The Crowd-funding Revolution and the Reinvention of

Capitalism
By Gar Smith
Tuesday February 15, 2011

It’s never easy raising cash to start a new business. This truism was the focus of a recent meeting
of the Sustainable Business Alliance (SBA).

On February 7, scores of local entrepreneurs poured into The Hub, on the forth floor of
Berkeley’s David Brower Center (corner of Oxford and Addison), to hear a panel of fund-raising
experts discuss a host of cash-chasing solutions -- ranging from community financing and
crowd-funding, to peer-lending, socially responsible investment funds and direct public
offerings.

While Wal-Mart has no problem raising millions to build a new box store in Biloxi, it’s a harder
slog for a business school grad who wants to open a bagel shop in Berkeley. As the SBA outlines
the problem:

“Locally owned, small businesses constitute about one half of the private US economy in terms
of output and jobs but they receive almost no investment from the nation’s pension funds or from
mutual, hedge, venture, or any other kind of investment funds.”

Cobbling together start-up capital for a new business is an even greater problem in a half-
collapsed economy. (“Half-collapsed” because, as UC Berkeley economist Robert Reich points
out, there are two US economies. Most Americans are struggling to survive in the jobless First
Economy while the 2% in the Second Economy are sitting on trillions of dollars in uninvested
assets.) What the small business sector desperately needs is a new generation of innovative cash-
traps for the cash-strapped.

Providing solutions was a panel consisting of Jenny Kassan (CEO of Cutting Edge Capital and
Managing Director of the Katovich Law Group), Ari Derfel (Executive Director of Slow Money
and co-founder of Berkeley’s celebrated Gather Restaurant), Gary Bell (CEO of the Coop
Federal Credit Union) and Bill Peterson (Chief Credit Officer for San Francisco’s New Resource
Bank.). The panel was moderated by Jody Colley, publisher of the East Bay Express (whose
upcoming edition would feature a timely cover story on “Fundraising for the Facebook
Generation”).

Local Lenders to the Rescue

The unequal access to capital is not a new problem. Berkeley Coop CEO Garry Bell recalled that
the coop (now located at the corner of Shattuck and Ashby) was started in 1942 during another
period of uncertainty and fiscal constraint. When large commercial bands ceased making money
available for families seeking home loans, Berkeley residents banded together to form their own
independent financial coops. These community based lenders are still focused on providing
funds to promote public good, not private profit.

Jenny Kassen tossed a question to the audience: “What do you think is the average return on a
401(k) invested in the stock market?” The answers from the wiser-than-average crowd ranged
from 6 to 10 percent. “Actually,” Kassen revealed, the yield historically averages much lower,
“around 2-3%.” As to the argument that investing in the stock market is “less risky,” Kassen
suggested that there may be less risk investing in local businesses that you can actually visit and
oversee on a daily basis. (For those still enamored of the stock market, the panel recommended a
Web site called Mister Market -- a platform for socially responsible trading that provides an
alternative to Wall Street.)

Bill Peterson explained that he works for a “four-year-old bank with a radical philosophy” -- i.e.,
one that focuses on sustainability, not profit. In Peterson’s words, the New Resource Bank
(NRB) is “a courageous group of guerilla evangelists” committed to making investments that
serve good causes. “Slow-banking” is not concerned with traditional banking goals like
profitability, market-share, and growth, Peterson noted. Instead, NRB’s goal is to “influence the
flow of capital to businesses that are doing good.”

As Peterson sees it: “If you drive a Prius and shop organic, you shouldn’t have your money in
Bank of America or Citibank.” Instead, you should be putting your money in a community bank.
But first, he cautioned, make sure you investigate the local bank’s mission -- Does it exist to
pursue profits or to extend services?

The panel noted that another option for local fund-raising may soon be found in “alternative
currencies” like the “Hour,” a form of legal tender created 10 years ago in Ithaca, New York. In
California, Sonoma County was cited as a region where a working alternative currency is quickly
gaining traction. Unlike Berkeley’s fledgling “Bread” bills (founded in 1997, one “Bread hour”
was worth 12 US dollars), Sonoma’s “Community Cash” uses electronic credit currency.
Montpelier, Vermont is working on a food-based currency that will benefit local farmers. [For
more info, see: http://www.ithacahours.org; http://sonomacash.bellanet.com. Recommended
movie: “The Money Fix.” http://www.themoneyfix.org]

Meanwhile, one of the best options for today’s would-be entrepreneur can be found in a slew of
innovative “crowd-funding” options (including online grant-sites like Kickstarter.com and
IndieGoGo) that are offering a radically new source of funding.

Crowd-funding applies the power of social networking to create a capital-raising alternative that
is proving increasingly effective because it allows unlimited numbers of small “investors” to
kick in sums as meager as $5 to $10. The only problem is, under US law, these alternatives may
be illegal.
How SEC Laws Favor the Super-rich

Security and Exchange Commission (SEC) laws were supposedly set up to protect investors but,
they also serve to protect the established investing clout of the financial Ruling Class. As defined
under current law, investing is an activity reserved as an exclusive privilege of the well-off and
super-rich.

For example, Kassen explained, it is “illegal” to try raising funds without first dealing with a
stack of “onerous paperwork” from State and Federal agencies. (There is a campaign to get the
SEC to relax its regulations to reduce the paperwork for small businesses.) Furthermore, under
SEC laws, you need a “pre-existing relationship” before you can solicit an investment from
someone. So, if you don’t happen to have a bunch of rich relations (which is par-for-the-course if
you’re already a member of the Ruling Class), you’re out of luck. In addition, under the SEC’s
Schedule A regulation, unlimited funds can only be raised by approaching “accredited investors”
-- i.e., individuals with more than $1 million in assets, which covers less than two percent of the
US population.

