Serial Entrepreneur Club – EP77: Get the Right Funding for Your Startup

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You’re listening to The Serial Entrepreneur, Our Club Hour now podcast as well. You could listen to this on your favorite podcast channel. Uh, we are Startup Club, by the way, approaching a million members. We’re very excited about that. If you’re not already a member of Startup Club, feel free to click on that greenhouse just above.

and, uh, joined the club. Today we are talking about raising money for your startup. So if you’re in the audience, uh, and you’re thinking about raising money, we want to hear from you. It’s gonna be an exciting topic. I know this is a topic that Jenny Casson has talked a lot about on Clubhouse. She has a session on Clubhouse, and she does it every Tuesday at seven o’clock.

Is that right?

[00:01:00] Sorry, Uh, uh, seven o’clock Eastern. Yeah. Yeah. We, I you’re, you’re Pacific, right? Yeah. So I, so always, I I was thinking . Exactly. Easterners we think the same way. And you’re in Pacific, you think that way as well. But No, let me, let me tell you this. Uh, I’ve been through 25 years and about 10 different companies, and we’ve raised.

In so many different ways. Uh, and we’ve done it with venture capital. We’ve done two IPOs. We’ve done, uh, Regulation D, which is the, and we did a private placement memorandum. Uh, we did angel investing, we did government funding. Uh, so we’ve just sort of covered the gamut, but it, it can be very, very confusing.

And so we’re gonna try to take this apart today. We’re gonna try to understand what’s going on. In the world of raising money, I know we’re gonna be a little bit focused on the American side because we have Jenny here as well, and I know. [00:02:00] Uh, Jeff and I work for a company called pod.com, and I’m also invested in a company called Hip Optical.

And with these companies, we’re trying to, we are actually looking at raising money in 2023. I know the environment may not be the best right now, but we are looking to raise money and really understanding the nuances of it. You know, what is the risk associated with these types of investments? You know, are we.

Um, first in line, or are we last in line? You know, I’m, I’m, I’m involved in a company, Jenny, um, which raised 60 million in, um, venture capital and the owner. And, and one of the investors called me in a, a couple years ago to see if I could help turn the company around as board of director. And quite frankly, it’s, it’s, it’s, it’s a challenge.

Um, but the sad part about it is that the owner. Who spent 15 years of his life working and building this company has pretty much been wiped out. There’s almost, you know, maybe a [00:03:00] 1% chance the owner will ever get anything. And the person, he’s not even working for the company anymore, so he doesn’t even make a salary.

Well, our co-moderators are Michele and Jeff today. Michele would be great if, uh, you could set up the moderating, uh, for Jeff and myself and Jenny and we can get started here. I’m hoping you’re not having technical difficulties. I know you jumped into a start of the room. I’m good. Really? Yeah. Could you get, I’m trying to assign you as moderator just Yes.

All right. Awesome. So be, you know, as we kick it off, uh, or before we kick it off, if you’re in the audience again and you have a startup or you’re thinking of raising money, this is an unbelievable chance. For you to ask one of truly the best experts in, in that I know when it comes to raising money from a legal perspective.

Jenny, I think, I hope I didn’t confuse everybody right away with reggae, reg d.dot, dot, do.dot. I mean, can you just sort of give us a, a two minute primer [00:04:00] on, you know, starting with Angel investing, you know, down to. Um, I guess venture. I mean, I don’t think we’ll be talking about ipo, but, Wow. Two minutes.

Okay. Well, let me share my approach. Um, when I think about fundraising for a business especially from a legal perspective. So I think of it this way, there are two decisions that you need to make from a legal perspective. One is, what is it exactly that you’re offering to the investor? I know in the world of venture capital, when you’re raising money for a typical, you know, high growth tech startup, you really don’t have any say in that at all.

The investor that hands you the term sheet, usually they’re, they’re gonna tell you how they’re gonna invest in your company. But because I specialize in helping people raise money on their own terms, I think it’s very important for the entrepreneur to decide, you know, what is the best way for me to accept [00:05:00] investment from investors?

And that could be some type of a debt instrument revenue. Debt or regular debt. It could be equity, but maybe it’s a type of equity where your investors can get paid even if you don’t have an exit, maybe it’s some kind of a convertible instrument. There’s really an infinite number of types of legal relationships you can have with investors.

So, so that’s number one is figuring out what that’s gonna look like. And then number two, separate from that is what, um, securities law compliance strategy will you choose? And these are the laws. And these laws exist as far as I know, in every country and sometimes not even at the, both at the national and uh, state or provincial level as well in, I know in Canada and and the US there’s laws at both levels.

So you do have to be really careful about what you do when you’re looking for investors. You. People go on clubhouse every day and break the law and [00:06:00] talk about, Hey, I’m looking for funding for my business. That’s often illegal. Not that it’s always illegal, but you have to know the law and comply with the right law to be able to do that if you want to be able to do that.

So the legal compliance strategies that are available in the. There’s many, many, many. But um, the main ones are, um, a private offering that allows you to raise money from both accredited, meaning wealthy and unaccredited investors. That is possible. Um, And then there’s your kind of the more, um, well known way, which is a private offering that allows you to only raise money from accredited investors, which is, you know, wealthy investors.

There’s also, um, crowdfunding, which is, you know, now legal at the national level since 2016, which allows you to raise money from anyone in the country. And publicly advertise. And then there’s something [00:07:00] called Rule 5 0 6 C, which allows you to publicly advertise, but it has, But you have to limit your investors to just accredited investors.

And those are kind of the main categories. There’s lots of. You know, details within those. And then some others I’m not even mentioning cuz they’re very specialized. But, um, like for agricultural co-ops, for example, . But, um, and nonprofits also can raise money from investors and they have their own special exemptions.

