Colorado is a hotbed of entrepreneurship, with a vibrant mix of startups creating everything from natural food brands to financial tech. So it’s been puzzling to see the state’s crowdfunding efforts take so long to gain traction. The Colorado Crowdfunding Act was passed in March 2015 and went into effect August 2015. It allows local businesses to raise up to $2 million from Colorado residents. Karl Dakin, an educator, small business advocate and expert in early stage capital, has been at the center of the efforts. He recently launched one of the state’s first intrastate crowdfunding portals, Invest Local Colorado, which is now hosting its first issuer. We talked to Karl about the Colorado crowdfunding scene and his plans to host 30 offerings in 2018.
Congratulations on launching Invest Local Colorado. What’s taken so long for things to get going?
It took us a little over two years to get our platform open. We worked with two white label platforms—both fell down. We talked to about 40 payment processing companies who could not do what we needed or charged prices that are too high. We ran into all kinds of obstacles—for example, the Colorado statute requires escrow agents to be a depository bank or credit union in the state, but none of the banks would do so. We overcame this obstacle by obtaining a waiver to use a non-bank escrow agent as long as the funds are held in a Colorado bank. That single solution took four and a half months after getting turned down by banks for over a year!
It’s been amazing how long it’s taken to get little things done. We’re still looking for a payment processing company that is affordable. It’s possible we may arrange for a bank to offer payment processing for free or at deeply discounted rates in order to get the escrow deposits. We’ll probably do more waivers and rules interpretations—we’re fortunate that our Commissioner has the ability and willingness to be highly discretionary to make things work. We have an ongoing dialogue with the Commissioner’s Office that’s almost weekly to make sure we’re not coloring outside the lines when we try something new.
Has Colorado adopted the new intrastate crowdfunding Rule 147A?
Yes, they did it by discretion of the Commissioner without need to go back to legislature for amendment of the Act.
What about the portal economics?
Under the JOBS Act, federal portals are allowed to charge a commission, and broker-dealers can take a success fee.
In Colorado, as a state portal, we’re required to charge a flat fee that must be paid up front by the issuer. We went to the Commissioner early in 2017 and obtained an opinion letter that allows us to charge a separate fee to investors as long as it’s not contingent upon making an investment. We established the Colorado Capital Club as a membership association and charge an annual fee. This allows us to monetize the cost of validating residency and setting up accounts. We ended up with two revenue streams that enable us to shift most of the cost of listing a capital campaign from the issuers to the investors.
We’ve managed to overcome most of the obstacles that we have faced. We now see our greatest challenge as a lack of public awareness. Successful completion of a number of investment crowdfunding campaigns will do more to accelerate public support than anything regulators can do through further deregulation.
Your first issuer is live, right?
Our first issuer is Paradox, a hemp farming and oil extraction startup. However, this capital campaign presented the additional challenge of finding a bank that will hold ‘hemp money’ in an escrow account. Most banks will not hold marijuana or hemp money. We were unable to find an affordable payment processing company to handle investment transactions. Only a couple of businesses were willing to provide services and they wanted 5% to 10% of the entire capital raise for simply moving money via ACH from one bank to another. We are also experiencing challenges with this campaign because the issuer did not develop their crowd before launching their campaign.
There are more companies that will be listing on our platform early this year. We’re working on a project for growing hops indoors using aquaponics in support of the craft brewing industry. We’re also talking to fashion companies, food businesses, coffee shops, real estate developers—a little bit of everything. We’re forecasting 30 listings in 2018 with an average raise of $500,000 and 1,000 investors each.
So there seems to be some pent up demand.
Our original forecasts were far higher. We originally forecast four times the number of capital campaigns. We adopted our more conservative projections after working for over two years to get our platform open. I think in five years we can get up to 10 to 20 deals a month, even with competition. There’s a lot of entrepreneurial activity in Colorado, yet banks are still handcuffed in lending and angel investors only invest in 2 out of every 100 companies they look at. This leaves a huge gap in the capital market for us to work with.
For crowdfunding to be widely adopted, it’s got to be positioned to target the ordinary person with a lower income. And it has to be bundled with a reward of some sort, so that the investor is getting a price discount on the issuer’s products or services, because the investment decision is based on saving money more than it is on making money.
Tell me more about your experience so far.
We’re finding that most entrepreneurs don’t understand raising money and are not prepared with a crowd of people ready to invest. To address this issue, we’ve launched the Build Your Own Crowd program. Businesses can ‘test the waters’ and gauge investor interest in a future offering. Participants in the program receive paid mentors, educational programs on crowd building, and templates they can use to build their fan base. If a business graduates from the program by recruiting 500 people to join the Colorado Capital Club—we will waive our standard listing fee of $5,000.
Because we’ve adopted a business model that serves both investor candidates and businesses raising money, we have monetized the cost of crowd building and can provide substantial support to both investors and issuers to develop needed skills.
That said, we’re continuously working to improve everything and set up infrastructure that takes advantage of this new capital industry—an admission that as much as we know, we have a lot to learn.
What about the investor side?
We’ve created an investor scorecard and workbook for members of our Colorado Capital Club on Investing in Main Street. We view every investor as unique. We show them how to develop a personalized approach to selecting those businesses that they will financially support based upon direct and indirect benefits that they may receive.
In terms of investment, we have the standard limitations on non-accredited investors— they can invest up to $5,000 into an offering. That’s not an issue for most people whose income and savings, if any, severely limit their ability to make an investment
Any other reflections on the state of crowdfunding?
Deals structured for accredited investors may not work for non-accredited investors—I view it as two almost distinctly different tribes of people that think and act differently. I believe that for investment crowdfunding to gather momentum, it needs to focus on ordinary people (non-accredited investors) financially supporting local businesses, social enterprises and community projects.
I think it’s going to happen. We’re facing a population of people that have been taught since birth that they are not qualified to make investment decisions and to outsource management of their investments to others. A few success stories about ordinary businesses raising money will raise awareness and accelerate adoption of investment crowdfunding.