Because the SEC forbids all but the well-to-do from engaging in “general solicitations” to raise
whopping amounts of capital, crowd-funders cannot currently offer contributors any promise of
stocks, interest or capital gains. Your “investment” (which can never be legally referred to by
that word) amounts to a non-returnable donation. In other words, giving money to a crowd-
funding organization is essentially the same as donating money to charity. You do it because it
benefits your karma, not your capital assets.

While, crowd-funded start-ups are allowed to offer “perks” (in the form of, say, tote-bags or
discounted meals at a restaurant you’ve donated to), offering too many of these “unfunded
liabilities” could nibble away a business’ thin margin of profit. Another complication:
acknowledging donations with tote-bags and T-shirts runs the risk of offending the SEC’s
regulation on “disinterested generosity.” Kevin Lawton, author of The Crowd-funding
Revolution, hopes the SEC will grant an exemption to allow crowd-funding organizations to
offer securities to small, wallet-sized contributors.

The SEC’s constraints on loan-seekers are an obstacle that the Sustainable Economics Law
Center hopes to challenge. The SELC hopes to convince regulators to allow people to solicit
$100 donations without having to file the “onerous paperwork.” The present system doesn’t
make a lot of sense, Kassen reflected: “You can go to a casino and lose all your money but you
can’t invest in the companies of your choice.”

A Case in Point: How Gather Gathered Its Capital

Rounding up the resources to open Berkeley’s award-winning Gather Restaurant (located in the
ground floor of the Brower Center) provides a classic case of Slow Money in action. It took nine
months to raise the capital for this organic and locally sourced food oasis (and all at a time when
the economy was in free-fall from the collapse of the housing market).
In order to win the contract to create a restaurant in the Brower Center (aka “Berkeley’s Greenest
Building”), Derfel explained how he and his partner had to raise $400,000 in one month. They
went to friends and colleagues and they went “bank-shopping.” Derfel recalled how “I personally
asked about 400 individuals and about 60 said ‘yes.’” From March 2008 to October 10, 2010,
Derfel told the Hub crowd, the process of creating Gather was a parade of “eight-hour-days,
24/7, with no time off.” Now that the restaurant has been financed, designed, built and opened
for business, Derfel says, investors should be receiving “95% of profits back until they are paid
off.”

One of the fund-raising constraints was Schedule A’s definition of “accredited investors.”
Unfortunately, not too many small, independent entrepreneurs count multimillionaires among
their closest friends. Fortunately, the Gather guys discovered Schedule D, which places a limit
on “accredited investors” but allows contributions from up to 35 “unaccredited” investors.
Gather made full use of this option and opened for business with 75% equity and only 25% debt.
Derfel told the Hub crowd that he hopes investors may realize a 5-10% profit within 10-12
years.

Since it’s opening, Gather has won accolades for its food and its philosophy, while creating 75
new jobs and leading the way for four new restaurants that have subsequently sprouted in the
neighborhood. Esquire magazine recently named the fledgling restaurant one of the country’s top
20 eateries and crowned Gather’s Sean Baker “Chef of the Year”!

The Slow Money Movement Is Slowly Cashing In

In the past two years, the Slow Money movement [www.slowmoney.org] has convened two
national conventions, in the process raising $5 million that has been channeled into projects that
support farms, food and topsoil. (Derfel noted that a study of history shows that all the major
civilizations that have collapsed shared a common problem -- a loss of topsoil, leading to a
collapse of their food systems.)

Recognizing the critical importance of viable cropland, the Slow Money movement has created
an entity called The Soil Trust. As Derfel explained, only 5% of the funds currently are used for
grants while the remaining 95% are left to generate interest from stock investments. Eventually,
100% of the Soil Trust will be reinvested.

If one million Americans invested 1 percent of their assets in local food systems, Derfel
observed, this would raise billions for long-term investments in America’s Soil Bank. This
would, in turn, erase the perceived “risk” for institutional investors who would then become
interested in jumping onboard. One of the goals of the Slow Money eco-monetarists is to inspire
the country’s Big Buccaneers to start investing in “the spirit of Biophilia (the love of Nature) and
the Triple Bottom Line -- People, Planet and Profit.”

For starters, the Slow Money movement is inviting millions of Americans to each invest 25 tax-
deductible dollars. “If we do our job right,” Derfel grinned, “we’ll be losing 10-15% each year.”
But because the Soil Bank doesn’t have to return the donations, he continued, “If we do make
money, we are required by-law to turn the profits back into good things.”
Meanwhile, the culture may be evolving faster than anyone anticipated. Derfel recently hosted
Joel Salatin (the whip-smart, wise-cracking pig-farmer featured in the documentary Food, Inc.).
“Thirty years ago,” Salatin confided, most of his customers were “crunchy-granola hippies”
looking for sustainably raised, chemical free meat. These days, he reported, 50% of his clients
are “Christian homeschoolers.”

Derfel paused to recall a recent day at Gather where he encountered one investor leading a class
of school kids on a trip through the downstairs restaurant and then ran into another investor
upstairs, voluntarily engaged in a planning meeting. “The sense of community is the most
important creation,” Derfel said with a wide smile. “Money becomes a means of creating
community.”

Derfel mentioned Martin Luther King’s observation: “We must rapidly begin the shift from a
thing-oriented society to a person-oriented society. When machines and computers, profit
motives and property rights, are considered more important than people, the giant triplets of
racism, extreme materialism, and militarism are incapable of being conquered.” With every
purchase (and contribution), we make a decision about what kind of country we wish to live in.
“At the end of the day,” Derfel concluded, “we are all investors.”

Gar Smith is a Berkeley-based writer and Editor Emeritus ofEarth Island Journal.