So anyway, so those are kind of the two main decisions that you wanna make from a legal perspective. And sometimes people get confused and they. Well, you can raise money from in or you can do crowd funding, and that’s two different decisions into one pot. Crowdfunding is a legal compliance choice. And it says nothing about who your potential investors might be or what you’re offering saying, I’m raising money from angel investors.

Has nothing to do with your compliance choice. It has to do with who your investors are and [00:08:00] probably how they will be investing. So it’s just important to to understand those are two separate decisions. They’re related to each other cuz what you offer is going to be affected by how you offer it, but they are two separate decisions.

Wow. Wow. I think it’s, it’s, I think I’m more con confused now than I when we started, but No, no. I’m teasing. I’m teasing you a little bit here. I, I’m teasing, but there’s a lot of acronyms and numbers flying around and, um, you know, I, I, I understand that. Uh, let’s talk a little bit about Reg cf, Um, the, the Regulation Crowd fund.

How much money can you raise from that? And so what are the parameters around that? Raising money under Reg. Yeah, so regulation, crowd funding became legal in 2016, allowing, uh, you to make an offering to investors nationwide, which was not possible before. Before you had to do state by state compliance, which was very onerous.

Um, [00:09:00] So you can, you know, you have to list on a platform and these, there’s certain platforms that have gone through a compliance process to be able to be licensed, to be a place where you can list your offering. So you can’t just go out and do it yourself, you have to use a platform. And then, uh, you can raise up to 5 million, which just got increased recently from 1,700,000.

Um, The thing is though, that you do need to be aware of is that if you’re raising more than, and they just increased it. I, I don’t re it’s something like if you’re raising more than 124,000, they just increase these numbers for inflation. Um, , you have to have reviewed financials, um, by an independent cpa, and that costs a few thousand dollars we’ve found.

Um, and if you’re raising more than 1,000,700, a million, 70,000, you have to have audited financials, which is more expensive. So a [00:10:00] many people will start out with a raise of, you know that up to 124,000. Now you even. Still do have to have, um, financials prepared by a professional in compliance with generally accepted accounting principles.

So there’s definitely some onerous things required to, to use it, but it’s very worth it because once you complete the financials and then complete a whole other set of disclosures, you can post your offering up on one of these platforms and anyone in the country can. Sometimes there is a state filing required depending on where your, where you are and where your investors are.

But, um, that’s usually a fairly simple thing to do. Is that one or two years of audit? Do you know? You have to have two years, um, of financials. So it, but of course if you’re a newer company, you know, it would just be since inception. All right, very cool. So this, now if, if I’m doing a Kickstarter, like I got a product and I wanna put it on the [00:11:00] Kickstarter, I don’t need to file any of these kinds of documents, do I?

Exactly. So Kickstarter is not an investment crowd funding platform. It’s a, we call it rewards based or donation based. So that’s not a securities offering. It’s not regulated by securities law. So it’s much less onerous to do that type of an offering.

Okay, great. So we have Damien on on stage here. Damien, are you there? He’s our CFO for paw.com. We’ve got Jeff who’s a cmo.com, and I’m obviously a shareholder in paw.com as well. And so it’s an interesting case study because. You know, I think we’re ready. Like we’re, we’re about ready to pull the trigger.

Damien, what are, what are your thoughts? Or do you have any questions for Jenny right now? Um, no particular questions. Maybe if you can just expand a little bit on the differences between Reg CF and Reggae plus. Sure. So, um, regulation, crowd funding, um, It what, you know, you can raise up to 5 million and the [00:12:00] compliance process is fairly easy.

You just have to complete a whole bunch of disclosures, file them with the s e C, and then you’re good to go. Um, regulation A, So Regulation A has been around for a long time. For many years it was considered kind of a dead letter because you could only raise up to 5 million. And it is somewhat of an onerous process.

And then with the Jobs Act of 2012, um, they increased by quite a bit how much you could raise. So you can now raise up to 75 million. So it has be, there’s a revival of Reg A, and then reggae plus there’s reggae and reggae plus. Reggae plus it. You can raise more. Um, but you do have to have audited financials.

And under Reg A. It’s much more onerous. You do have to, um, file something with the s E C and then they’re gonna make comments on it, and you’re gonna go back and forth with the S E C until they’re satisfied with your disclosure document. And there, [00:13:00] there are state by state filings that you have to do, um, under Reggae Plus, they’re not as onerous, um, as they are under Reg A, but, It’s something you would probably do if you wanted to raise a significant amount of money, because the cost to do a Reggae Plus is probably in the range of about a hundred thousand dollars in legal and accounting fees.

Wow. And, and the Reg F is costs how much for Reg cf? Roughly, you know, that so depends, you know, it depends on the complexity of what you wanna offer. Um, it depends on how good a job you wanna do on your form C, you know, disclosures, but, you know, I would say 10 to 25,000 maybe. Okay. I have one more question, Michele.

I know I’m being a question hog. Um, but, uh, so, so certain we, uh, we, we, we do a reggae plus for. Could we, uh, we have a million customers. Are we allowed to email those customers and tell them we’re [00:14:00] raising money through this platform, using regulation A plus? Are we allowed to solicit that boldly? Yes. Yes.

That’s one of the great things about Reggae Plus is you can publicly advertise, but then if you get like a thousand shareholders, what’s gonna, How do people trade them? How do they, where’s, I don’t understand. It’s almost like you’re a public company, but you’re not. Yeah. Yeah. It’s um, those, Oh, go ahead.

Sorry. I was gonna ask, but you, you can advertise, but those customers would still have to be, um, qualified, right? They No, no, no. They don’t. Nope. They do not have to be accredited. Anyone can invest under reggae. Yeah. Same thing with regulation. Crowd funding. Yeah. Crowd funding. I knew that was the case. I didn’t know that was the case for Reggae Plus as well.

