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Updated: The Crowd-funding Revolution and the Reinvention of Capitalism

By Gar Smith
Tuesday February 15, 2011 - 07:59:00 PM

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:; Recommended movie: “The Money Fix.”]  

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 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 22 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 “eighteen-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 significant fund-raising constraint is the Federal definition of an "accredited investor" and the limits this places on an entrepreneur's ability to sell private securities. Unfortunately, not too many small, independent entrepreneurs count multimillionaires among their closest friends. Fortunately, the Gather guys discovered Schedule D, which allows for an unlimited number of “accredited investors” and allows 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 [] has convened two national conventions, in the process channeling $5 million of investment from members of Slow Money's network 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, foundations typically invest 95% of their funds in “traditional vehicles.” In contrast, the Soil Trust is designed specifically to invest 100% of its funds in sustainable food enterprises. As Slow Money Associate Director David Corson-Knowles emphasizes: “Slow Money is launching the Soil Trust to be driven 100% by mission aligned investing, not transitioning it from the typical foundation set-up.” 

If one million Americans invested 1 percent of their assets in local food systems, Derfel observed, this would equal more than $4 billion of investment that would have a measurable and lasting impact on rebuilding local economies -- and building more fertile soil for future generations.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. “We will then use the money in the Soil Trust to provide guarantees, seed capital and co-investment in sustainable food enterprises,” Derfel explained. “Doing so would mitigate risk and make it possible for existing financial intermediaries to participate in investments that otherwise would fall outside of their normal risk profile.” 

“The Soil Trust, as a risk-mitigating tool, would take on the risk that keeps investment in local food systems from happening to an adequate level. “If we do our job right,”Derfel grinned, the Soil Trust specifically will likely lose 10-15% annually. However, as a not-for-profit foundation, the Soil Trust is neither obligated to make money nor required to provide financial returns to those who donate to it. This is what makes it a potentially powerful tool, capable of catalyzing millions of dollars of investments in local food systems.” And, at the end of the day, Derfel notes: “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.”  

Our thanks to David Corson-Knowles for helping us fine-tune this article. 

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

.Editor's Note: This update corrects some errors in the original posting.