Crowdfunding Platform NextSeed Merges with Collaboration Capital to Form Fintech Investment Firm

Investment crowdfunding platform NextSeed has merged with Collaboration Capital in a move to create a leading “technology-driven impact investment firm open to everyone.” In effect, the NextSeed merger with Collaboration creates a Fintech forward digital investment bank providing access to capital and access to opportunity for a broad-based investor base.

NextSeed, a FINRA regulated funding portal that recently received its broker-dealer license, has long been a leader in providing debt-based capital to small businesses while providing access to an interesting asset class to smaller investors. Collaboration Capital is an SEC-registered investment advisor. According to the company’s LinkedIn page, Collaboration is an advisor to “forward-looking families” focusing on the ESG and impact investing sector.

The strategic merger expects to further expand the combine companies mission to “democratize finance.”

[easy-tweet tweet=”The strategic merger of @NextSeed and Collaboration Capital expects to further expand the combined companies mission to democratize finance” template=”light”]

Both companies are based in Houston, Texas. NextSeed CEO and co-founder Youngro Lee will remain the CEO of NextSeed while becoming the CEO of the combined entity.

Lee, who previously specialized in international private equity at global law firms Cleary Gottlieb and Kirkland & Ellis, currently serves on the SEC Small Business Capital Formation Advisory Committee and also serves as the founding President of the Association of Online Investment
Platforms (AOIP).

Christopher Knapp, the founder and CEO of Collaboration, will remain as CEO of the firm.

Knapp previously co-founded and served as CEO of Chilton Capital Management after a long career at Brown Brothers Harriman & Co. He launched Collaboration Capital to build a new type of investment firm focused on impact/ESG investing for its clients.

Collaboration seeks to leverage traditional fundamental securities analysis that incorporates select ESG considerations to reduce the overall risk to investment portfolios, while developing portfolios consisting of companies that exhibit sustainable business practices.

According to a note from Nextseed, the combined firm also plans to launch a new asset management division to focus on:

(1) proprietary public ESG (environmental, social, governance) investment strategies developed by Collaboration Capital
and

(2) city-focused private investment funds concentrating in community-driven real estate, startups
and growth-oriented small businesses in select US metro areas.

While NextSeed has always catered to both accredited and non-accredited investors, the addition of the broker-dealer license has helped the platform to expand in other areas of the private markets.

Youngro Lee of NextSeed 3Lee commented on the merger news stating he has spent the last few years tirelessly building the technology and infrastructure to empower small, local investments at scale while navigating the complex regulatory requirements to ensure compliance.

“Our mission at NextSeed has been to connect businesses and individuals to build vibrant communities,” said Lee. “Now, by combining with a respected investment adviser such as Collaboration Capital that also believes in the power of the capital markets to affect positive change, we are beyond excited to create an entirely new type of investment firm that is strategically positioned to serve the investors and entrepreneurs of the future.”

Knapp explained that a founding tenet of their investment advisory practice at Collaboration is combining what they call the old and the new.

“For us the old – a term we use with the greatest of respect – is an emphasis on critical thought, primary research, fundamental security analysis, and taking the long view. The new is embracing change opportunistically and to invest diligently in where the world is going. Our combination with NextSeed marks a significant step forward in our longstanding commitment to democratize access to capital and opportunity. Significantly, it also facilitates our ability as advisors to deliver client portfolios that combine intensely global and hyper-local mandates.”

Association of Online Investment Platforms Visits Capitol Hill to Discuss Crowdfunding Exemptions & More with House & Senate Staffers

The Association of Online Investment Platforms (AOIP) visited both House and Senate staffers last week, along with a meeting at the US Department of Treasury. The goal of the trip was to review the status of current crowdfunding exemptions and what must be done to improve the emerging ecosystem of providing access to capital to promising young firms. The trip to Washington, DC involved AOIP founding platforms, advisors, and the Small Business and Entrepreneurship Council (SBE Council) – a  leading voice for entrepreneurs and small business.

The creation of AOIP was publicly announced in September of 2017. The Association seeks to boost trust, educate investors while advocating on behalf of the investment crowdfunding industry. Each of the founding platforms is a FINRA regulated funding portal and each platform is affiliated with a regulated broker-dealer. The founding platforms include: SeedInvest, Republic, NextSeed, and Microventures.

At the time of the announcement of the new Association, the founding members published a policy position paper addressing desired changes to existing securities law. Investment crowdfunding became law following the signing of the bipartisan JOBS Act of 2012. During the meetings at both the House and the Senate, AOIP members advocated for an increase in the funding cap of Regulation Crowdfunding or “Reg CF” (from the current $1.07 million to $10 million), as well as an update on investor limits, enabling special purpose vehicles (SPVs), and more. While much of the discussion centered on Reg CF, other securities exemptions, including Reg A+ and Reg D, were part of the conversation. The recommendations by AOIP were well received by staffers from both parties.

Founding AOIP Chair and founder and CEO of NextSeed Youngro Lee, commented on the meetings:

“As we continue to see more utilization and success of Regulation Crowdfunding, it is becoming clear that improving the rules will enable even more businesses and investors to benefit and create value for each other.  Many congressional leaders and regulators understand this principle, and are working hard to develop the proper rules while balancing appropriate protections.  Meeting with key stakeholders in our government provided us the opportunity to share our perspectives and insights, which we greatly appreciated.”

Karen Kerrigan, President and CEO of SBE Council and a long-time advocate for entrepreneurs, said the meetings were highly successful but more work was needed:

“Capitol hill staff and key policy leaders found the data shared by AOIP members, and the rationale for raising the funding cap and the need for other reforms, both intriguing and compelling. We are off to a solid start in advocating for changes that will improve regulated crowdfunding to make it a more viable option for entrepreneurs to raise the capital they need to launch and grow their businesses.”

During the day-long excursion on Capitol Hill, AOIP members and advisors participated in a pane over lunch held in the Capitol moderated by Andrew Dix, Crowded Media Group founder and CEO. Staffers were invited to pose questions to AOIP members as the Association introduced themselves as a leading voice for online capital formation and access to opportunity.

Doug Ellenoff, Managing Partner of the law firm of Ellenoff, Grossman & Schole and counsel to AOIP, noted that in an otherwise difficult political environment for agreement, not unlike when the original JOBS Act was passed overwhelmingly by both parties in 2012, reception for AOIP’s message to modify the now 3-year-old rules to improve the Regulation Crowdfunding rules was generally positive and constructive.

Maxwell Rich, Deputy General Counsel of Republic – a full-stack investment platform including digital assets, stated:

“As Regulation Crowdfunding has grown, matured and gained traction amongst the general public, the same trend has occurred on the regulatory, legislative and administrative fronts. The AOIP’s meetings with key legislative and administrative representatives this week, coupled with the Commission’s Harmonization Concept release, provides a strong signal that this novel offering exemption is on the upswing and may soon see progressive changes to its foundation, which should ensure continued growth.”

Ryan Feit, co-founder and CEO of SeedInvest – now part of leading digital asset platform Circle, has been around the industry since before the JOBS Act was signed into law. Feit said that their shared experience and empirical data will help sway legislators as it is hard to argue against facts:

“Seven years ago on Capitol Hill, our conversations regarding equity crowdfunding were very theoretical,” said Feit.  “It was great to return after years of experience, armed with actual hard data which proves that equity crowdfunding truly works.”

During the many meetings with Capitol Hill staffers, AOIP distributed the Association’s position paper and discussed data regarding capital raises to date. The Association also emphasized the fact that under Reg CF there has been no fraud to date, in contrast to what some observers predicted at the time the JOBS Act was signed into law.

AOIP plans to return to Washington, DC soon to continue the conversation with policymakers and work closely with Congressional members interested in supporting capital formation and access to opportunity for all Americans – regardless of location. AOIP also recognizes the importance of providing access to solid investment opportunities to smaller investors and not just the well-to-do.

As part of the mission of AOIP, a Code of Conduct has been published which sets a higher bar of conduct for member platforms. In the coming months, AOIP will be initiating outreach to other investment platforms interested in pursuing the outlined industry goals while fostering a sustainable ecosystem for the US crowdfunding market.

[Editors note: Crowded Media Group is the parent company of Crowdfund Insider.]

Association of Online Investment Platforms Issues Policy Paper Recommending Improvements to Crowdfunding Rules

The Association of Online Investment Platforms (AOIP) has published a series of policy recommendations encouraging Congress to act and improve the online capital formation marketplace by fixing existing flaws in crowdfunding rules.

The AOIP is a newer advocacy group formed in the last year. The founding members consist of several of the most prominent crowdfunding platforms in the US. Inaugural members include SeedInvest, Republic, Microventures, and NextSeed. The group hopes that, over time, other industry participants will join in their message of facilitating capital formation for promising early-stage firms and small businesses all across America, while providing solid investment opportunities not just for the rich, but everyone.

The AOIP’s mission is to build a sustainable online investment industry that democratizes finance for everyone.

[easy-tweet tweet=”The AOIP’s mission is to build a sustainable online investment industry that democratizes finance for everyone” template=”light”]

The group believes that this mission can only be fulfilled if each of the three constituent parties finds value and success in this industry. These three constituent parties are issuers, investors and, of course, platforms. All three must find a way to accomplish their goals. If one does not, in the long run, they will all fail.

The policy position paper comes at a time when the Securities and Exchange Commission (SEC) is in the midst of a regulatory review.

The SEC is seeking feedback on regulatory “harmonization” and how the capital formation ecosystem can be improved. It is the intent of AOIP to provide a direct comment to the SEC consultation but the position paper is a basis for what the Association hopes to accomplish.

Last week, the SEC issued a report on Reg CF specifically calling the number of offerings and total raised as being “relatively modest.” The SEC report recognized some of the shortcomings in the exemption.

AOIP Chair, Youngro Lee, who is CEO of NextSeed called the harmonization move by the SEC a very positive development for the future of small business capital formation laws.

“The original JOBS Act was instrumental in launching a new industry seeking to provide opportunities for small businesses and everyday investors, but there were real challenges presented by the legal limitations,” said Lee. “Thoughtful harmonization of the various confusing securities offering exemptions could truly accelerate the adoption of new capital formation laws for the benefit of everyone.”

Speaking specifically about the AOIP position paper, Lee said that over the past few years we have seen the early promise of Reg CF.  However, there is so much more that could be accomplished if the relevant laws and regulations could be improved further.

“We hope that the AOIP can help further the public dialogue and better inform legislators and regulators to make a positive difference in this industry.”

The AIOP Policy Position Paper is embedded below but a summary of the regulatory requests is as follows:

  • Increase the funding cap of Reg CF to at least $10 million for issuers.
  • The definition of an accredited investor must be fixed to recognize  investor sophistication
  • No investment limits should be placed on accredited investors under any private offering exemptions
  • Investment limits on non-accredited investors should be set as a per investment cap — not a cumulative cap
  • Investments under Reg CF should be calculated as a function of income OR net worth
  • Special Purpose Vehicles (SPVs) or Nominee structures must be allowed for issuers
  • Testing the waters should be added to Reg CF
  • Flexible compensation should be allowed for platforms as current restrictions make it extremely difficult to facilitate small offerings profitably
  • Regulated platforms should not be forced to bear an undue burden of issuer liability
  • Audited or reviewed financials must be removed for issuers raising less than $1 million
  • 12g requirements must be eased as companies with many shareholders should not be compelled to become reporting companies
  • Reporting requirements should reflect the type of security of context of the company and the offering
  • An Innovation Tax Exemption should be developed for Reg CF that benefits investors.