Okay. Yeah, if you don’t want unaccredited investors, you can, There’s a much easier pathway for you, which is rule 5 0 6. Um, in fact, with Rule 5 0 6 C, you can publicly [00:15:00] advertise and you could start doing that right now. Uh, but you would have to make sure all your investors are accredited if you wanna include everyone and not have a test of wealth and income.

You could do Reggae Plus and raise up to 75 million publicly advertise, and anyone can invest. But in terms of having that large enough, first of all, let’s keep in mind that you can offer any type of security you want. You don’t have to offer equity. So that’s one thing to keep in mind. Your investors may not be getting equity.

That would be a choice that you would make. Second of all, um, if the, if you do wanna offer equity, um, It is true that you could end up with a lot of equity investors, but that’s not necessarily a bad thing. I mean, there’s many, many companies out there that have hundreds and hundreds of equity holders. Um, And they, you know, they’re, they’re just fine.

Um, there is this, sometimes people will go ahead and set up [00:16:00] a special purpose vehicle to have all the smaller investors invest in that vehicle, and then the vehicle itself is the investor in the company. So that’s, that’s another option. It adds a layer of complexity, but you can certainly do that too.

Now I did that with Moon Pay Michele. Wow. There’s so many questions that are flooding into my head. So Jenny, you just mentioned how you could do a special vehicle. Like if you do one of these offerings, can you limit what any particular in faster can? Come, you know, invest with I, I mean, like, could you just make, for example, every, you know, share is cost.

I’m gonna make this up $20,000 and you can’t own more than three shares per person. Are you allowed to design your program in such ways? Is that to kind of Yeah, manage. . Yes, Yes, yes. Okay. Absolutely. You can do [00:17:00] whatever you want. I mean, you probably wouldn’t do that because you probably would wanna make it accessible to people who could maybe invest, who couldn’t invest 20,000, you know?

But you can do whatever you want. You can price your shares however you want. , you can have caps on how much, how many shares that anyone can own. It’s, there’s so much flexibility in corporate law, . Right. Which is not surprising given the people who, uh, control our legislators. Right. So, and then can benefit from that

Absolutely. So it’s, you can get as creative as you want. Yeah. But I think the lesson here is don’t do it to your own demise. That such that it’s so overly complex to manage or communicate. Right. Or to untie, so to speak. Exactly. I mean there’s always a tension between keeping things simple but also designing it for your particular situation.

A lot of people really wanna, they say, Oh, I’m gonna just use a [00:18:00] safe, you know, this has become so popular. A simple agreement for future equity, cuz they’re like, I wanna just keep it super simple. I don’t wanna pay a lawyer , but a safe has a lot. Implications to it that may not fit for you. So, um, it’s probably worth it given that the way that the way you bring on investors is gonna have a huge effect on your company for like, maybe, you know, 10 or more years.

It’s probably worthwhile to take some time to think through what exactly you wanna do and not use off the shelf document. Right. And then one other question as it pertains to counsel. Um, so for example, we’re in Florida, does this mean that we have to use a Florida Bar attorney? Like what, what are the regulations on these things?

It’s, it’s, it’s unclear to me. ? Yeah, good question. I mean, every state is a little bit different in terms of their rules of practice , but, [00:19:00] um, I have clients all over the country. Hopefully the state of, I know the state of Florida is a little on the stricter side. Hopefully they won’t come after me when they hear this, but, um, I, the securities law and corporate law are very much kind.

There’s a lot of federal aspects to it and also a lot of aspects to it that are almost identical from state to state. Plus, you know, a lot of companies in Florida are formed under Delaware law, Right. So, um, or maybe some other state law. So generally speaking, I would say you do not have to have a lawyer that’s licensed in the state where you’re located.

That’s very good to know. Thank you. Yes, you can hire me even though I’m not barred for it. Excellent. , that’s useful. And uh, so everybody always focuses on venture capital. You know, I know this is a, a decision based on a company’s, you know, personal, but it seems like you, you know, venture capital, you know, you do the deal, you [00:20:00] win the lottery, you’re a millionaire.

Or, or even me, billionaire, they do, you know, you lose the money, they do a Netflix story and next, you know, that’s how it flips to role. Right? And then you get the biggest check in history , and then you still get a big check at the end of the day talking about Mr. Newman. Of course. Right. Um, but uh, you know, so tell me about like, from a legal perspective, I don’t know if it’s more of a opinions or legal perspective around venture capital.

Like what, when is the right time to do venture capital? Yeah, so I think there’s so much confusion out there about venture capital. I think a lot of people think that venture capital is kind of the only way that a, a startup can get funded. And so peop, sometimes you’ll hear people say either you’re venture backable or you’re a lifestyle company, which means you can’t get funding and you have to bootstrap.

And this is so not true, . So, um, venture capital is a very specific type of funding designed for a very specific [00:21:00] type of situation. It came about, you know, in the fifties and sixties when, you know, the kind of technology computer industry was taking off. And the purpose of it is to fund very high growth companies that have the intention of dominating a market.

And it’s u it was, it’s definitely used in the technology space. It’s also being used somewhat in the, um, consumer package, good space. Um, but it’s not a fit for 99.9% of companies because most companies are not trying to be the next Apple, Google, Facebook, whatever. And don’t, you know, and maybe either don’t wanna be or couldn’t be because that’s just not the type of company they are.

And that doesn’t mean you can’t get funded. It just means you should not pursue venture capital style funding cuz it’s not a fit for you. And this can be very confusing because there people sometimes say, Oh, well I’ll just go for angel investors then. But the thing is, most angel investors, active angel [00:22:00] investors are part of the venture capital ecosystem.

So if you go for angel. You’re pretty much going for venture capital like that. It’s the same model. So if you’re not a fit for venture capital or you don’t want venture capital because it can be very, uh, destructive to your company, you can lose control, you know, you can get diluted down to nothing, et cetera, then there’s still a lot of other choices.

