometimes itís not a fully-formed idea, but many times itís a great idea.
Itís just not ready for professional investment yet.
So what crowd funding can do is provide on-ramp professional capital, because many times what
VC or Angel Investors says is, ìLook, this looks great but I need you to go get a customer..
Go build a prototype.
Go launch your website.
Go create something and then come back to meî And what Crowdfund says is, ìI can now
go out, I can raise $50,000, $100,000, half a million dollarsí worth of capital.
I can do those things,î and I return to the Angel Investor and can say, ìLook, Iíve
done this, Iíve raised capital successfully.
Iíve launched my site successfully, I have a customer and now my business is worth more
and now Iím ready for professional investment.î
Douglas Goldstein: We are talking pre-angel, which to me sounds like it will entail a lot
more risk for the investor.
Jason Best: We make no qualms about this.
Crowdfund investing, like any startup investing, is the highest risk form of investing out
there.
If you are going to be playing in this space, you should only be playing with a small percent
of your portfolio.
Portfolio diversification is the way in which you prevent against loss, so if you are going
to be investing in startups in small businesses, make sure itís less than 10% of your overall
portfolio.
Douglas Goldstein: Can you give me an example of a
company that might use your services?
Sherwood Neiss: As far as for Crowdfund Capital Advisors, the type of organizations weíre
working with are Venture Capital and Angel Investors, who are looking to understand this
crowd funding space and so how will we as professional investors begin to work with
companies whoíve used crowd funding in the past, or how can we look at this market as
an opportunity for further investment in this space?
This is a new space.
We look at crowd fund investing really as web3.0.
This is where the social web or web2.0 meets capital formation, and itís really an opportunity
to investment space.
A couple of other entities that work with us would be governments in other countries,
in the United States, as well as regional development banks and other NGOs who want
to use crowd funding as a way to further their goals and really support the initiative they
already have in place.
Douglas Goldstein: How do they see this and where do you think you will fit into the regulatory
map?
Jason Best: Weíre working very closely with the SEC and FINRA right now, and they are
the governing bodies for securities in the United States.
The legislation describes how this will function.
The oversight requires that these quartiles are registered with FINRA, so that they can
make sure that you donít have fly-by-night portals popping up, and they are restricted
on what they can do.
If you are a broker dealer, of course youíve got the full purview of a broker dealer and
you can go out and to rate deals and look for investors, but they type of funding platform
is just called the funding portal.
This is really a white-labeled funding platform that does nothing that a broker dealer does,
where itís just sort of pitching ideas, ideas go up, and the crowd decides whether or not
thatís where they are funding.
Douglas Goldstein: Letís say a company comes along and wants to raise some money, an early
stage company.
What percentage of their net worth would they sell off?
Sherwood Neiss: It would really depend on the need.
If Iím a restaurant and I need to buy some new equipment for my kitchen, letís say I
need $50,000 to raise for that, I would know what the value of my business is because my
accountant would be able to tell me and I would say, ìOkay, what percentage of that
value is $50,000?î and then thatís the amount of money that I would propose to raise whether
through a debt or an equity orphan.
Douglas Goldstein: Would they be able to have different shares of classes so they are preferred
in common so that people will not necessarily either have voting rights or dividend rights?
Sherwood Neiss: The SEC is determining what sort of shares will be allowed in crowd funding
right now.
We think that there probably will be some ability to do that but our position is weíd
like it to be as straightforward as possible for investors because we donít want to get
into derivatives or very complicated financial instruments.
We want it to be very simple, straightforward for everyone to be able to understand.
Douglas Goldstein: Is there an offering document that investors will see that the companies
have to prepare?
Sherwood Neiss: For listeners who are familiar with the current perks or awards-based crowd
funding today like Kickstarter or Rockethub, thatís a beginning point to think about an
offering document where you have a pitch video and documentation of what will be done with
the funds.
What will happen on the equity or debt side of that thing, there would still be a pitch
video and description, but youíd also have whatís called a deal room or a place you
would log into for serious investors to be able to look at financial information and
detailed information so they could make a full determination about whether or not to
invest.
Jason Best: All of these will be recorded on term sheets and what we commonly know as
offering memorandums so to be summarized on there.