Kendrick Nguyen, an AOIP Director and CEO of Republic said his platform endorses the views set forth in the AOIP’s position paper.

“These proposals are natural next steps that legislators, regulators, and market participants can undertake to improve Regulation Crowdfunding, so that it can be a meaningful financing tool for small businesses and, in turn, enhance access to investment opportunities for investors across all income brackets.”

The true potential of [Reg CF] is still critically constrained by the arbitrarily low fundraising cap of $1 million per year and various burdensome requirements said AIOP Director and SeedInvest CEO Ryan Feit.

“The industry has now collected a considerable amount of data which illustrates that equity crowdfunding is working, so we ask that regulators and policymakers revisit the current set of suboptimal rules.”

Bill Clark, another AOIP Director and CEO of Microventures, said there have been some growing pains for the Reg CF sector.

“Some of the current regulations surrounding Reg CF can be prohibitive to smaller businesses; for example, the $1.07 million cap and no ability to manage your investors through a special purpose vehicle. By easing some of these rules, Reg CF may become a more attractive opportunity for more small businesses.”

Longtime crowdfunding advocate and securities attorney Doug Ellenoff called the Association’s practical suggestions extremely timely. An AOIP advisor, Ellenoff said that even if only a few of the AOIP’s recommendations are considered and adopted, Regulation Crowdfunding has the potential of becoming a much more useful pathway towards capital formation for entrepreneurs.

“Correspondingly, investors too would have greater access to more and better deals to the extent entrepreneurs have elected to avoid this private offering exemption up until now.”

Ellenoff said that like any new SEC exemption, the agency needed time to observe how this truly revolutionary approach to fundraising would workout, particularly given all of the voiced concerns of certain investor protection advocates and regulators.

As the look back analysis indicates, much of those concerns have not been borne out, explained Ellenoff.

“Nonetheless, the three years have been important to establish the legitimacy of this novel online fundraising approach in a controlled and measured manner.  Now though is the time to further experiment and adopt some of these much needed recommendations to broaden the acceptance of Regulation Crowdfunding.,” stated Ellenoff.

AOIP has already met with SEC staff and multiple offices on Capitol Hill. The Association sees a growing awareness of the importance of online capital formation and what it can mean for both issuers and investors. While the AOIP Policy Position Paper is a living document that is open to change over time, the group will be actively advocating on behalf of both issuers and investors as well as the success of the entire industry.

[easy-tweet tweet=”AOIP has already met with SEC staff & multiple offices on Capitol Hill. The AOIP sees a growing awareness of the importance of online capital formation & what it can mean for both issuers & investors” template=”light”]

Interested parties may contact the AOIP by emailing Youngro Lee at youngro@aoiplatforms.org.


[pdf-embedder url=”https://staging-crowdfundinsider.kinsta.cloud/wp-content/uploads/2019/06/AOIP-Policy-Position-Paper-June-2019.pdf” title=”AOIP Policy Position Paper (June 2019)”]


[Editors Note: Andrew Dix, CEO of Crowded Media Group, is founding Special Advisor to the AOIP.]

Concept Release: The Securities and Exchange Commission Asks for Feedback on Ways to Harmonize Securities Exemptions

The Securities and Exchange Commission is seeking comments on the current securities exemption structure. In a release yesterday, the SEC asked the public to provide feedback on “ways to simplify, harmonize, and improve the exempt offering framework to expand investment opportunities while maintaining appropriate investor protections and to promote capital formation.”

In the US, there is an alphabet soup of securities exemptions, or methods for companies to raise capital, while remaining compliant under the law. The rules have been created over decades with tweaks and additions that have added to what can only be described as a mish-mash of convoluted rules.

For ordinary people, the structure is Byzantine at best. The only true beneficiaries are lawyers steeped in the acronym-speak of securities law. Issuers pay dearly for this knowledge.

For online capital formation, this publication frequently references Reg D506c, Reg A+ and Reg CF, even while recognizing the fact that most people find this confusing as they simply want to raise capital while being compliant.

Part of the equation and SEC consultation is the definition of an “accredited investor.” Long in use, the current rule is wealth based demanding individuals that qualify to earn over $200,000 a year or have a net worth of more than $1 million. While simple to apply, this metric has failed in recognizing investor sophistication. While common sense dictates that wisdom is not measured by cash in the bank, the current regime has disenfranchised tens of millions of investors. As private markets have become a preferred route for capital formation, the net effect has been to block the masses from some of the most promising investment opportunities in history. Meanwhile, the rich get wealthier.

The SEC has long discussed their project to review securities exemption harmonization. The common-sense initiative was launched by SEC Chair Jay Clayton who commented on the request for public feedback:

“We are taking a critical look at our exemptions from registration to ensure that our multifaceted private offering framework works for investors and entrepreneurs alike, no matter where they are located in the United States. Input from startups, entrepreneurs, and investors who have first-hand experience with our framework will be key to our efforts to analyze and improve the complex system we have today.”

While it is not clear if there will be an actionable outcome, the project is long overdue.

[easy-tweet tweet=”We are taking a critical look at our exemptions from registration to ensure that our multifaceted private offering framework works for investors and entrepreneurs alike” template=”light”]

The concept release seeks input on whether changes should be made to improve the entire exemption ecosystem. The SEC is asking for feedback on the following topics:

  • The limitations on who can invest in certain exempt offerings, or the amount they can invest, provide an appropriate level of investor protection or pose an undue obstacle to capital formation or investor access to investment opportunities
  • The Commission should take steps to facilitate a company’s ability to transition from one offering to another or to a registered offering
  • The Commission should expand companies’ ability to raise capital through pooled investment funds
  • Retail investors should be allowed greater exposure to growth-stage companies through pooled investment funds such as interval funds and other closed-end funds
  • The Commission should revise its exemptions governing the secondary trading of securities initially issued in exempt offerings

Crowdfund Insider asked Doug Ellenoff, Managing Director of Ellenoff Grossman & Schole and longtime advocate of financial innovation for his thoughts on harmonization. Ellenoff credited the SEC staff for pursuing a more rational approach to private offerings exemptions:

“In the aftermath of the JOBS Act of 2012, the rules have only become more arcane and I believe more confusing for the public to navigate these regulatory financing options.  While I appreciate the need and history of each of the provisions, other than securities lawyers, what entrepreneur is able to properly process the range of currently available options (pros and cons; expenses etc.)–4(a)(2); 4(a)(6); Rule 504; Reg D– 506(b); 506(c); 3(a)(11), Rule 147 and Rule 147A; Reg A and Reg A+,” stated Ellenoff.

He said there is just no simple, common sense way to explain these provisions:

“I have spoken at hundreds of events to glazed over audiences trying to convey it in a digestible manner … and even seasoned securities lawyers are having trouble making sure their clients truly understand how to proceed legally and make the right judgment call,” Ellenoff stated. “So it’s timely in my judgment to clarify and meaningfully crowdsource responses to the SEC’s list of dozens of questions.  I encourage everyone’s participation.   This is a significant challenge but a magnificent chance to make a meaningful impact on capital formation for entrepreneurs to effect securities law policy.”

Maxwell Rich, a securities attorney and Chief Compliance Officer of leading crowdfunding platform Republic had this to say:

“Republic supports the Commission’s efforts in studying ways that the various registration exemptions used to raise capital in the United States can be simplified, harmonized and improved. While regulation crowdfunding is a nascent and emerging capital formation framework, its interactions with other exemptions such as Reg D and Reg A+ lack synergy and symmetry, which causes investor and issuer confusion.”

Rich said they hope this study will provide “common sense and actionable recommendations” for expanding investment and capital raising opportunities while maintaining appropriate investor protections.

Youngro Lee of NextSeed 3Youngro Lee, founder and CEO of NextSeed and Chair of the Association of Online Investment Platforms, added his voice of support for the SEC’s harmonization initiative.

“This is a very positive development for the future of small business capital formation laws.  The original JOBS Act was instrumental in launching a new industry seeking to provide opportunities for small businesses and everyday investors, but there were real challenges presented by the legal limitations.  Thoughtful harmonization of the various confusing securities offering exemptions could truly accelerate the adoption of new capital formation laws for the benefit of everyone.”

By requesting the public’s feedback on regulatory harmonization we can expect a diversity of opinion on the matter. But in the end, it is what the SEC does with the information. And whether they are willing to act, or alternatively, they feel a need to pass the buck over to Congress.

Regardless, it is painfully obvious action is needed.

The public comment period for the concept release will remain open for 90 days following publication of the release in the Federal Register.


FACT SHEET

CONCEPT RELEASE ON HARMONIZATION OF SECURITIES OFFERING EXEMPTIONS

The Commission issued a concept release that reviews the framework for exempt offerings, including several exemptions from registration under the Securities Act of 1933 that facilitate capital raising.  The concept release seeks comment on possible ways to simplify, harmonize, and improve this exempt offering framework to expand investment opportunities while maintaining appropriate investor protections and promote capital formation.

Background

Over the years, and particularly since the Jumpstart Our Business Startups Act of 2012, several exemptions from registration have been introduced, expanded, or otherwise revised.  As a result, the overall exempt offering framework has changed significantly.  Our capital markets would benefit from a comprehensive review of the design and scope of the Commission’s exempt offering framework.

Highlights

The concept release requests comment on:
The Exempt Offering Framework Whether the Commission’s exempt offering framework, as a whole, is consistent, accessible, and effective for both companies and investors or whether the Commission should consider changes to simplify, improve, or harmonize the exempt offering framework.
The Capital Raising Exemptions within the Framework Whether there should be any changes to improve, harmonize, or streamline any of the capital raising exemptions, specifically: the private placement exemption and Rule 506 of Regulation D, Regulation A, Rule 504 of Regulation D, the intrastate offering exemptions, and Regulation Crowdfunding.
Potential Gaps in the Framework Whether there may be gaps in the Commission’s framework that may make it difficult, especially for smaller companies, to rely on an exemption from registration to raise capital at key stages of their business cycle.
Investor Limitations Whether the limitations on who can invest in certain exempt offerings, or the amount they can invest, provide an appropriate level of investor protection (i.e., whether the current levels of investor protection are insufficient, appropriate, or excessive) or pose an undue obstacle to capital formation or investor access to investment opportunities, including a discussion of the persons and companies that fall within the “accredited investor” definition.
Integration Whether the Commission can and should do more to allow companies to transition from one exempt offering to another and, ultimately, to a registered public offering, if desired, without undue friction or delay.
Pooled Investment Funds Whether the Commission should take steps to facilitate capital formation in exempt offerings through pooled investment funds, including interval funds and other closed-end funds, and whether retail investors should be allowed greater exposure to growth-stage companies through pooled investment funds in light of the potential advantages and risks of investing through such funds.
Secondary Trading Whether the Commission should revise its rules governing exemptions for resales of securities to facilitate capital formation and to promote investor protection by improving secondary market liquidity.