But most people think that it’s either vc, bootstrap or maybe get a bank loan. So you talked about dilution. Um, this idea of liquidation preference. Does, I know it exists with venture capital. It seems like every venture capitalist deal looks exactly the same. I, I, you know, I think they have the same paperwork.

Oh, yeah. It’s pretty much standardized. You can see it online. There’s a, a website for the National Venture Capital Association. All the doc legal documents are right there for anyone to see. There’s no mystery to it. And almost everyone has this concept of liquidation preference, where they get the prior rights, [00:23:00] you know, when mm-hmm.

when, if the company sells down the road, which is similar to the situation of the company I’m working in, where the entrepreneur spent 15 years and it’s losing the company and then his chance of recovery is, is almost 0%. Yeah. It’s very common. Is that, But is that liquidation preference? I know I’m involved.

I’ve invested in our crowd. They seem to have similar rules for raising money as well. Is it similar when you do a Reggae Plus or you do a Reg CF that you would give liquidation preference to shareholders? Yeah. Is that common or not common? And, And I’ve done the follow up to that is what platforms.

Could we use P? We wanted to do it without liquidation preference, right? So when you are doing crowd funding, or you know, offering the investment opportunity to people who are not VCs or on the VC model, it’s completely up to you to offer whatever you want and design it specifically for your particular situation.

So it would be up to you to decide whether to offer a liquidation preference at all [00:24:00] and. If so, the details of the liquidation preference, and you can, that that can be done on any platform. There’s no platform that allows you to offer any kind of security that’s gonna govern the, you know, is gonna tell you whether or not to offer a liquidation preference.

So, It’s just a matter of deciding, you know, do we want to offer one or not? I oftentimes, the way I draft my documents is I don’t think liquidation preferences are necessarily bad if the company sells the people who put in a ton of money. I don’t think it’s unfair to say they should get first dibs on at least a one x back.

So, The first money goes to them to at least make them whole, right? But after that, then what happens? , that’s kind of the, where the devil is in the details because the one x liquidation preference is pretty standard for VC deals. But then what happens? What happens to what’s left over after that? Does it, [00:25:00] Does it then get divided up?

Does, does the VCs get like a second bite of the Apple where they also get a big ch chunk of what’s, you know, what’s available after that? And that’s where founders like end up with nothing. So the way I draft my DOC documents is I will, it will put in a one x liquidation preference, but the people who get money after that are the founders.

Yeah. So, so it should be set up with the, the one x or. Their percentage, whichever is greater. Right. And then not that they get the one X and then they also get their equity percentage of the remainder, which sometimes they try to do. Correct. Yeah. I mean there’s all kinds of different ways to set it up, but I, the way I like to do it is I say one X to the investors, one x to the founders at on the same.

Like at the same valuation as the investors. And then if there’s anything left over that everyone shares based on their percentage ownership. [00:26:00] Now, a lot of, you know, VCs would laugh in your face if you told them you wanted that, but , But you know, if you have the right investors, They’re fine with it, especially if your whole model of your business doesn’t necessarily depend on an exit for investors to get paid.

Cuz a lot of my clients are like, You know what? I’m not really shooting for a big exit. I may someday have an exit, but I’m shooting to become a profitable company and when I’m profitable, I’m gonna be paying out dividends to my investors. So the investors start getting paid much more quickly. And they don’t care as much about your exit because they’re getting money in a different way.

It just seems unfair though, that these investors come in, they get, they get their money, guaranteed you don’t, and um, You know, the only scenario you get your money in is if there’s a big success. If there’s sort of a stagnant, you know, if the valuation is not, you know, sort of a medium success and you’re issuing dividends, but you’re [00:27:00] not able to, you know, get the valuation above that one x, you walk with nothing, it seems like they’re not taking the risk.

You’re putting the money in, but not taking the risk. Yeah, and it’s completely up to you to design that however you want to. Um, and if you have a good argument as to why it’s fair and why they will get a reasonable return on their investment. In addition to all the other benefits of investing in your company, they.

People will say yes to that, they won’t be VCs. But there, there’s, guess what, uh, 99.7% of the population is not a vc. , you know, is not part of the VC ecosystem, so that’s fine. You don’t need to get a Yes from a vc. Yeah. And there’s plenty of other people out there, and maybe it depends on the company. Like for instance, pod.com, you know, it, it, it’s been now four, four years in a row, one of the fastest growing companies in the United States.

You know, we’ve got, um, Six, seven years invested in it. It’s doing [00:28:00] extremely well. Why do we need to offer a liquidation preference when we raise money for pot.com? Right? But if it’s a new startup and you know, it’s clubhouse, for instance, I totally understand why Clubhouse raised a lot of VC money at the beginning.

Um, totally get it. They had to move to market quickly, and I do know that that is the benefit of VC capital. It’s smart money moving quickly if you need a lot of. And Clubhouse, when they first launched, they needed a lot of money, so they had to move quickly cuz they were up against, uh, Meta Facebook and they’re up against Twitter and they’re up against Spotify.

They had a lot of challenges. I know that we did venture capital at Hostopia when we were launching a hosting platform in 2000, and that was strategic as well. And because it was strategic, we were able to benefit from. The business that was generated from actually doing the deal, there were other benefits.

So it, it, it really depends, I guess, on the type of company and the maturity of the company and et cetera, et cetera. Right. And [00:29:00] also your plans of how you’re gonna grow. There’s, there’s this whole movement, um, There’s this organization called the Tugboat Institute, which, um, is a movement of evergreen companies.

That these are companies that never sell, um, people that start a company and it grows and it becomes incredibly successful. But they’re still owned by like the original founders. And, um, their investors love them because they’re getting beautiful fat dividend checks every year. . So in that case, liquidation preferences, doesn’t matter cuz they have no intention to sell.

