Crowdfunding sites like Kickstarter have long offered backers a straightforward deal. People donate money to a creative project and get a reward, like a T-shirt or cool new gadget.
But one thing backers couldn’t get was equity in the new company.
A new law, however, has changed that. And now a Big Island cider maker has become a pioneer in this novel way of raising capital.
Hawaii Cider Co., a spin-off of Kailua-Kona’s HawaiianOla Beverage Co., on Tuesday closed a round of financing that raised $503,613 from 401 investors. The site Wefunder.com served as the internet platform for the crowdfunding effort.
Hawaii Cider’s chief executive Brett Jacobson declined to discuss the crowdfunding campaign, citing securities laws that prevent company officials from promoting stock sales.
According to its Wefunder site, Hawaii Cider is trying to raise money to build a facility where it can bottle its cider and beer. HawaiianOla will use the facility to can its beverages as part of a joint venture. Before the Wefunder campaign, Hawaii Cider had raised $1 million, the company said in a news release; it was seeking another $1 million through Wefunder.
Touting a plan to make cider with local produce like dragonfruit, pineapple and lychee, the company hopes to tap into the growing popularity of hard cider while creating a market for local farmers.
Hawaii Cider’s sister company, HawaiianOla, which has 12 products in stores around the islands, has a track record of building and marketing a beverage brand. It’s also a certified “B” corporation, a designation for companies that meet certain social and environmental operation standards.
That all might sound good. But is it wise to let companies peddle stock on a website similar to Kickstarter, the crowdfunding pioneer that was recently promoting such products as miniature three-string guitars, titanium dice and an electric air freshener shaped like a cartoon unicorn?
The so-called JOBS Act is designed to ease regulatory burdens on small companies and help them raise capital.
That would have been prohibited not long ago, said Gregory Kim, a Honolulu attorney who specializes in securities law and advising emerging growth companies.
Congress passed the federal Securities Act of 1933 in response to the stock market crash of 1929, which triggered the Great Depression, said Kim, a partner in Convergent Law Group of Mountain View, Calif. He’s also a lecturer at the University of Hawaii’s William S. Richardson School of Law.
The securities law generally requires securities to be registered with the Securities and Exchange Commission and requires an enormous amount of disclosures and legal and professional work – with a price tag of $1 million or more – for companies issuing equity through an initial public offering, Kim said.
An oft-used alternative to a public offering is a private placement, Kim said, but a commonly used type of placement allows sales of such stock only to investors with high net worth.
Enter the Jumpstart Our Business Startups Act of 2012. The so-called JOBS Act is designed to ease regulatory burdens on small companies and help them raise capital. One of the provisions deals with crowdfunding. In May 2016, after years of delay, the SEC issued rules implementing the act and allowing companies to start selling shares on crowdfunding sites.
The Wefunder site that Hawaii Cider used looks much like a Kickstarter site, but there’s more to it: the site’s operator is registered with the SEC and the Financial Industry Regulatory Authority, a private organization that helps regulate securities brokers. FINRA’s predecessor, the National Association of Securities Dealers, founded the NASDAQ exchange.
A company can raise up to $1 million through a crowdfund offering, according to SEC rules. And there are limits as to how much people can invest: a person with annual income of $30,000, for instance, can invest $2,200 at most. The crowdfunding site Indiegogo also offers equity crowdfunding deals, but Kickstarter does not.
Wefunder has a raft of information about the companies it is sponsoring, plus primers on the types of investment instruments offered for sale.
Those who read closely will learn Hawaii Cider Co. offered not stock, but a bond that converts into stock only if the company reaches certain milestones. The upside is the bonds earn 8 percent interest annually, and if the company reaches its milestones, investors get a 15 percent discount on the stock price at the conversion date.
But for now, Hawaii Cider’s purchase agreement notes that the bonds are subject to restrictions on transfer, there’s no public market for the bonds, and there’s no assurance “that a public market will ever exist for the Securities.”
In other words, an investor could end up with valuable stock or with a note worth nothing more than the paper it’s written on.
This might seem like risky, complicated stuff for a small investor with no experience in the stock market.
“It’s an intuitive and appealing idea — Kickstarter, but with stock,” Michael Dorf, a professor at Southwestern Law School, told Slate. “It’s also a disaster waiting to happen.”
But Douglas S. Ellenoff, a partner with the law firm Ellenoff Grossman & Schole in New York, argues that there’s little chance that stock-offerings-by-crowdsourcing will have disastrous social consequences: the $1 million offering limit, among other rules, prevents that.
In some instances, securities laws did not prevent a naïve investor from participating in private placements even before the JOBS Act, said Ellenoff, an authority on JOBS Act crowdfunding who has participated on a FINRA-sponsored panel on the topic, among other talks. “What he would not have had was the information you’re seeing,” Ellenoff said.
In addition, while entrepreneurs often raise seed cash from friends and family, there has not been a national marketplace where people can tap into small deals that are regulated, Ellenoff said.
“That’s revolutionary,” Ellenoff said. “And I think it’s very enlightened.”
Hawaii economic development officials like to see this sort of investment in a local startup. In a state starved for capital, Wefunder offers ways for companies to raise funds without having to move their businesses to Silicon Valley, said Sara Lin, associate with the Hawaii Strategic Development Corp., which works with private investors to help develop startups.
Hawaii Cider Co. is not the only Hawaii company to raise funds under the JOBS Act’s crowdfunding provision, but it appears to have raised the most. Big Island coffee company Anikona Farm’s campaign, which closed last week, raised just $3,593, its Wefunder site reports.
The JOBS Act was designed not just to help small startups; it is also meant to make it less expensive for larger firms to enter capital markets.
An entirely different section of the law applies to such bigger companies. A company with less than $1 billion in revenue, for instance, can qualify as an “emerging growth company” under the law. That was the case for First Hawaiian Bank when it held an initial public offering in August 2016, said Joel Rappaport, First Hawaiian’s executive vice president and general counsel.
The JOBS Act meant less costly paperwork for First Hawaiian; the company had to file only two years of historical financial information in its stock prospectuses, for example, instead of three years which larger companies must file, Rappaport said.
First Hawaiian’s IPO was orders of magnitude larger than Hawaii Cider Co.’s. And buying stock in a major bank in Honolulu is a bet much different from a cider company on the Big Island.
And as with any investment, it is buyer beware.
“It’s an investment lesson at worst,” Ellenoff said. “And maybe you feel good about it.”