What’s Next?

The Commission welcomes all feedback and encourages interested parties to submit comments on any or all topics of interest and to respond to one, multiple, or all questions asked in this release.

The concept release will be published on the Commission’s website and in the Federal Register.  The comment period will remain open for 90 days from publication in the Federal Register.


[pdf-embedder url=”https://staging-crowdfundinsider.kinsta.cloud/wp-content/uploads/2019/06/SEC-Concept-Release-Harmonization-June-2019-33-10649.pdf” title=”SEC Concept Release Harmonization June 2019 33-10649″]


Association for Online Investment Platforms & SBECouncil Visit US House & Senate plus SEC to Discuss Improvements to Crowdfunding Rules

The newly formed Association for Online Investment Platforms (AOIP) visited Washington, DC last week to discuss improvements for access to capital for small business and better opportunities for smaller investors. The trip was organized in partnership with the Small Business and Entrepreneurship Council (SBECouncil) – the leading advocacy group for small business.

The meetings were bipartisan in nature and scheduled with both House and the Senate offices, most of which are interested in supporting small business – the most vital sector of the economy when it comes to job creation and wealth formation. The group also visited with the new Advocate for Small Business Capital Formation at the Securities and Exchange Commission (SEC).

Representatives from several platforms participated as well as key AOIP advisors.

Youngro Lee, CEO of Nextseed and Chairman of AOIP, said  that one of their top priorities is to  open a direct line of communication with both legislators and regulators to share the on-the-ground results of Regulation Crowdfunding (Reg CF) directly from the perspective of the investment platforms that have actual experiences dealing with issuers and investors utilizing Reg CF on a daily basis.

Lee said with the incredible support and assistance from the SBE Council, they met with various legislative staff from both sides of the aisle and from both chambers to deliver the key message that Regulation Crowdfunding, despite certain significant (and in some instances arbitrary) limitations, is actually accomplishing its original goal to strengthen and support the US main street economy by opening up access to the private capital markets.

“Specifically, since JOBS Act Title III was finalized in May 2016, several hundreds of millions of dollars have been raised for and invested in small businesses and startups (via both equity and debt) by enabling tens of thousands of everyday investors and communities to invest in companies they believe in,” said Lee.

Karen Kerrigan, President and CEO of SBECouncil said currently there is significant bipartisan and bicameral interest in improving capital access for startups and small to mid-size businesses.

“That may not seem like the case with what the Congress is focused on currently, but every member is accountable to their constituents back home, and this is an issue they continually hear from entrepreneurs and business owners,” said Kerrigan

Kerrigan also sees the potential to provide improved access to high-quality investment for smaller investors.

“As you know there is a growing narrative on the disparity in wealth and access to opportunity. While the data and surveys continue to show that people are feeling good about the economy and job opportunities, lasting and long-term financial security continues to be a big issue that can be addressed by increasing opportunities for smaller and non-accredited investors to build wealth through high-quality investment opportunities,” Kerrigan stated.

Kerrigan said there are many who believe that “the system” is rigged against them, and providing greater access to quality investment opportunities through crowdfunding is a great way to democratize access to these opportunities to build wealth.

Lee said that the vast majority of legislators are extremely supportive and open to improving the ecosystem for online capital formation for small businesses beyond the traditional Wall Street or Silicon Valley-driven financial system … once they actually understand the real results of Regulation Crowdfunding and the various legal/regulatory limitations that have hampered its potential growth:

“This issue of improving small business capital formation ecosystem is non-political and non-partisan: legislators on both sides of the aisle expressed sincere interest and support for exploring how the current laws could be improved to help main street businesses and local communities,” Lee explained.The reality, unfortunately, is that it’s very difficult to pass any new laws in the current political climate, but we believe small business capital formation is a matter of long-term national economic growth and security such that this topic should transcend politics.”

Lee said that misunderstanding, misinformation, and unwarranted pessimism are the biggest hurdles in advocating for online capital formation.  Lee believes it’s simply human nature to be afraid of the unknown, and that’s completely understandable:

“The word “crowdfunding” also gets mixed up in so many different contexts that legislators often don’t understand the differences between unauthorized and illegal capital-raising activities, donation-based fundraising campaigns, or less-regulated investment platforms vs SEC/FINRA-regulated investment platforms that facilitate public securities offerings to non-accredited investors, as made possible via the JOBS Act.”

Lee believes that many of the negative stories coming out from the crypto universe – almost none of which was related to or undertaken pursuant to JOBS Act – also creates a lot of confusion and fear if one doesn’t actually understand the various legal distinctions.

According to Lee, another concern is the circumstances of US politics over the past several years and the constantly evolving faces in Congress.

“It’s been difficult for a clear and consistent message about Regulation Crowdfunding (and broadly speaking, public securities offerings to non-accredited investors) to be communicated between actual registered investment platforms and legislators.”

Kerrigan added that competing priorities in the Congress, and competing for floor time to advance legislation are significant challenges.

“The other hurdle is the general sluggishness of regulatory agencies and not being pushed – or held accountable – on advancing reforms,” Kerrigan said.

Lee noted that while some offerings and businesses may not have performed as well as they hoped for – typical for early-stage ventures – there has been virtually no instances of fraud in the process of any securities offerings launched via Reg CF.

Lee stated that every Funding Portal or Broker-Dealer facilitating Reg CF is regulated by SEC and FINRA, who have done a great job adhering to their own mandates under law and regulatory guidelines to try to facilitate better utilization of the relevant laws, while keeping the bad actors out of the system in the first place (the SEC/FINRA registration process itself is “no joke”).  As a result, hundreds of small businesses and startups have been able to get off the ground, and many of them have even started making payments back to their investors.

The group also had the chance to visit with the SEC Office of the Advocate for Small Business Capital Formation.  The concept of an Advocate for small business was first championed on the pages of this publication and was signed into law at the tail end of the Obama administration.

The very first Advocate, Martha Legg Miller, joined the SEC at the beginning of the year.

The group expressed their hope that the Advocate would become a champion of improving the regulatory environment for investment crowdfunding.

Lee said it is good to see the SEC proactively engaged on this topic of supporting small businesses and showing real interest in how regulations could potentially be improved to facilitate more positive capital market activities for local communities.   Lee noted that it’s only natural that the most amount of attention and resources are allocated to the largest and most complex type of offerings coming through Wall Street and Silicon Valley, but he feels that the new Office of Small Business Advocate was “genuinely interested in learning about our experiences to date outside of those traditional finance/tech hubs, and be willing to provide more support for small businesses and local communities as well.”

“[The] SEC’s leadership in this context will be increasingly important in the future, especially as FINRA is also largely relying on SEC guidance on how FINRA regulates its online investment platform members and Congress will be very interested in feedback from SEC and the Office of Small Business Advocate,” commented Lee. “From AOIP’s perspective, we believe it is important to be as transparent and collaborative as possible with regulators to provide them more helpful context and information that will ultimately help them in turn help the online capital formation industry over time.”

For the AOIP the work continues and this inaugural trip is predicted to be one of many as they advocate on behalf of online investment platforms to provide access to capital for promising young firms in an effective manner that also sees quality offerings delivered to investors.

Lee said that now connections have been established with policymakers to provide their perspective, they will continue to engage with legislators, regulators, and the public to increase awareness of best practices in online capital formation to help serve this industry.

“The legislative process is inherently difficult and complex, but we know there are still a lot of great public servants in Congress, and in some ways even more importantly, their hard-working staff, who truly do want to help everyday investors and small businesses succeed.   As an industry, we just have to keep doing our part and continue to innovate and provide good products and services to our communities, and ultimately, all of our work will speak for themselves,” shared Lee.

Kerrigan added that it is vitally important to “show up and continue to push.” Realistically, Congress is busy and policy traction takes perseverance and time:

“We will continue to identify ways to bring interested lawmakers together to champion this critical issue, and then appropriate vehicles to advance those reforms.”

AOIP: New Association Launched to Help Guide Investment Crowdfunding Industry

Association of Online Investment Platforms Seeks to Boost Trust, Educate Investors & Help Businesses in Need of Funding

The investment crowdfunding industry in the United States was launched following the signing of the JOBS Act of 2012. This bi-partisan legislation enabled online platforms to promote securities offerings in private firms in need of growth capital. This regulatory change heralded a new era of Fintech and opportunity – both for smaller firms in need of funding and investors previously boxed out of participating in some of the most exciting investment opportunities around.

In the past several years since investment crowdfunding became law, the industry has slowly matured and grown. Multiple online investment platforms now offer debt, equity and alternative securities in promising private firms to investors of all sizes and levels of sophistication. Today, a collective group of four of the most prominent online investment platforms have joined together to create a new representative association as the voice of this emerging industry.

The Association of Online Investment Platforms (AOIP) was created with the intent of educating both investors and issuing-firms on the opportunities available in investment crowdfunding. Simultaneously, the new group wants to establish a more cogent voice for the currently fragmented industry.

The AOIP will develop best practices for its members and the investment crowdfunding industry sector.  In steering the investment crowdfunding industry, the AOIP is committed to transparency and operational excellence because its members believe the industry depends on the long run experience of investors and issuing firms using investment crowdfunding.

Founding platforms include MicroVentures, NextSeed, Republic, and SeedInvest. Each of these platforms have committed to dedicate resources to help the industry grow. The Founding Directors include, Bill Clark (Microventures), Kendrick Nguyen (Republic) and Ryan Feit (SeedInvest). The group has selected Youngro Lee, CEO and founder of NextSeed, to be the AOIP’s inaugural Chairman / President.

Lee commented on the formation of the new Association:

“We believe it is important for the general public to better understand the evolving regulations that allow everyday Americans to invest online into private companies, as well as the online platforms that seek to facilitate these opportunities, in a fair and transparent manner. Ever since the passage of Regulation Crowdfunding there has been significant confusion and misunderstanding in the market about what online investment and ‘investment crowdfunding’ actually represents.”

“The AOIP was formed in an effort to improve communication and trust between the general public, private companies, online investment platforms, and our regulators and legislators so that collectively we can someday truly democratize access to private capital and investments,” added Lee.

In the US, investment crowdfunding falls under multiple federal exemptions, as well as many intrastate rules, that allow for online capital formation. While the opportunity for smaller firms to raise the funding they need to grow has never been better, the AOIP believes there is still a shortfall in awareness – an issue the Association intends to address.

The AOIP has enlisted the assistance of Doug Ellenoff, Managing Partner of the New York City based law firm Ellenoff Grossman & Schole LLP, as lead counsel.  Ellenoff, a prominent and well known figure in the investment crowdfunding industry, lauded the launch of the new group:

“Given the participation of many of the best known and experienced platform executives in the emerging investment crowdfunding industry, the AOIP will provide the necessary advocacy to advance their collective needs and concerns to the various constituents comprising the ecosystem of online capital formation, including the AOIP’s own membership, regulators and investors to enhance and continually improve the online investment experience overall.”

Launched today, the AOIP has debuted a website to educate the public about its mission and published a Code of Conduct for member firms to help establish a high degree of integrity for platforms in the industry.