So, You don’t have to sell your company for investors to get paid. There’s many ways for investors to get paid. But let me, let me push back a little bit there, because I do know that when you do a VC deal, typically there’s a time limit. Oh yeah. They’re not correct. Six years of seven years. Okay. So yeah, so we’re not talking about the concept of liquidation preference.

You never sell. We’re talking about, Yeah, that’s a BC specific. Thing. They generally have these time periods where you have to sell by a certain date or that’s [00:30:00] part of the VC model. The VC model is if for you to be a success, you have to have a big exit, ideally within five to seven years, because what the promise that they’ve made to their, their investors, the limited partners that invest in the VC fund, is that you’re going to get paid out by the year 10.

And you’re gonna make like a huge multiple on your original investment so that they have to push you to do that. And that’s the goal. But if you don’t have VCs investing, you don’t have to do that. along along similar lines, Jenny, just a question. I experienced this once with a company that I was involved with where they had given one of the principal investors, also a VC fund.

Not only did they have, um, liquidation preference, but they had the right to approve. The sale of the company if the offer was below a certain amount, so they had a threshold that, Yep, anything above that threshold, the founders could go ahead and make the deal. But anything below that threshold, they had to approve it.

And in this particular particular case, [00:31:00] that really led to the demise of the country because that investor was particularly greedy. There was a very good offer from a very good buyer. But it didn’t meet that threshold and the investor did not allow the deal to take place. And then eventually, no deal ever took place and the company eventually went bankrupt.

Yeah. Um, VCs have these in, in the term sheet. They have these things called protective provisions. Which gives them the right to approve just about any major decision that you would make. Um, you know, raising additional money, selling the company, amending your charter, um, all kinds of things. And so, yeah, salary too.

Salary too. Um, I haven’t so much seen salary. Um, but yeah, you can go look at the N C A website and see the long list of protective provisions of things that they have the right to approve. So, yeah, it’s um, You’re pretty much, as they say, when you get a vc, you’re getting your boss. They become your boss.

And [00:32:00] that’s true. So of course then they have a board seat usually, so they’re gonna be really dictating what you do with your company and they don’t always make the best decisions. My husband was working for a really great company. The investors, um, you know, made some decisions that ended up destroying the company , and he had to move on.

So, This happens. So you, That’s why I’m not a huge fan of that way of, of getting funding. Right. It’s funny, Jeff, you’re talking about that, that clause, like, and when we, uh, when Hostopia, we raised the vc, we had the VC funding in 2001, and they had, you’re right, they had the ability to block us from raising additional money, but we had one clause that said if we do it, a liquidity event or an ipo, Then, uh, they couldn’t block the de transaction.

There were still two board members on the board who voted against Hostopia doing an ipo. Fascinating little bit of history there, like a case study to see [00:33:00] that, uh, your VCs, they, cuz they knew they lost control once they, once you did ipo, they lost all that, all that control, all that power just went. And it was a small ipo.

It was only 30 million. Uh, it was Canadian company, right. But still, uh, it, uh, it just, they totally wiped them out. And that was, I thought that was pretty cool. All right. We’re moving over to crypto cause Michele and I have a meeting at three o’clock today with a gentleman who’s done a reggae plus. and he, uh, is issuing tokens for real estate.

He is a real estate fundy and I don’t know how much he’s raising and whatnot, but, um, it’s pretty cool cause we have a meeting in like 25 minutes. So I’m, I’m really gonna be ready for this meeting now. Right. So tokens, like, do these crypto offerings require the same legal requirements as if doing a regular offering.

Are they somehow getting around it by doing a. Hmm. Yeah. So this has been a very hot topic in the world of securities law. [00:34:00] You know, are these things securities? Cuz if they meet the definition of a security, it’s definitely regulated under securities law. And there have been so many of these ico, you know, a few years ago, there are so many ICOs where they said, Oh, it’s not a security, it’s a coin.

So we’re gonna just raise billions of dollars selling this coin. But it definitely was a security because the definition of a security is basically anything that someone would put money into with the expectation of making a financial return. Um, and. Even if you say like, Oh, these coins are, you know, their currency in our game, You know, or something like that.

If the, if you’re putting the message out there that the reason someone would wanna buy this thing is because they’re gonna, it’s gonna increase in value, which is generally the. The reason why people buy them, then that’s a security and it’s definitely subject to securities law and there’s a lot of crackdowns right happening right now.

for that, you know, for the [00:35:00] things that happened five years ago, the S SEC can move a little slow, but the long arm of the law will eventually catch up. Can’t I just slap an APE image onto, you call it an NFT , right? Couldn’t I just call it an nft? Here’s an ape image. Yeah. There is an exemption for things that have ape images on.

I’m just kidding. , that’s a securities law joke. , I am lopping on mute here. So, um, yeah, no, it, it, the, they’re gonna look to the actual realities of what is being said to people that’s inducing them to put money into it. You know, it’s just, if peop, if pe people are pouring money into something, it’s probably, cuz it’s probably not.

Cuz they get to buy a t-shirt for their. Avatar on your game. You know, , it’s like they’re, they’re pouring money into it because they expect to be able to sell it someday at a huge [00:36:00] multiple. And if that’s the case, then it is the security.

All right, great. Well, if you’re in the audience and you’re thinking about raising money, or again, you have a question for Jenny here. This is a rare opportu. For you to, to really dig in and, and think about your own business, where you’re at, and whether or not you wanna raise money and what that would entail.

And, and she’s on stage here and she isn’t charging any of us anything. Thank you very much, Jenny, but uh, I really appreciate that. Damien, I don’t know if you have any questions or Jeff or Michele, Cause I’ll keep going. , Damien? No, I’m all set. Thank you. I appreciate it. Yeah. All right. Um, alright. So then, What are the consequences?