All these fields will be consolidated down on to standardized forms that will be used
by everyone.
Douglas Goldstein: You spoke with the companies going out to their social network.
I presume that thatís the model as opposed to a company coming to you and say, ìHey,
can you go market this to a million people?î and you would say ìWell, weíll set you up
and you have to send it out to your LinkedIn or Facebook Group.î
Sherwood Neiss: Crowdfund investing provides kind of a new and innovative way to raise
capital.
What we also see is that thereís going to be a lot of innovation that happens around
this concept and what you had just identified, one of the areas that we are already seeing
is there are companies who are calling themselves Crowdfund Accelerators who say, ìWe will
come in and run your campaign for you because we are experts at running a social media campaign
to raise capital.î I think people are willing to do it themselves or they will do it through
people who have that expertise.
It is definitely not just, ìIím going to hit the send button on an email to all thousand
people in my address book.î There definitely is a campaign mentality that has to be carried
out to be successful.
Jason Best: The keys to success in Crowdfund Investing are a great idea, a transparent
entrepreneur, a great business model and a very strong social network.
Thatís the capital to support all of your ideas.
Sherwood Neiss: If you are not an expert yourself, find maybe a niece or a nephew or son or daughter
who is.
Douglas Goldstein: What concerns should small companies have about going ahead and raising
money though crowd funding?
Sherwood Neiss: There are several.
The first and foremost is you need to be organized and transparent.
The very first thing that youíre going to have to do when you register to do Crowdfund
offering is to give out all of your personal information - your name, your social security
number, your date of birth, your address, telephone numbers, any identifying information.
So if you commit any fraud, we, the SEC, the IRS, and everyone else can come and find you.
You have to be a very transparent individual and this is not replacing any steps that you
have to go through when starting a business.
You have to incorporate the business before you get started.
You have to have a bank account to get going so itís going to require some capital upfront
and you have to sit down and get a business plan done.
If youíre a smart entrepreneur and you think that this is a great way to access capital,
youíre right but youíre going to need to socialize your idea with your community before
you raise any money to see if in fact they think itís worth your time to go to this
entire exercise.
Jason Best: Just to add to that, when youíre providing your personal information as an
entrepreneur, your social security, date of birth, those sorts of things, those are used
to conduct background checks, criminal fraud checks and securities fraud checks.
That data isnít displayed on the internet, but it is required because they want to make
sure that there is a vetting process that goes on so that people all know on the platform
that they are legitimate businesses with legitimate business people.
Jason Best: Crowd funding for a lot of people might be something new, but if you look at
it, itís been around for thousands of years in essence.
Thatís the way communities used to finance everything by pulling their money together,
but most recently Kickstarter, itís been around for five years, so weíve been seeing
this industry grow over the past five years and the fact of the matter is thereís zero
fraud in it because the crowd and the crowd diligence uncovers any new onsets that are
going on in the space and shuts down any fraud.
Sherwood Neiss: There were instances where people have tried to perpetrate fraud in Kickstart
or Rockethub but the combination of these sophisticated algorithms that they put in
place to look for pattern fraud as well as having hundreds of eyes looking at a deal,
itís very powerful.
Douglas Goldstein: How can people follow your work?
Sherwood Neiss: On www.crowdfundcapitaladvisors.com.
Douglas Goldstein, CFPÆ, is the director of Profile Investment Services and the host
of the Goldstein on Gelt radio show (Monday nights at 7:00 PM on www.israelnationalradio.com.
He is a licensed financial professional both in the U.S. and Israel.
Securities offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA,
SIFMA.
Accounts carried by National Financial Services LLC.
Member NYSE/SIPC, a Fidelity Investments company.
His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered
at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.
Disclaimer: This document is a transcription and/or an educational article.
While it is believed to be current and accurate, divergence from the original is to be expected.
The original podcast can be heard at https://sites.google.com/site/goldsteinradioshows/.
All information on this website is purely information and should not be used as the
sole basis for making financial decisions.
The opinions rendered herein are those of the guests, and not necessarily those of Douglas
Goldstein, Profile Investment Services, Ltd., or Israel National News.
Readers should consult with a professional financial advisor before making any financial
decisions.
Please see the complete disclaimer at https://sites.google.com/site/goldsteinradioshows/.