Over the coming weeks, AOIP will be engaging with both regulators and policymakers to develop fair and transparent practices in the investment crowdfunding sector. Platforms are encouraged to reach out to the AOIP leadership as they welcome additional members.

Andrew Dix, founder and CEO of the Crowded Media Group and founding special advisor to AOIP, pointed to the importance of such a group for the development of the online investment industry and to spur positive growth.

“The US investment crowdfunding industry has needed a strong voice for quite some time. The industry is fortunate that these platforms have stepped up to provide the direct leadership necessary to achieve its potential and fuel robust growth.”

Prominent Group of Fintech Leaders Send Letter to SEC Chair Jay Clayton Demanding an Increase in Regulation Crowdfunding to $20 Million

In a letter forwarded to Securities and Exchange Commission (SEC) Chairman Jay Clayton, a group of Fintech leaders demanded the Commission to increase Regulation Crowdfunding (Reg CF) from the current $1.07 million max amount to $20 million – a substantial increase to current rules. The demand to increase Reg CF, an iteration of securities crowdfunding that was created by the JOBS Act of 2012, comes at a time when there is pressure for the US to maintain is position as a leader in investment crowdfunding the space. As pointed out by the signatories, both Germany and the UK have increased their crowdfunding threshold to €8 million (USD $9.4 million). The European Commission may move to make this a pan-European threshold with some EU insiders pushing for a higher amount.

The letter was sent under the letterhead of Crowdfund Capital Advisors (CCA), co-founded by Sherwood “Woodie” Neiss and Jason Best. The two founders were vital to the passage of the JOBS Act when President Obama signed the bill into law.

Neiss told Crowdfund Insider;

“Each of the parts of the JOBS Act served a niche well except for those companies that liked the idea of crowdfunding from Main Street investors without the costs of a Title IV (Regulation A+ offering). By increasing the maximum an issuer can raise to $20 million under Regulation Crowdfunding, we can now fill this void and allow a broader spectrum of small issuers into the marketplace. With 2 years of history and data under our belt, we can see that the system is working, capital is flowing, jobs are being created and money is being pumped into our economy. Rather than ask for another de minimus increase in the cap, let’s raise it to an amount that will really allow the industry to take off but in the same systematic and transparent way that benefits issuers, investors, and regulators.”

Neiss, in an email to Chair Clayton, said “the United States should not be left behind, but should make the bold move to increase the cap to $20 million.”

[easy-tweet tweet=”the United States should not be left behind, but should make the bold move to increase the cap to $20 million’ #RegCF #Crowdfunding” template=”light”]

The SEC has the ability to act and such a move would most likely have the support of much of Congress and most likely the Executive branch. The question is whether, or not, Chair Clayton will be willing to take such a bold move that will clearly support small business and capital formation – a policy area Clayton has consistently said is one of his top leadership priorities.

The letter to Chair Clayton was signed by the following crowdfunding industry leaders:

  • Sherwood Neiss – CCA
  • Doug Ellenoff – Ellenoff, Grossman & Schole
  • Youngro Lee – CEO of NextSeed
  • Tyler Gray – COO of Microventures
  • James Dowd – Managing Director North Capital
  • Kendrick Nguyen, CEO of Republic
  • Ryan Feit – CEO of SeedInvest
  • Karen Kerrigan – Small Business and Entrepreneurship Council (SBE Council)
  • Ron Miller – co-founder of StartEngine
  • Nick Tommarello – CEO of Wefunder

The letter is available for download here and is re-published below.


July 19, 2018

The Honorable Jay Clayton
Chairman
U.S. Securities and Exchange Commission 100 F Street, NE
Washington, DC 20549

Dear Chairman Clayton:

We compromise the largest online crowdfunding platforms and industry influencers in the United States. Given the positive early results since 2016 for both entrepreneurs and investors, we believe the time has come to raise the maximum amount an issuer can raise via Regulation Crowdfunding (Reg CF) from US$1M to US$20M. Please keep in mind that during the 2 years of this new exemption there has been no fraud and very limited regulatory issues.

Since the launch of Regulation Crowdfunding:

    • Over 1,000 companies have filed with the SEC to raise money on online platforms that are registered with FINRA to facilitate capital formation.
    • Over $137M has been committed to these issuers. 95% ($130.4M) of that capital was funded and invested into 715 companies (68.5% success rate).
    • These 715 companies are supporting 4,172 jobs and producing over $249M in revenue.
    • Issuers have filed in almost every state in the Union.
    • Issuers have been funded in 80 industries (according to Morningstar’s Global Equity Classification Structure).

The cap should be adjusted because:

    • There has been zero fraud, competent issuers have been able to raise serious capital from investors that believe in their products or services, and retail investors (for the first time in recent history) have a transparent, systematic way to back companies they believe in.
    • Successfully funded companies are supporting and creating valuable jobs and providing substantial economic activity in a broad range of locally important industries all around the United States.
    • The initial cap of US$1M was meant to be adjusted. Only once since the launch of Regulation Crowdfunding has this been adjusted and at the time only by $70,000. Such de minimus adjustments do not fully allow meritorious issuers to fully benefit from this new form of online finance nor expand the opportunity for issuers seeking to raise in excess of $1M.
    • The current $1M level is now far below what startups and SMEs need for seed stage capital. May 2018 data indicates that the median sized funding round for Angel or Seed stage companies in the US is $2M. This means that even for the smallest funding round the current limits do not allow an issuer to raise their entire round via Regulation Crowdfunding. This dramatically increases costs and time spent on raising capital by US businesses. This reduces the number of American innovators and job creators in the United States.
    • While the “funding gap” that Regulation Crowdfunding was meant to address is filling the void. The funding “opportunity” really comes from those small/medium firms that are seeking to raise up to $20M. Raising funds under $20M has become increasingly challenging as Venture Capital/Private Equity has moved upstream over the past decade. Raising the cap will allow issuers that wish to utilize this form of online finance the ability to raise in excess of $1M and tap their local investors without having to deal with the costly, time consuming process of either filing a full prospectus with the SEC or spending hundreds of thousands of dollars on a private offering.
    • Many companies forego Regulation Crowdfunding in favor of Reg D, 506(c), because of the low Reg CF limit. This has the effect of reduced disclosure to investors, since Form D provides less information even than Form C. In addition, ordinary investors are cut out of some of the most attractive deals that have already attracted institutional funding, which seems unfair and counter to one of the goals of Reg CF.
    • Both the United Kingdom and Germany have adjusted their caps to 8M EUR (US$9.4M). The United States should not be a follower but a leader

In a FINRA live chat with Robert Cook you said, “I continue to worry that retail investors do not have access to as broad a slice of our capital markets as I would like them to have. Said another way, you have private capital and public capital. Retail investors can really only participate in the public capital, and to the extent private capital has become so robust, you’ve shrunk opportunities. That bothers me a bit. If that trend continues, a much more select group is participating in the growth of the economy.”

We believe increasing the caps on Regulation Crowdfunding will address your concerns and invite more retail investors into a systematic, transparent part of the private capital markets that is creating jobs and providing valuable economic stimulus.

We kindly urge you to adjust the maximum amount an issuer may raise to $20M. Sincerely,

Sherwood Neiss, Crowdfund Capital Advisors
Doug Ellenoff, Ellenoff Grossman & Schole
Youngro Lee, CEO NextSeed
Tyler Gray, COO Microventures
James Dowd, Managing Director North Capital
Kendrick Nguyen, CEO Republic
Ryan Feit, CEO SeedInvest
Karen Kerrigan, Small Business and Entrepreneurship Council Ron Miller, CEO StartEngine
Nick Tommarello, CEO Wefunder

NextSeed is a Bank Loan Alternative Helping Entrepreneurs Raise the Money They Need to Succeed

NextSeed is one of a handful of FINRA approved Reg CF crowdfunding portals that is successfully providing access to growth capital for small businesses across the US. It is the only platform in operation that focuses solely on debt financing as most other platforms are more equity focused.

Empowered by the JOBS Act of 2012, NextSeed is a bank loan replacement for SMEs that need financing to operate and grow their business. These same businesses are too frequently denied access to money as banks simply do not want to shoulder the risk of lending to many SMEs. Due to crushing regulatory burdens, the banking industry has moved away from lending to small business. It simply costs to much – so why do it? Yet SMEs are the lifeblood of the economy. SMEs generate most all jobs and economic prosperity. Myopic policymakers have unduly harmed the economy with their law making zealotry but NextSeed is there to fill this funding gap.

By matching investors to viable small businesses, NextSeed has created value for both sides of the equation. The business is able to raise the money they need on a regulated platform and the investor can earn a solid risk adjusted return.  While still relatively small, NextSeed may be the future of small business lending as it disintermediates the dwindling number of community banks.

Youngro Lee is the founder and CEO of NextSeed. He swapped a promising career as a global private equity attorney to pursue a mission of helping small businesses to survive and thrive. But while NextSeed benefits from new investment crowdfunding laws, more could be done if policymakers improved the rules.

Recently, Crowdfund Insider caught up with Lee to learn about NextSeed’s perspective in providing online capital to small businesses across the US.


During a meeting of the SEC Small Business Capital Formation Forum in Texas, you said that businesses have difficulty accessing small bank loans. Can you share what you are seeing in the marketplace?

Youngro Lee: Obtaining a bank loan is generally a very difficult process for small businesses.  All things being equal, commercial bankers generally prefer to make larger business loans (e.g., $1 million+) considering that the amount of time and effort necessary for diligence and processing business loans is similar regardless of loan size, but larger loans generate larger fees.

As a result, small businesses looking for loans under $250,000 often have a difficult time getting such.  Banks’ heightened lending requirements and preferences also mean that certain industries and entrepreneurs are left behind.

Most businesses in food & beverage (or other consumer-facing retail businesses) don’t meet the criteria, younger entrepreneurs who might not have a long history of credit or significant personal assets can’t catch up, and even seasoned entrepreneurs trying to open a brand-new concept, may not be able to obtain traditional bank financing.  As a result, many entrepreneurs seek alternative financing.

Even more worrisome is that as more time passes, due to systemic and regulatory constraints, the banking industry will continue to move away from small business financing. Community banks will also continue to suffer and dwindle in numbers, while fewer banks open for business.  In my opinion, the irony of Dodd-Frank’s desire to reduce the influences of “too big to fail” banks is that these big banks have now become even bigger.  From these banks’ perspective, investing in small business lending is simply not an efficient allocation of their resources compared to other opportunities.  As a result, we’ve seen many non-bank entities entering this vacuum including many Fintech lending startups.  Nonetheless, new solutions aren’t necessarily the best solutions.

[clickToTweet tweet=”As more time passes, due to systemic and regulatory constraints, the banking industry will continue to move away from small business financing #Fintech” quote=”As more time passes, due to systemic and regulatory constraints, the banking industry will continue to move away from small business financing #Fintech”]

You mentioned the alternative for many small businesses is MCA (merchant cash advance) financing.  How big is this problem?

Youngro Lee: MCA is akin to payday lending for small businesses. The effective interest rates of MCA can become extremely high (in some cases over 100% APR), but the true costs are hard to understand since MCA costs are not expressed as an effective APR (they are not required to).  Many online and marketplace lenders that probably wouldn’t describe themselves as MCA lenders are also effectively offering similar financial products to potential business borrowers.  In many instances, there are also various layers of brokers who facilitate these transactions which can drive up costs tremendously.