So if someone actually does raise money and they don’t do it correctly, are, is this, are we talking a fine, Are we talking jail time? Like I, I don’t know, is this like actual serious offense or is this like you didn’t pay your taxes or something? I don’t know. [00:37:00] Um, it can be pretty serious. I mean, at a minimum, you, if you’re found to have violated securities law, at a minimum, you do have to.

Offer all of your investors the right to get their money back, and they can also sue you to get their money back and demand, you know, get damages and interest and all of that. If you really are a bad actor, it can go beyond that to the point where it could be criminal criminally prosecuted. You know, if you did it with the intent to defraud people.

And on that note, like when we did our dot. Company. We did a, we raised 7 million through my LinkedIn contacts and we did uh, a Reg D That’s a 5 0 6 C, is that what, I don’t know if that’s what you were talking about. Yeah, 5 0 6 C probably is what you did if you publicly advertised and included only accredited investors.

Yep. And we did a private placement memorandum. Mm-hmm. . And I just wanted to ask, is that something that is normally done on every [00:38:00] investment? Um, or like, what would be the benefit of doing it or not doing it? Yeah, so it’s not legally required. What is legally required is that you disclose to all your potential investors any material information that they would, would wanna know before making an investment.

So if you have a big lawsuit pending against you and you don’t mention that to investors, they will have a, a cause of action to sue you cuz they need to be given all the information that would be material to their investment decision. But you don’t have to do that in the form of a private placement memorandum.

I mean, the purpose of a private placement memorandum is to really have a formal way of disclosing every possible thing that you, under the sun , that you could think of that investors would wanna know. And it is almost funny sometimes when you read them, cuz they’ll have things like, Yeah, if there’s like a nuclear war, we would probably go out of business, just so you [00:39:00] know, , you know, so they’re kind of these overly legalistic document.

They’re like CYA documents. Um, to make sure that you can say I disclosed everything of material nature to the potential investors. But, um, You don’t have to do it. Yeah, either. You know, as long as you make sure you do disclose everything that people need to know, you’re fine. I know. I think we had some of those crazy risk factors.

Uh, I’m sure you did . Um, when we did our S one for an ipo, we had to do an S one man that was complicated and very expensive. I think we spent 1,000,008. On legal fees and commissions or whatever it was, it just, it was a lot of money spent. Uh, I know we spent about 20,000 when we did the private placement memorandum.

What I did find is it took, like, we had to raise $7 million in 30 days, and it was like, what? It did really, what, what I thought it did well is, and people did know me, but what it did, it, it created an intangible, this concept of this in this investment and almost made it [00:40:00] tangible. And the document almost looked like an S one, you know, had the nice front page and everything, and when you send it to someone, it’s like, Holy shit, this guy, Yeah, this is serious.

These people have their, they got their act together. I, I’m putting my money into this, this, this company. So there’s a, there’s a little bit of a marketing benefit. That is a great point. I think you’re totally right about that. It, it gives it so much more credibility that you took the time to really do it right.

Yeah, I agree. That’s a really good. Well, we have Wesley on the stage. Uh, welcome Wesley to the, to the Serial Entrepreneur Club Hour. Uh, do you have a question or a thought? Are you raising money you wanna share with us? Uh, anything on this topic? Yeah, I mean, I’m, I’m currently just, uh, started a cat litter business and going to Jenny’s point, you know, People and I, and I’ve seen it across all industries.[00:41:00] 

Somehow or another, greed gets in the way and that’s what topples everything. If, if you’re not in the position where you’re looking to grow a business and your mindset is to, is to. Employ people and give them, uh, you know, give them a lifestyle. But your mindset is No, I’m going to rate every investor and then topple the company.

But yeah, that’s what I’m doing. I’m trying to raise money to start a eco-friendly, biodegradable cat litter company. Great. I’m a huge cat lover, so thank you for doing that. . [00:42:00] Um, yeah, it’s. I mean, the whole topic of what is a, what is considered a reasonable return on investment, what is a market rate return, and then what is a return that is really kind of greedy and extractive isn’t very interesting topic.

Um, people have so many different opinions on that. I, there’s, I was just recently talking to someone who, uh, these, um, foundations. Claim to care so much about underrepresented entrepreneurs that don’t have access to capital, and they’re patting themselves on the back offering loans via a certain crowdfunding platform at a 13% interest rate.

And these are foundations with, uh, with a mission to do good in the world. And I was just shocked that they would feel proud of themselves that that was the return that they were expecting. And I actually did ask them like, Isn’t that kind of, um, isn’t that high? And they [00:43:00] said, Well, we have to make market rate returns even though we’re a foundation.

We have to make, make market rate returns, and these are very high risk loans. You know, So I just, it’s, it depresses me quite a bit that. That there’s greed in every sector of our economy, and at the same time, I don’t wanna demonize people because there’s so many factors at play. I mean, For example, if you are running the financials of a, of a foundation, you know, you may be a financial professional and your bosses may be breathing down your neck saying, You better not lose money.

You better make a 13% re you know, you better charge a 13% interest rate cuz these are risky loans. So, you know, it, it, there’s many different perspectives on this topic, , Uh, 13%. I know there was a Shopify loan. I know a company did. And, uh, once Black Friday hit it automatically because you would pay a percentage of your revenue.

And I did like the calculation of interest. It was like 60, 70%. Yes. These revenue. Absolutely. This is [00:44:00] Shopify. Yes. Mm-hmm. . This was insane. This was Usri. I mean, I don’t, I don’t know. Let what? Uh, oh, Cats, By the way, Wesley, Michele, you two should definitely connect. Michele’s got about a million followers on, um, Owings with one of her eCommerce companies.

So hopefully your cat litter would, uh, would do well on meowing tos. Wesley. Well, the deal is, you know, I mean, seriously, this is when you look at the market, the cat litter, and this is how I looking at the cat litter. Uh, my mother was almost 80 years old. She’ll be 80 next year. Well, she couldn’t. She can’t carry a bag of cat litter anymore.

It’s too heavy. It’s like a damn sack concrete. And then when you look at really what goes [00:45:00] into, you know, maybe I’m getting a little off topic here, but when it goes into the mining and the ecological destruction in the cat litter market, A lot of these new cat litters that are coming and emerging in this, they’re waste products in the agricultural market.

Corn cob, for example. Uh, sorghum seed. I mean, a lot of this is, Yeah. The problem is, and it’s always been two things I don’t possess. I don’t suffer from greed and I don’t suffer from anxi or, uh, not anxiety, but uh, yeah, that’s the [00:46:00] problem. Thats everything when you’re trying to go into business. Oh, greed and amnesia.

That’s. Well, yeah, you proved it right there. You had amnesia for a second. All right. That was funny, Wesley. That was really good. Uh, but we do wanna stay on topic and, uh, you know, if you have any more questions in the audience of Jenny about, or you’re interested in raising money for your business, please again, raise your hand.

Come on stage. It’s Friday afternoon and we got 15 minutes left. 15 precious minutes. Jenny. Uh, when you do a file, a Reg CF or Reg A plus, or Reg D or any of these, is there a time limit, like you have to do it by, does it expire? Do you have to raise all the money? Or you have to give the money back? Is there anything other rules like that?

Um, it depends. With Reg cf, um, you generally are gonna set a, a closed date for your offer. Um, and you, and you have a target, [00:47:00] a minimum target that you have to reach. So let’s say you wanna raise 500,000, but your minimum target is a hundred thousand. If you reach a hundred thousand by your target date, you get all the money if or anything above it.

Um, so that’s generally how it works. I mean, you can, there’s other things you can do. Like you can extend the deadline, you know, if you, if you don’t reach your goal, you can extend, um, you can also have rolling closes. Where you can, you know, even if your target is, you know, a million, you could have closes at every a hundred thousand so you could pull money out before you reach that full million.

Hey Jenny, Are there any other financing fees or underwriting fees associated with the reggae plus? Um, not necessarily, it just depends. I mean, there’s some, um, you know, actually I don’t need, um, I assume there’s a filing fee. I can’t, I can’t remember what the filing fee is with the s e c, but it’s not high.

So, That’s [00:48:00] not a, What about the platform? So do they shake a fee? Well, you don’t have to use a platform for reggae plus, you do have to use a platform for Reg cf, but not for reggae Plus. So you can use a platform, but you don’t have to. So, and of course you can also use a broker, but you don’t have to. So there’s no required fees.

But if you use, if you use some kind of an intermediary, there would be a. But if you did use it, do you know what generally the fee would be? I don’t. I assume it’s, you know, some we’re around, you know, five to 8%. Yeah. So that seems like a lot. It’s some that. You had asked, I think Colin or someone had asked about the timeframes and stuff, and I think earlier someone mentioned, um, specs, um, special purpose acquisition, acquisition corporations.

And I think specs have very specific timeframes. Cause I think just recently, um, famously or infamously, um, some big specs that had been raised by some pretty high for. High profile people [00:49:00] had to give back the money because I think it was two years had passed and they hadn’t found a suitable, um, company to bring into the spec.

Is that correct? , You know, I don’t deal with specs because I, I just, I don’t deal with public companies at all. I, I specialize in private companies, so I, and you know, the whole spec thing just seemed like such a scam to me when it first started. So I, I never did get very involved. Although I do have a friend who’s done some spec deals and I think there are some out there that have, you know, that are.

Worked well and made a lot of sense, but, um, the whole, and just for those who don’t know us back is a situation where you raise money for kind of a shell company with the intention of re of using that money to buy a company and you don’t know exactly what it’s gonna be. So it’s kind, the investors are kind of taking a big gamble, when they’re investing.

So I, I’m not a, I don’t think that’s a super great model. Um, it’s kind, it’s very risky for investors and there have been some crackdowns on it recently. Now I, I thought it was, I thought it would be an opportunity here [00:50:00] for entrepreneurs or startups who are at a certain stage in their business to, to go public versus relying on the venture capital.

See, right now, because of Sarbanes Oxley and the regulations and whatnot, you, you can’t do a $30 million IPO anymore. You need to be a billion dollar company, plus, and even then, that’s questionable. Whereas specs I thought would create that opportunity for businesses to go public, gain liquidity, but still be a smaller entity.

And I thought, I thought it was gonna be gonna shake out that way, and maybe it still will, but I just find it’s so hard in the United States and to actually go public. It’s, it’s almost impossible. Whereas in other countries like UK or Canada, you know, smaller companies actually do go public, and we do actually have investors and people do trade stocks in smaller businesses.

So I, I thought the specs would help with that. But it, you know, what happened happened, I guess there’s a lot of scams, just like you had with the ICOs and, and everything else in the [00:51:00] past. Yeah, exactly. Um, gosh, you reminded me of something to say about that and I can’t remember. Um, a mom, my mom going public.

Oh, I know what I wanted to say. . Um, yeah, because it ha you know, very well intentioned laws. I’ve gone into effect over the last 20 years to protect investors. Um, Like Sarbanes Oxley. But because of those laws, it has become so expensive to be a public company that we now have, I think about a quarter of the public companies that we had before that all those new laws went into effect.

So many companies are going private cuz they just can’t afford the costs of being a public company anymore. So that’s kind of a bad consequence because now our. Public markets are much less diverse in terms of what’s actually in there. When you invest in, in the stock market, you’re investing in a much smaller, you know, pool of companies.

And I guess the, the [00:52:00] flip side to that is, is the introduction of Reg CF and things like that, which is another way than for John Q Public or Jane Q Public to be able to invest in, in private companies, um, that normally wouldn’t be available to. . Exactly. Yeah. I mean, the vast, vast, vast majority of companies in our country are not public companies.