I don’t necessarily think that MCA as a financial product is itself the main problem. Short-term financing that can be disbursed quickly can be very helpful in certain situations if it is utilized properly and strategically – e.g., when a business just needs to access a small amount of capital quickly to address a temporary gap in cash flow.

The bigger problem is that small businesses can’t easily identify and access the type of capital that would truly benefit their situation.  Many business owners don’t know where to go if they can’t get bank loans, and they often take the first financing option they see.  In this context, many MCA brokers and providers (and similar capital providers) are great at getting in front of small business owners with the promise of fast access to cash.  When that happens, it is difficult for small business owners to truly understand how much they are paying for this type of financing, which could come back later to hurt their businesses.

Can you quantify the difference for small businesses between raising debt capital on NextSeed vs seeking MCA or taking out loans from alternative lenders?

Youngro Lee: NextSeed debt crowdfunding is a brand new type of value-add and cost-effective fundraising mechanism to small businesses.  We do this by offering the opportunity to invest in private debt issued by small businesses to everyday investors in their community who are interested in investing locally.

The main difference between raising debt capital on NextSeed and obtaining alternative loans is that a NextSeed offering process is much more than a purely financial transaction, as issuers can directly engage their community on NextSeed through their offering.  We believe this active engagement process will help businesses build meaningful relationships with potential customers and ultimately improve their financial bottom line.

[clickToTweet tweet=”NextSeed debt #crowdfunding is a brand new type of value-add and cost-effective fundraising mechanism to small businesses #SMEs #Entrepreneurship” quote=”NextSeed debt #crowdfunding is a brand new type of value-add and cost-effective fundraising mechanism to small businesses #SMEs #Entrepreneurship”]

Cost-wise, we seek to facilitate financing at rates competitive to the market (and certainly a lot better than typical MCA terms).  This is possible because the typical MCA or alternative lender generally has to earn a certain rate of return via interest payments in order to pay for their own cost of capital, or to be able to sell their originated loans to institutional investors.  In contrast, NextSeed does not receive ongoing interest payments from the debt offerings completed on our platform.  We’re focused on how to optimize the cost of financing for small businesses at a level that the public is willing to invest in.  In other words, we are not incentivized to increase the interest rates for businesses just so that we can profit more, or to cover a spread on the internal cost of capital.

Would you like to see a new security class (perhaps under Reg CF) for debt? What do you envision?

Youngro Lee: Definitely.  In retrospect, many provisions and legal requirements under Reg CF (and Reg A for that matter) were clearly drafted with equity financing in mind, given the various investor protections and structural issues that are relevant in the context of equity transactions.

For example, there are extensive disclosure and reporting requirements that were intended to address the prospect of secondary trading which the SEC and FINRA care about deeply but have little relevance to debt financing or debt holders.

I think a more practical and simpler approach to regulating debt offerings under the JOBS Act would be very beneficial for both small businesses and non-accredited investors that would like to have easier access to private business debt in a transparent way.

How would this help small business? Why does this not exist now?

Youngro Lee: The vast majority of small businesses in the US are family-owned, lifestyle, cash flow businesses that support the day-to-day livelihoods of the owners and their employees.  From an investment perspective, most brick-and-mortar small businesses are not like tech startups that are trying to build scale and increase their enterprise value over time in order to provide an exit to their investors upon an acquisition. This means that as a practical matter, most local small businesses would likely be better off maintaining control & ownership of their business rather than having to sell equity to third parties, and instead be able to grow via debt financing that they can reasonably pay off over time.  In turn, investors in such debt products would benefit by receiving cash-on-cash returns in an alternative asset that they otherwise cannot access on their own.

I think the fact that we experience these fundamental economic problems today is simply a reflection of how society evolves rapidly, but laws and regulations can’t keep up on a real-time basis.  Historically, community banks have generally provided the necessary debt capital for small businesses and communities across America.  The world has changed dramatically over the past several decades as a result of globalization and incredible technology innovations, which naturally necessitate different types of financial services for businesses and individuals.  However, since the financial industry has always been heavily regulated (i.e., it’s never been easy to set up a bank), the industry as a whole has not had much incentives to adapt to the needs of the market or their customers.  As a result, one of the unintended consequences of all the legal and regulatory actions in the financial and banking industry (or lack thereof) over the past several decades has been that small businesses and small investors were left behind.

[clickToTweet tweet=”One of the unintended consequences of all the legal and regulatory actions in the financial and banking industry (or lack thereof) over the past several decades has been that small businesses and small investors were left behind #Fintech #Crowdfunding” quote=”One of the unintended consequences of all the legal and regulatory actions in the financial and banking industry (or lack thereof) over the past several decades has been that small businesses and small investors were left behind #Fintech #Crowdfunding”]

Nevertheless, for every action there’s always a reaction, and I am optimistic about the future precisely because of developments such as the JOBS Act.  In my opinion, the JOBS Act is the silver lining of the 2008-09 global financial crisis – as devastating as that period was for the finance and banking industry, the JOBS Act would have never been passed by Congress otherwise.  Because it did, new incentives and structures were created for the financial industry, entrepreneurs and other market participants.  Frankly, it’s the reason why companies like NextSeed exist and why we are trying so hard to develop new solutions to address these fundamental problems.

[clickToTweet tweet=”the JOBS Act is the silver lining of the 2008-09 global financial crisis – as devastating as that period was for the finance and banking industry, the JOBS Act would have never been passed by Congress otherwise #Crowdfunding” quote=”the JOBS Act is the silver lining of the 2008-09 global financial crisis – as devastating as that period was for the finance and banking industry, the JOBS Act would have never been passed by Congress otherwise #Crowdfunding”]

Can you share progress at NextSeed? And future expansion plans?

Youngro Lee: Every day is a challenge at a startup, but we at NextSeed are very optimistic about the future.  More and more small businesses and individuals are becoming familiar with the nuances of investment crowdfunding for debt capital, and when they do, they realize how it can help achieve their goals.   As more issuers raise funds via NextSeed to grow their businesses and their investors start to see payments, our members are seeing for themselves what it feels like to invest in their community.

In 2017, over $4 million was raised on our platform for 18 businesses, and 17 businesses that had previously raised on our Reg CF platform and our TX intrastate platform paid over $1 million back to their investors.

Regardless of anything else that may be happening around us, we continue to focus intensely on our mission – connecting businesses and individuals to build vibrant communities – and we believe that the public adoption of this new way of fundraising and investing will accelerate.

In the near term, we are refining our business processes to improve our services and product offerings.  At the same time, we’re also working on our long-term plan to establish NextSeed communities in various other markets and serve additional industries.

There is no doubt in our minds that in 10 years, small business financing and investing will look nothing like what it is today.  We just want to help guide this evolution in a way that will benefit as many people as possible along the way.

[clickToTweet tweet=”There is no doubt in our minds that in 10 years, small business financing and investing will look nothing like what it is today #Fintech” quote=”There is no doubt in our minds that in 10 years, small business financing and investing will look nothing like what it is today #Fintech”]

NextSeed Crowdfunding: Out of 21 Successful Reg CF Offers, 13 are Food Related

NextSeed, a Reg CF crowdfunding platform based in Houston, Texas, has successfully funded every issuer it has listed on its platform. As far as we know, there are only two other Reg CF platforms that can claim the 100% funded accomplishment today. NextSeed is a debt-based crowdfunding platform and does not list issuers raising capital by selling shares in their company. Founded by CEO Youngro Lee, NextSeed was recently described by Lee as a “community-driven small business fundraising platform utilizing crowdfunding laws.”

In a quick review of the crowdfunding platform there is a clear leaning in the type of campaigns that are being listed. NextSeed is ratcheting up the funding rounds in the Food and Beverage category.

To date, out of 21 successful crowdfunding rounds, 13 are food and beverage related. If you look at the amount raised, $2,982,000 has gone into food & beverage and $1,124,100 into everything else.

The successful food & beverage related Reg CF campaigns are as follows:

  • Porters – Restaurant ; raised $500,000
  • Gastrolounge – Evens & Dining; raised $440,800
  • Peli Peli – Restaurant; raised $358,000
  • The Brewers Table – Brewpub; raised $300,000
  • The Sugar Refinery – Bar and Restaurant; raised $273,800
  • Intero – Restaurant; raised $200,000
  • Cinco TacoBar – Restaurant; raised $200,000
  • Oakland Rec Club – Bar and Restaurant; raised$169,700
  • Rambler – Restaurant; raised $150,000
  • Vigilante Gaming Bar – Bar and Restaurant; raised $119,700
  • Kava Bar – Bar; raised $100,000
  • The Dumpling Brothers – Food Truck; raised $95,000
  • Jenna’s Asian Kitchen – Restaurant; raised $75,000

The non Food & Beverage related crowdfunding rounds are below:

  • The Native – Hostel; raised $396,500
  • The Co-Op HTX – Co-working space; raised $230,500
  • Healing Waters – Spa; raised $110,000
  • The Snoring Center – Health Care ; raised $100,000
  • Citizen Pilates – Fitness; raised $100,000
  • Smiley  Transportation – Transportation; raised $94,700
  • Red Diamond Yoga – Fitness; raised $67,400
  • Hair Revolution – Salon; raised $25,000

And what about currently live crowdfunding campaigns? The food and beverage theme continues with three live food and beverage crowdfunding offers:

  • Hoke Poke – Restaurant
  • Peli Peli – Restaurant (a repeat issuer)
  • Utopian Shift – Wine Store

The only non-food and beverage live offer is IgnitedStudios, an LA based co-working space.

A couple of observations. First, Reg CF clearly appeals to a consumer facing offer where investors have an affinity to, or interest in, the business. Naturally, food and beverage related issuers are a match. The next observation is that the offers on NextSeed started small but have progressively gotten larger. I wonder how soon they will start hitting the $1.07M ceiling?

As NextSeed continues to hone its service and expand its reach it will be interesting to see how this community driven funding platform evolves.

NextSeed: A Community-Driven Small Business Fundraising Platform Utilizing Crowdfunding Laws

NextSeed CEO Youngro Lee shares what is working & what is not under Reg CF.

NextSeed was the very first, crowdfunding portal to receive FINRA approval. But the investment crowdfunding platform was honing its skills and processes under the Texas intrastate crowdfunding exemption before Reg CF was actionable. To date, NextSeed has raised over $3.8 million between the two sets of rules but the platform has taken a decidedly different approach than other crowdfunding platforms. NextSeed only offers debt-based securities and has steered clear of equity and hybrids like the popular SAFEs.

Some industry followers believe that NextSeed is trailblazing the future of Reg CF – at least as the rules stand now. And so far, NextSeed has generated an admirable track record of solid success. One of the top Reg CF platforms, NextSeed boasts a 100% success rate in crowdfunded securities. Meanwhile investors are already experiencing the benefits of their investments by receiving interest payments or revenue sharing securities. While any investment carries intrinsic risk, some of the investment returns appear to be quite strong.