Meaning they’re not, you know, those companies that trade on stock exchanges or, you know, they don’t, public companies have to do quarterly filings. They’re, um, you know, they’re, The good thing about them is they are required to disclose a lot, and they’re highly regulated, but, You know, there’s so few of them that if you invest on the stock market, you are really not investing in the, you know, 99.99999% of our economy.

Which is unfortunate. That’s why there’s such a huge lack, you know, uh, lack of capital for private companies cuz it’s so much of it is on in the [00:53:00] public markets. It seemed like we had to question the chat about NGOs that you’re raising money, I think for a nonprofit, do they have to file these documents as well?

Is there the whole different set of regulations around that? Yeah, so this is one of my favorite topics. The idea that nonprofits can raise money from investors, cuz I’ve done it myself. I raised 1.1 million from 135 investors for a nonprofit offering of. For a, uh, a nonprofit, um, that does, it makes investments in social enterprises.

So if your nonprofit HA does revenue generating activities, it might make sense to raise money from investors. Um, Gen. There is a federal exemption from securities filings if you are a nonprofit offering, making a securities offering. But you do have to check your state , cause every state [00:54:00] is different on the nonprofit thing.

So, I ha I’ve had clients, for example, in Massachusetts that’s one that comes to mind that’s very liberal. So if you’re in Massachusetts, you’re eligible for both the federal nonprofit exemption and the Massachusetts nonprofit exemption, which means with almost no filings at all or fees, you can publicly offer an investment opportunity as a nonprofit to residents of Massachusetts if you’re, if you’re in Massachusetts.

So it’s, it’s a great tool. And now with Reg cf, Reggae plus Reg D, do you have to get, um, approval in each state as well? No. Well, some yes and no, depending on which one you’re talking about. So Reg us. What was that? No, I said help us again, Tell us which, what we, what we have to do. Yeah. Yeah, I mean state level compliance, it really varies.

So FI with 5 0 [00:55:00] 6 with rule 5 0 6, which is part of RegD, you don’t have to get any state level approvals, but there are state notice filings that have to be filed, um, with Rule 5 0 4, which allows you to do a private offering. To anyone and does not restrict you to accredited investors, you do have to do state by state compliance for nonprofit, ex exempt nonprofit offerings.

You do have to do state by state compliance For Reg cf, you don’t, but you may have to do a state notice filing depending on which state you’re in and where your investors are coming from. With Reg A, there are state reg A plus. There are state. Filings that are, uh, I think somewhat expensive and onerous because many reggae offerings are not, uh, they, they’re not available in all states.

Oh, wow. And if, if, if Paul were to go forward and we wanted to use a platform, I know there’s our crowd start engine. Am I, am I missing any other ones that you might know about? [00:56:00] Um, I guess, I think most of the, um, Most of the Reg CF platforms also allow, allow Reg A offerings. So there’s probably a ton of of platforms you could use.

Got it. Okay. You don’t have a favorite then that you’d recommend people use? No, I don’t. Okay. . Stick with the, stick with the legals. All right. Well, this has been fascinating. I don’t know if anyone else here has a question or a thought before we close it out here on the, on the stage. If not, thank you very much, Jenny.

And uh, I also mentioned to you that, uh, we signed a publishing deal with Forbes to put the, put out the book, uh, the anti would you call the Greenfield Greenfield, the anti Greenfield book called Start Scale Exit Repeat. And we’ll, we’ll, hopefully some of the information that we got from this session will also be put into a chapter in that book.

So thank you very much for, for everything you shared with us today. It was incredible. I learned a lot. [00:57:00] Damien, do you think, did we, did we learn something here, Damien? Absolutely. Thank you so much Johnny. Sure. Could. Would it be okay if I shared a something, uh, before we sign off? Absolutely. A three minutes.

So go for it. So I am having a three day event where we’re gonna be doing a deep dive into all of this. It’s called Raise Capital on your own terms, Build it, fund it, grow it. And if you’re listening right now, we do have. Discount code for 20% off the, um, the, the fee to, to go, to come to the event. It’s a virtual event, so you can come from anywhere.

So if you use today, Jenny 20, , j e n n y, and then the number 20, if you go to my, um, My website, jenny passon.com. You’ll see a popup there or a something. You’ll see. You’ll definitely see the event there. Click on the link. The event it’s $197 for the three days. And you, if you use Jenny 20 today, you can get 20% off.[00:58:00] 

It’s unbelievable. Can’t believe it. I know. I can’t believe it’s that cheap, but I That’s amazing. That’s amazing. And, uh, they can get in contact, cause we also put this out in podcast as well, but they can get in contact with you from your website. Jenny Casson, Can you just spell that? The radio test here for us.

Jenny casson.com. Yes, it’s j e n n y k a s s A n.com, and we do have a ton of resources there. Things you can, you know, download and use to get you started on figuring out your plan for fundraising. And also a book. We can go to Amazon, You have, you came out with a book can, What’s the title of the book again?

Raise Capital on Your Own Terms, How to Fund Your Business Without Selling Your Soul. Wow, that’s amazing. Amazing. What a great hour. Right, Michele? Fantastic. And, um, I, I say Mimi is in the audience. We can do a little post about your seminar as well. So we’ll touch bases with you. Um, and [00:59:00] we’ll just say it’s a special code for all of our members.

Thank you so much. Yeah. And feel free to reach out to me via, um, Clubhouse or uh, Instagram or, but yeah, Play website is best . Awesome. Okay, great. Thank you so much. I really enjoyed the conversation. Have a wonderful day. Absolutely. Bye. And we really have a wonderful day everybody. We really want you to follow us on Startup Club.

We have two phenomenal authors. Uh, if you go to Startup dot. For email list will tell you who those authors are, uh, in, in the next coming weeks. Uh, two very famous authors, so please, uh, sign up to that mailing list. Thank you again, Jenny. Bye now.