NextSeed was co-founded by CEO Youngro Lee, an attorney by training who worked at several prominent law firms including, Weil Gotshal, Kirkland & Ellis and Cleary Gottlieb. The former private equity lawyer with global experience, Lee shifted his focus to helping small companies access capital while creating a legion of fans and customers.

Recently, on the one year anniversary of Reg CF becoming actionable, Crowdfund Insider caught up with Lee to learn about his experience with investment crowdfunding.


Crowdfund Insider: After one year of crowdfunding under Reg CF has it matched your expectations?

Youngro Lee: Generally, yes — the aggregate volume of completed Reg CF offerings may not be a massive number in itself, but the overall construct of how Reg CF may be utilized is starting to become visible through real-life examples, both good and bad.

From our perspective, we never expected Reg CF to change the private fundraising/investment industry overnight — the financial markets are far too large and complex to be easily disrupted. As of now, Reg CF is simply another tool available for certain types of businesses and investors, and what will truly make the difference over the long-term is how market participants actually utilize and innovate upon these laws.

In this context, over the past year we focused on learning about the pros/cons of Reg CF and building our foundations for the future by seeking to establish the right precedents and develop the trust and confidence of our business and investor members.

Crowdfund Insider: What are some of the unexpected challenges you have encountered?

Youngro Lee: The biggest challenge has been trying to explain to the public what the new laws actually mean and how NextSeed is different from many other “crowdfunding platforms.”

When people hear “crowdfunding” many assume that means Kickstarter, where you’re donating money (or “purchasing” something that may or may not arrive), or else they think investment opportunities are only in “equity crowdfunding” to fund tech startups.

Many prominent media sources and influencers also make these broad assumptions, which exacerbate the general confusion. On NextSeed, so far we have only offered debt investments in local brick-and-mortar businesses which individuals can visit in person and experience it themselves.

In this context, we ourselves don’t view NextSeed as a pure “crowdfunding platform.”  Rather, NextSeed is a community-driven small business fundraising platform utilizing crowdfunding laws – our mission is to connect businesses and individuals to build vibrant communities. And we happen to feel very strongly that utilizing Reg CF to offer flexible debt financing to, and investment opportunities in, thriving local businesses can create better, supportive communities.

The other major challenge has been certain legal limitations of Reg CF – these rules were designed by the SEC as “one-size-fits-all” for all types of securities and do not address the advantages of debt securities.

For example, many of our investors have started to receive payments from their investments, and yet, the Reg CF investment limits do not take into account these returns (e.g., if your investment limit is $2,000, and if you have invested $2,000 and received $500 back by mid-year, you still cannot invest another dime until 12-months have passed, although your exposure to Reg CF investments is now just $1,500).

Crowdfund Insider: What are some of NextSeed’s biggest accomplishments in the past year?

Youngro Lee: We are very proud to play a part in helping our business members grow and create jobs in the process.  The Native hostel in Austin, the first ever successful Reg CF offering, has finished construction and will be opening very soon — the space looks amazing!  We’ve also expanded our presence beyond Texas and are now working with California businesses as well.

Our biggest accomplishment, however, is ultimately the success of businesses and investors on our platform.

So far, we’ve funded every business that we’ve listed, and over the past year we facilitated over $3 million in debt financing for our business members and over $400,000 in repayments to our investor members (including payments from our TX intrastate platform), with no defaults.

In addition, many of our business members have enjoyed increased successes following their NextSeed offerings by actively engaging with their investors and the NextSeed community generally.  We also have our first repeat issuer – the Peli Peli Group, who raised funds for their existing Houston restaurant (an amazing South African restaurant and one of the most popular venues in Houston) through a Texas intrastate offering last year, and is now pursuing a Reg CF offering on NextSeed to expand into Austin.

Crowdfund Insider: You are a debt only platform. Will you continue to focus solely on debt?

Youngro Lee: For now, we are focused on debt — especially debt offerings for growth-oriented local businesses that directly serve individual consumers (i.e., not B2B), because we feel this is where Reg CF can be particularly effective.

We specifically built our investment infrastructure so that we can facilitate monthly payments to our investor members, and we also facilitate Form 1099s at year-end, which is critical for investors who invest in debt securities as they receive interest income.  We have no plans to list equity offerings for startups (which the media primarily seems to focus on, especially on the negative outcomes), and there are several solid platforms out there that are doing a great job.

“Not Accepting Donations. Only Investments are Accepted, You’re Building Businesses Here!”

Overall, we feel there is a fundamental gap in debt financing for deserving small businesses that is simply not being met by traditional bank lenders, nor from “alternative” lenders (including marketplace lenders).  We receive quite a few funding requests from businesses who want to refinance their “alternative” loans received online or other MCA (merchant cash advance) products, which often exceed 50%-100% APR.  Someday, we hope we can help with refinancing as well. For now, we focus on businesses seeking growth capital.

Crowdfund Insider: What about other exemptions? Will you push into Reg A+, Reg D? Are you still using the Texas exemption?

Youngro Lee: Reg A+ and Reg D are both very intriguing options that we may explore in the future, especially as we work more with established and successful small businesses that are looking for larger amounts of capital, but still want to fundraise via crowdfunding to develop their community rather than pursue institutional capital.

We have also increasingly been approached by accredited and institutional investors who appreciate our mission and would themselves love to invest in their local businesses, but are limited in how much they can do so by Reg CF.

Since 2017, we have operated under Reg CF only and have not utilized the TX intrastate exemption for new offerings. With the new Rule 147(a) finalized recently, there remains some uncertainty about how the implementation would work at the state level, so we are keeping an eye out on these developments.

Crowdfund Insider: How are you sourcing qualified issuers? Is this a word of mouth process? What is the biggest challenge to onboard issuers?

Youngro Lee: We try to establish strong relationships in our own communities by being a genuinely helpful resource for our business contacts, as explaining Reg CF and NextSeed requires a serious educational process.

When we decide to proceed with an issuer, we provide a “white glove service” to support their needs and do not leave them to figure out everything on their own at their own expense.  We assist with the key steps of a campaign using what we’ve learned from own continuous experience — everything from campaign creation to general marketing plans, and we don’t charge additional “marketing fees” to do so (we only receive fees if the offering is successful).  We believe our firm-wide commitment to our issuers’ success is a key reason why we’ve successfully funded every issuer we’ve listed.  In turn, issuers who’ve worked with us advocate on our behalf to their contacts, which leads to other qualified issuers (see testimonials from Peli Peli (Houston) and Cinco TacoBar (SF Bay)).

Crowdfund Insider: There has been much discussion on what needs to be improved with Reg CF. What is at the top of your list?

Youngro Lee: We believe Reg CF could be significantly improved if, among other proposed changes, the investment limitations are modified in a more practical manner, rather than set as an arbitrary blanket threshold for all investors.  One way is to revise the limits to reflect “net exposure” to Reg CF investments.

Currently, the annual investment limitations under Reg CF apply to all types of businesses and all types of securities equally, which hampers an investor’s investment options. Savvy investors that understand the different risk profiles of debt and equity securities (e.g., a highly profitable restaurant providing a short-term note at 12% annual rate with monthly payments vs equity in a pre-revenue, idea-stage startup) are baffled that the cumulative investment limitation applies to both investments equally, and have been asking us to request for changes to the SEC.

One simple suggestion would be to set the investment limitation on a “per investment” basis, which is what various states (including TX, which has a $5,000 limit per investment and no limit for Accredited Investors) had established for their respective intrastate crowdfunding laws.

Crowdfund Insider: What does NextSeed have on its Roadmap over the coming months? Will you be adding new features? What about new services?

Youngro Lee: We are focused on building an active NextSeed community across the country that cares about investing local, one offering at a time.  There’s so much work ahead, but we’re going to do our best to support as many small businesses and individual investors as we can, for as long as we can — hopefully forever.  We are constantly seeking feedback from our members and staying on top of legal developments, and will actively be introducing new features, products and services to improve the overall user experience on NextSeed.

Crowdfund Insider: How do you see platform growth for 2017? What about over the next few years?

Youngro Lee: Despite the challenges to date, and whatever lies in the future, our growth continues to accelerate in terms of the number of offerings, volume, and investor member count.

We envision building vibrant communities in many locales and can’t wait to see the small business ecosystem grow as individual investors jumpstart new businesses, those businesses create jobs and repay their investors, and the communities then move forward together.

It’s difficult to predict what the future holds, but we sincerely believe that if we continue to focus on our mission, serve our business members well, and facilitate investment returns back to our investor members as we have been, our growth will naturally continue, along with the rest of the investment crowdfunding industry!

A Personal Perspective on Title III Investment Crowdfunding

US Capitol Green Light Go


“So why did you leave law to pursue crowdfunding?”

Over the past couple years, I’ve received this question more than any other.  Prior to starting NextSeed in 2014, I was a lawyer for over 7 years specializing in private equity fund formation and private investments.  I left my legal practice, and my amazingly talented colleagues left their established careers in law, finance, marketing and technology because we all believed that investment crowdfunding can fundamentally change how the private capital markets work for small businesses and small investors.

ben-franklin-money-large-face-100-dollarsWe came together to try to build our crowdfunding platform into a sustainable small business investment marketplace, where we could help connect businesses with people in their community to create opportunities for everyone.

The 28 million small businesses in the US drive the US economy, accounting for 54% of all US sales volume and creating 66% of all new US jobs since the 1970s. Despite serving as the backbone of every community and the literal grounds upon which people congregate and share their life stories, small business financing has largely been restricted to institutional or wealthy private investors.

On the flip side, 97% of all Americans are non-accredited investors who have had limited investment options to plan their future.  We believe investment crowdfunding can change this reality for the better.  In the first 90 days since Regulation Crowdfunding went live, there’s already been tremendous activity and interest across various Reg CF funding portals.  We’ve seen increasing demand on NextSeed as well – over the past year 11 businesses crowdfunded over $2 million in debt through our debt crowdfunding platforms (prior to launching our national funding portal, we had launched a Texas-only portal in 2015 pursuant to Texas intrastate crowdfunding rules), and substantial repayments have already been made back to the investors on our platforms.

During my legal career in private equity, I witnessed first-hand the immeasurable power of information and capital when PE firms were able to act upon them quickly.  The global PE industry has grown into a multi-trillion-dollar market today because it solved real problems for businesses (lack of access to capital) and investors (lack of access to sufficient investment opportunities) that weren’t being fully addressed by the public markets.

However, the PE industry was limited to Accredited Investors only and therefore the focus was on the capital needs of large or hyper growth-oriented companies that can satisfy the return expectations of large investors.  As a result, the vast majority of small businesses and small investors in the US are woefully underserved by our current financial system.

So when the JOBS Act was announced in April 2012, I was genuinely blown away.  Theoretically, small businesses could now leverage technology and the internet to raise capital directly from anyone, and small investors could access many more investment options than the stock market.

My ultimate eureka moment occurred in December 2012 when I had the opportunity to visit Bangladesh to see microfinancing in action.

By any measure, Bangladesh is a developing nation. Children walked barefoot on dirt roads and rusted sheet metal mounted on wooden posts passed for roofs on family homes.  And yet, I saw with my own eyes how an innovative alternative financing structure like microfinancing was creating opportunities for local entrepreneurs and growing their local economy, supported by other members in their community and the microfinancing lender who kept account of the borrower’s success by pen and paper.  Even without a sophisticated banking system or regulatory structure, community-based microfinancing has proven to be a viable mechanism to fuel local economic growth in many developing countries.

So if this simple system works in unsophisticated markets, just what might be possible in the US if community-based financing could be structured, regulated and administered using the latest technology? The JOBS Act legally provided the framework to test these ideas for the first time in US history, and we were determined to find out.

After carefully contemplating how the proposed JOBS Act provisions could be effectively utilized in practice, we started our platform with a focus on debt financing for Main Street small businesses (restaurants, cafes, hospitality businesses, etc.).  Many of these businesses are not typically looking to raise massive amounts of capital by selling equity, but need relatively small amounts to expand or establish their business.  For many of these small businesses, however, traditional financing has been getting more difficult to access in the aftermath of the Great Recession.

Old BankIronically, big banks have become even bigger (the top 6 banks now control over 67% of the entire US banking industry assets). Due to increased compliance and operational costs, many big banks are focusing on more profitable capital allocation from their balance sheets than making small business loans.  A multitude of alternative lenders and merchant cash advance services have swooped in to fill the void, sometimes causing more harm than good for the small businesses that utilize these services.

In this context, debt crowdfunding allows small businesses to obtain flexible financing while showcasing their business to the public and establishing trust with their investors. Even the individuals who invest amounts as small as $100 can become loyal customers and brand ambassadors for the local businesses they invest in as they develop an emotional connection with the businesses they support.  On NextSeed, businesses are also required to make monthly payments back to their investors, thereby reducing their overall risk profile (e.g., relative to equity investments that may not pay out until a liquidity event occurs years down the line).  In turn, based on member feedback we now understand that our members are drawn to small business investing because it offers a level of transparency and simplicity unavailable in most other investment options.

REGULATION CF TITLE IIIThe emerging investment crowdfunding industry is not without doubt.  Some have suggested that the industry will become rampant with fraudsters that take advantage of unsophisticated investors, but this ignores the fact that Funding Portals are regulated by the SEC and FINRA and are required to conduct extensive background checks on all issuers.  Others point to the inherent risks of early-stage investments in startups as evidence that investors will likely lose their entire investments, but this also ignores fundamental risk-reward calculations that any investors consider, as well as the wide universe of securities (e.g., small business debt).

Even the SEC implicitly assumed that all Reg CF offerings are equally risky, as it imposed an aggregate “one-size-fits-all” investment limit across all Reg CF investments regardless of the underlying securities or businesses (in contrast, many states with intrastate crowdfunding rules, including Texas, reject this general presumption and only set a maximum limit on a per-investment basis).  In reality, by design and by law, investment crowdfunding leverages technology and the power of the crowd to provide better oversight and diligence in the private markets than ever before possible.  Businesses seeking to crowdfund are legally required to provide very detailed information about their ownership and operations, there is an open Q&A forum for anyone to be able to ask questions, and the popularity of social media can quickly provide social validation for any offering (or not).

Progress in society is always incremental.

The current investment crowdfunding laws may not be perfect, but that’s ok.  Laws can and do evolve over time as they are tested, interpreted, and modified to reflect the reality they operate under.  We’re still in the earliest of days in this industry, but we are definitely seeing increased traction and demand from businesses and investors who want to become a part of this new financial system.

Ultimately, I believe Regulation Crowdfunding represents a revolutionary shift in the foundation of the US private capital markets that can and will create new opportunities for all of us.  Despite the challenges and obstacles ahead, let’s remind ourselves that the future is literally up to us – we have the power to make investment crowdfunding “mainstream” by participating and growing this industry until it becomes the norm.

NextSeed is but a single voice in this enormous moment, but we feel incredibly blessed to play a role.


Youngro LeeYoungro Lee, JD/LLM  is Chief Executive Officer of NextSeed, the first Title III approved crowdfunding platform in the United States. A former private equity funds lawyer in the U.S., Europe and Asia, Youngro helped clients raise over $25 billion in aggregate to pursue various strategies. Youngro previously practiced law at Weil Gotshal, Kirkland & Ellis and Cleary Gottlieb. He is a graduate of Cornell University and Cornell Law School.

NextSeed, a Debt Based Crowdfunding Platform, Generates Success with Intrastate Rules in Texas. Sees Potential in Reg CF

Texas FlagTexas is one of the 30 states that pushed forward with an intrastate crowdfunding exemption while the federal exemption of Title III of the JOBS Act remained in the doldrums. Since Title III or “Reg CF” have kicked off in mid-May, there has been some discussion as to how widely intrastate rules will be utilized. In a recent article on Crowdfund Insider, Senior Contributor Anthony Zeoli expressed his belief that intrastate rules may be a better option for small companies.  Texas has recently laid claim to being the most vibrant intrastate market having financed over $1.8 million in a bit over a year. Speaking at a Texas State Securities Board meeting, according to AustinInno, Texas Securities Commissioner John Morgan stated;

“I think Texas really is a leader in this area.”

Board member E. Wally Kinney was quoted saying;

“Ours is pretty much the model for the country right now. Our folks are really a leader in this.”

Morgan referenced 119 intrastate crowdfunding deals across the country (no source provided). Texas counted for 35 of these offerings.

NextSeed ApprovedThe leader in the TX pack happens to be NextSeed, a crowdfunding platform that has also moved into the Reg CF space. NextSeed, co-founded by a former private equity attorney, Youngro Lee is a bit different as they are only crowdfunding debt.  While many people focus on raising equity capital online, NextSeed realizes that many small businesses are in need of an alternative to bank loans.  Some investment crowdfunding advocates believe that over time, Reg CF will become mainly a debt based funding round.  NextSeed’s most recent successful Texas offer was for a $385,000 term loan for a top 5 Yelp/Tripadvisor restaurant in Houston.

Youngro LeeLee recently explained to Crowdfund Insider the NextSeed approach;

“We are focusing on debt crowdfunding for small businesses to help address two fundamental problems in the US economy.  First, for many small businesses it’s hard to get bank loans to cover all of their financing needs, but their remaining options are difficult and expensive.  Second, most people understand how small businesses generally operate and are very passionate about their local businesses, but they never had an easy way to invest in anything other than stocks and bonds of large corporations.  SMB debt crowdfunding allows these two problems to solve each other by connecting small businesses with small investors – a true democratization of finance.”

Lee also points to the fact that debt may be simpler, in some ways, than equity;

“In addition as a practical matter, when a business is selling debt there is generally no need to discuss complex issues such as shareholder rights or company valuation — so long as the business is generating enough revenue to cover its ongoing payment obligations, everybody wins.  In the context of Title III where many small investors probably had never invested in private businesses before, we wanted to facilitate offerings that are simple and easy to understand.”

Lee believes the growth of intrastate crowdfunding under the Texas exemption is indicative of the potential of Title III.  He does believe that Title III can be improved upon – one area he mentioned was the income-based investment limits.  In Texas, non-accredited investors are limited to $5000 per business per year.  Thus, investors may participate in multiple offers.  Under the Texas rules, there is no presumption that all companies are equally risky.

 

Youngro Lee of NextSeed Talks Crowdfunding Rules (Video)

Youngro LeeYoungro Lee, CEO and co-founder of NextSeed, visited with Bloomberg this week to talk about his platform launching under the Title III / Reg CF rules. Asked if the new rules will be a “game-changer”, Lee states, “I think it can be.”

NextSeed has been operating as an intrastate platform in Texas since last year. Texas is one of the many states that enacted rules to facilitate internet finance beyond the federal exemptions. NextSeed was the first  investment crowdfunding platform to launch under the state exemptions in 2015.

An interesting point is that NextSeed only offers debt securities. While many people think that crowdfunding is only about equity many industry insiders believe lending will become around 50% of the overall Reg CF industry.  And why is that? It is pretty tough to get a small business bank loan. NextSeed wants to “address one of the fundamental needs of the US economy.”

“Small businesses have a financing need. They can’t get bank loans and if you can’t get bank loans your options are frankly not good. What we are trying to do is connect the small businesses with people who are around that community who can believe in it, who can invest in it and build the community together.”

Watch the video below.

NextSeed CEO on Being First Approved Title III Crowdfunding Platform

Youngro LeeLast week Crowdfund Insider published an article on NextSeed, an investment crowdfunding platform that has been operating in Texas under the state exemption.  NextSeed is the first Reg CF/Title III funding portal to be approved by regulators and is thus ready to launch on May 16th, the first day Reg CF is allowable by law.  There are several other platforms that have filed with the SEC so expect more announcements soon.

When NextSeed launched its Texas operation, in 2015, the company stated;

“we are firm believers in how crowdfunding on NextSeed can change the landscape of small business financing – not just by offering a new and exciting alternative for businesses but also by empowering investors of all types to earn solid returns by lending to their local businesses”.

Reg CF Title IIISince last year, NextSeed has funded over $1 million for Texan SMEs while returning approximately $80,000 to investors (no defaults reported).  They intend on expanding this model across the United States.

NextSeed was co-founded by Youngro Lee, a highly experienced, former private equity attorney.  We recently reached out to Lee for some feedback on Title III crowdfunding. Lee told us;

“After more than 4 years since the initial passage of the JOBS Act, it’s very exciting that Title III is finally here. Despite the delays, we knew that sooner or later this day would come, and we therefore worked hard to get ready as best as we could.

 

 

Over the past year while we developed and operated an intrastate crowdfunding portal we learned a great deal about the needs of small business owners and non-accredited investors, and we’ll be applying our lessons at the national level. There are certainly many challenges ahead, but we believe Title III crowdfunding can truly become a powerful mechanism for both entrepreneurs and investors.”

Lee believes investment crowdfunding is not just a “temporary fad” that will go away. He sees it as a natural progression of capitalism and democracy. All made possible by technology.

 

NextSeed May Be “First” Approved Reg CF Crowdfunding Portal

NextSeed Approved

NextSeed, an investment crowdfunding platform based in Houston, Texas, may be the first funding portal approved by FINRA under Title III of the JOBS Act.  NextSeed reported they had received approval by FINRA on April 28th, the SEC filing is available here.  Last month, Crowdfund Insider reported that approximately 30 platforms were in the process of being approved to sell securities under Reg CF or retail crowdfunding.  NextSeed has been operating under the Texas intrastate exemption offering both term loans and revenue sharing investments for SMEs in Texas.

NextSeed states that its platform will sell debt securities from small businesses based in the US to the general public.  Under Reg CF, issuers may raise up to $1 million each year from both accredited and non-accredited investors.

NextSeed co-founder and CEO Youngro Lee said this coming May, when Title III becomes actionable, will be a “historic moment in the global finance industry;

“One of the biggest challenges that business owners face is the ability to get the money they need in order to grow. Utilizing debt crowdfunding, we help small businesses access a new source of capital while connecting with passionate fans. At the same time, we’re helping develop a new asset class for investors – the millions of American small businesses that form the backbone of the U.S. economy,” said Lee. “Ordinary investors previously had limited investment options, mostly driven by Wall Street. Everyone will soon have the opportunity to invest in hardworking small businesses across the country, so that we can all drive growth and create jobs, together.”

Youngro LeeLee is a former private equity attorney with experience in North America, Europe, and Asia.  Lee’s bio states he has worked on deals with aggregate value of over $25 billion.

NextSeed expects to charge an initial setup fee to issuing companies that offer securities through their crowdfunding platform. NextSeed may also charge a crowdfunding fee to issuers that successfully complete an offering.  Expect to see the first offers live on their site on May 16th.

 

 

NextSeed Becomes First Texas Crowdfunding Platform to Leverage Intrastate Rules

NextSeed just closed its first funding offer (for a small business) under Texas’ recently enacted investment crowdfunding rules. The offer was small, for a local business, but NextSeed founders believe that smaller issuers are an important part of the future of internet finance.

NextSeed states, “we are firm believers in how crowdfunding on NextSeed can change the landscape of small business financing – not just by offering a new and exciting alternative for businesses but also by empowering investors of all types to earn solid returns by lending to their local businesses”.

hr-i

Hair Revolution funded a $25,000 loan from 17 individuals.  Investors contributed from $100 to $5000.  The five year old company expects to use the new capital to expand product lines and offerings for customers.  Individuals who placed their money, and trust, in Hair Revolution, will benefit from an annualized rate of return of 7.69%, but also will know they have helped support a local business.

Small business create the vast majority of jobs. This is a fact. Yet traditional finance has fallen short in providing necessary capital to fund growth.  The state of Texas has embraced this truism and NextSeed is a product of the state’s policy.

Job Creation 2014 Small Business

Crowdfund Insider recently spoke with Youngro Lee, one of the three co-founders of NextSeed.  Youngro shared their collective vision of finance and what they believe is the future of crowdfunding.


 

 

Crowdfund Insider: How did you and your co-founders decided to launch a crowdfunding platform?

youngro lee picYoungro: I was a private equity funds lawyer for over 7 years, and during my career I was fortunate to work at some of the top private equity legal practices in the US, Europe and Asia.  During this time I learned from extremely talented private equity professionals about raising and investing private funds, and personally witnessed the incredible impact PE firms had simply by being able to aggregate capital from many different investors and act quickly on informational asymmetry.  What’s interesting is that while the term “crowdfunding” seems to be a recent phenomenon to the general public, the modern private equity industry had already perfected “crowdfunding” over the past 30 years, growing itself to a multi-trillion dollar industry globally.

Coming from the PE perspective, however, I also felt that rapidly evolving technology (especially with respect to the internet and social media) was going to seriously impact the global finance industry, because the increasingly cheap and convenient means of obtaining and spreading information online would make it much harder for professional investors (such as PE firms) to retain privileged access to deal flow and information.  When the JOBS Act passed in 2012 with provisions on non-accredited crowdfunding, I felt that this could potentially change everything about how private investments could, and would, be made in the future.

My co-founders (Abe Chu and Bobby Dunton) and I met in college and have been good friends for over 15 years, and I asked them for help because their professional careers in marketing and technology were the perfect complements to my legal/finance background.  We also had a common passion that we wanted to pursue through NextSeed, which was to be able to help everyday business owners and investors do better.  When it came time to make a final decision, we thought long and hard about what the future of crowdfunding could look like.  Ultimately, we decided that we had the skills and network to build a successful crowdfunding business, and so NextSeed was born.

Crowdfund Insider: Why Texas?Texas Flag

Youngro: From the beginning, we wanted to focus on non-accredited crowdfunding because (1) we believe the potential for growth and impact is exponentially greater in the non-accredited space based on sheer demographics (i.e., accredited Investors are less than 3% of the US population and, on a global basis, much smaller), and (2) we really wanted to be able to use our experiences and expertise to help regular people.  While implementation of Title III of the JOBS Act has been delayed, we knew that individual states were increasingly taking matters into their own hands.  When it became clear that Texas was also going to implement its own crowdfunding laws, we decided to start here due to the size and strength of the Texas economy (Texas is the 2nd largest state in the US with 4 of top 11 largest cities in US), as well as our personal and professional ties to Texas.

Crowdfund Insider: What is your opinion on the Texas crowdfunding rules?

Youngro: Like any new legal process, there’s a learning curve for all relevant parties.  While there are some elements that create challenges for the portals and issuers, other parts are practical and reasonable (especially compared to the proposed Title III rules), and overall the rules were sufficiently clear enough for us to build our business model around.  Perhaps most importantly, the Texas State Securities Board has been very thoughtful and helpful during this early stage of implementation, and we have developed a great working relationship with them to manage the inevitable uncertainty that arises from time to time.  Our goal is to help develop a sustainable and vibrant crowdfunding industry in Texas that could perhaps serve as a good example for other states that are considering their own crowdfunding rules and, of course, the SEC.

Crowdfund Insider: How will you source deals?

NextSeed LoansYoungro: Ultimately, we hope to establish our brand and credibility with the general public so that businesses will naturally consider NextSeed when they are looking for financing.  For now, we spend a lot of time on the ground talking to business owners and community leaders to help them understand what exactly crowdfunding is and how it can help them, not only by raising the capital they need at affordable prices, but also by engaging with their “lenders” (who are likely to be members of their community) in a way that is completely different from a traditional lending relationship.

In this very early stage, we are intensely focused on ensuring that lenders are repaid as promised so that the general public will eventually trust the quality of NextSeed offerings and our underwriting process.  We focus heavily on data analytics in our underwriting and risk-assessment process to quickly and efficiently vet businesses, and the terms of a NextSeed offering will reflect our evaluation of the related risk.  While we are confident in our underwriting model, until we develop a track record that people can trust, we are seeking exciting up-and-coming consumer-facing businesses who are just as excited as we are to be part of the crowdfunding movement.

Crowdfund Insider: Initially it appears you are only doing debt.  Why did you decide to commence with debt only?  Will you move into equity as well?

Youngro: While we believe there is tremendous potential in non-accredited crowdfunding, we also believe it will take time for the overall industry to mature and for most people to feel comfortable with the idea of purchasing private securities online.  Investing in equity is very complex and risky.  An equity deal can and should take more time for not only the investors to consider, but for the issuers and portals to prepare.  On NextSeed, we wanted to offer something simple and easy to understand for the general public – everyone generally understands what loans are, and most people know someone who runs a small business.

The Future of BankingSpecifically, we are focusing on small business lending because we believe there is a fundamental problem in the banking industry that can be effectively addressed via crowdfunding, including in many ways that even the leading P2P platforms cannot.  In the last 5 years following the global financial crisis, over 1400 small banks have disappeared (mostly community banks) and the big banks are bigger than ever – the top 6 US banks control 67% of all US banking assets.  This trend has led to two serious problems that affect all of us.  First, it’s now harder for small businesses to obtain small loans because big banks are focusing more on making larger loans to big businesses or on trading activities – as a result, small businesses are often forced to turn to alternative lenders that charge exorbitant rates. Second, our savings accounts return virtually nothing, but most of us don’t have access to quality investment opportunities.  In fact, big banks now have so much cash and can themselves borrow at such low rates that they literally don’t need more cash from us.  But you know who does? Small businesses.

Crowdfund Insider: Will you only offer intrastate deals?  Or will you do 506b/c too?  What about Reg A +? You seem interested in pushing your debt service into other states. Won’t you be competing with P2P lending platforms?

Youngro: We are currently focused in Texas only so that we can better understand our product fit and non-accredited crowdfunding generally, which is completely different than the accredited investor space.  Our advantage is that we can be 100% focused on becoming experts in the non-accredited space when most portals cannot even consider starting doing so.  If and when non-accredited crowdfunding becomes legalized in a workable and scalable manner in other states, we will consider those opportunities.

the crowd crowdfundingAs far as P2P lending platforms are considered, they are competition in the sense that all lenders are potentially competition to each other, but otherwise we view ourselves as complementary to P2P/marketplace lenders.  In any event, “peer-to-peer” lending is quickly becoming a misnomer at this point, as 80-90% of “lenders” on the major platforms are now institutional investors.  Certainly by leveraging sophisticated data collection and analysis technologies, marketplace lending platforms have been able to make quicker funding decisions and disbursements, while also drastically reducing diligence and other transactional costs.  NextSeed has developed its own proprietary technology and will leverage the latest developments in crowdfunding laws to further reduce transactional and legal costs compared to the existing P2P/marketplace platforms that either have to implement complicated bank intermediary structures or pre-arrange their own credit facilities at significant costs.  On NextSeed, lenders know exactly who they are lending to and how those funds are being used, because we focus on the local community first and foremost.  Our goal is to create a special connection between members of a local community, which is impossible to accomplish if the emphasis is solely on speed or financial costs and returns.

Lastly, business lending is a massive space – the success that the marketplace lending platforms have achieved so far is just the tip of the iceberg, as so much inefficiency remains in the banking and lending industry.  That’s why you are now seeing incredible interest in FinTech startups, and why Jamie Dimon warned “Silicon Valley is coming” in his latest annual shareholder letter (he forgot to mention Texas though).

Crowdfund Insider: Any thoughts on title III of the Jobs Act?

Crowdfunding Card Title III RegulationsYoungro: It’s obviously controversial, and perhaps rightly so given what’s at stake.  But sooner or later it has to be passed, in a workable and reasonable manner that is sufficiently clear for competent portals and issuers to be able to utilize.  Many critics of Title III focus on the same investor protection concerns that have been repeated ad nauseum going all the way back to the Great Depression, but the simple fact is that the world has changed since then, drastically.  Just because someone has less than $1 million or makes less than $200k does not mean he/she is unsophisticated, and just because someone has more than that does not mean he/she is sophisticated.  At this point in human history, where money can transfer ownership by the touch of a button on our smartphones, when we can learn instantly about what happens anywhere in the world, and when the world as we know it almost dissolved because “sophisticated” financial institutions who we entrusted with our money made terrible investment decisions, it’s almost nonsensical to claim that people who aren’t rich shouldn’t be able to even consider certain type of investments.

Moreover, crowdfunding is not just a temporary fad that will go away if the government refuses to deal with it – I believe crowdfunding is a natural progression of capitalism and democracy made possible through recent advances in technology.  If Title III is not passed soon, the US may not be able to claim any sort of leadership role in this critical aspect of future global finance, as we are already seeing many nations around the world (especially in Europe and increasingly so in Asia) actively embracing and implementing their own crowdfunding laws, not even looking to the US for guidance as they might have done in the past on finance-related matters.

Crowdfund Insider: How do you see this evolving over the next 5 to 10 years?

Crowdfunding Around the GlobeYoungro: Despite the current delays by the SEC, I believe non-accredited crowdfunding will become legalized and widespread over the next 5-10 years – not only in the US but across the world. Once that happens, the rules of global finance will begin to be altered in ways we simply cannot imagine today, perhaps not in the next 5-10 years but certainly in the next 10-20 years.  Crowdfunding platforms will naturally become the facilitators of capital flow, not unlike the role investment banks played in global finance over the past 30-40 years in connecting those who needed capital with those who had it.  Perhaps governments and investment banks will form their own crowdfunding platforms, and perhaps private equity firms will just become private equity managers that no longer need dedicated investment pools.  Nobody can predict what will happen exactly, but we at NextSeed are betting on one truth – the financial world we live in today will certainly not be the same tomorrow.