Crowdfunding for Craft Beverage Producers: Harvesting the Social Capital in Your Community

Harvesting Your Social Capital - Santa Rosa, CA – 9.8.16 1 Copyright © 2016 Breakaway Funding . All Rights Reserved

Thank You to Purple Wine + Spirits, our generous Wine Sponsor

Available at Bottle Barn in Santa Rosa, along with most fine wine retail outlets.


Presenters

Kim Kaselionis,

Managing Partner

Breakaway Funding, LLC

K. Christopher Branch

KC Branch Law Group

Food, Wine & Spirits

Jeff Clark

Live Oaks Bank

Domain Expert


Program

Networking 4:00pm – 4:30pm

Introductions & Program 4:30pm – 6:00pm

Jeff Clark, Live Oaks Bank

Kim Kaselionis, Breakaway Funding, LLC

KC Branch, KC Law Group

Q&A 6:00pm – 6:20pm

Networking & Close 6:20pm – 7:00pm

Crowdfunding

Jeff Clark Domain Expert

Live Oak Bank

Wine and Craft Beverage

A Bank’s View of Equity

© 2015 Live Oak Banking Company. All rights reserved. Member FDIC

A Bank Is A Cash Flow Lender Looking For:

i. Primary source of repayment

Cash flow generated by the borrowing entity

ii. Secondary source repayment

Collateral

Guarantees

Personal

Corporate

Government (SBA, USDA, Farmer Mac, etc.)

5

The “5 C’s” of Credit

Character: Good credit? Clean civil and criminal background investigation?

Cash Flow:

o Acquisition – Will historical cash flows support the debt?

o Expansion – Are the projections reasonable?

Conditions: The business, management, the industry and the economy.

Capital: Decreases the chance of default ‘skin in the game’

Collateral: Secondary source of repayment

6

Equity Considerations for the Bank

Proven ability to raise equity increases chances of loan approval

Individual ownership of 20% or greater = Personal Guarantee

Does equity investor meet SEC, ABC and TTB guidelines?

Does use of equity proceeds make the borrower more bankable?

7


. The information provided in this presentation is for informational and educational

purposes only and should NOT be considered investment advice, legal advice, tax

advice, or any other advice. Breakaway Funding is not a registered investment firm or

Broker-Dealer. The information offered in this presentation is not a representation or a

solicitation for the purchase or sale of securities.

The opinions and information contained in this material is based on sources believed to

be reliable and are written in good faith, but no representation or warranty, expressed or

implied, is made as to their accuracy or completeness.

Breakaway Funding shall not be liable for any loss, monetary or otherwise, that may

occur from your reliance on the information presented.

Disclaimer


Banking is Broken; Vulture Capital Scavengers


Angels are Scarce

“I’m looking for

Angel Investors.”


How do you get Financed?

SHOW ME THE

MONEY


Your Community

Where There is Community – There is Capital

Emotional & Economic Relationship


Bridging the Funding Gap

Support Entrepreneurs Seeking Growth Capital

Provide Community Banks Steady Stream of New Customers

Investment Opportunities for ALL Investors


What We Do

1) Prepare, Market and Conduct Capital Raise

2) Source, Vet, Deliver New Relationships to Banks

3) Provide Free Educational Webinars

Solving a two-pronged problem:

Lack of access to growth capital for SMB’s

Community banks struggle to lend


CROWDFUNDING

82% MicroBusiness Conference 4.22.16 18 Copyright © 2016 Breakaway Funding . All Rights Reserved


Crowdfunding - Defined

Groups of people combine their economic power to

support a project, a company or an organization

usually via the Internet.


Historical Examples

Joseph Pulitzer

Construction of the Base of

the Statue of Liberty

“Rewards-Based Crowdfunding”


Evolution Of Crowdfunding

Irish Loan Fund Gives loans to

low-income families in

rural Ireland

1700s 1800s 1976 2000-2001 2005 2006 2007 Apr 2012 Oct 2013 June 2014

Birth of Microfinance

Dr. Yunus launches program in Bangladesh

300+ Programs 20% of all Irish households use

program at some point

1st Documented

Crowdfunding Site for music –

Aritistshare

Nobel Peace Prize Yunus and Grameen

Bank win NPP

SEC Releases Title II Rules

General solicitation of private equity

approved

Kiva Gives Individuals

Opportunity to Provide small

loans

SEC Releases Title III Rules 2.0

All Americans can now become

Private equity holders

2009

JOBS ACT Passes

Opens door for all Americans

to become Angel Investors

SEC Releases Title IV Rules aka

Regulation A+ Raise up to $50MM

per Year from Unaccredited

Investors

Oct 2015 May 2016

Title III Became Effective

Lending Club Peer-to-peer

lending platform

($13B)

Prosper 1st peer-to-

peer lending market

place in U.S.

($5B)

Kickstarter Rewards based

Platform for Projects

($2.1B)

$20B


Crowdfunding Models

DONATION-BASED Funders donate money to

campaign owners and do not

expect to receive tangible

benefit from the transaction.

REWARD-BASED Funders donate money in

exchange for a “reward” –

typically the product or

service.

DEBT-BASED Funders lend money to individuals or

business owners and expect the future

repayment of a principle with or without

interest.

EQUITY-BASED Funders invest in campaign owners and

receive equity or equity-like shares in

return for their investment.

ROYALTY-BASED Funders invest and expect

to receive percentage of

profits from the

transaction.


Donation-Based Crowdfunding

“Non-Profit

Community”


Donation-Based Crowdfunding

Feature: Funders donate to feel good.

No expectation of any return (maybe tax deduction).

Pros & Cons for Issuers: Helps to Build Community (Pro)

Difficulty raising substantial capital (Con)


Rewards-Based Crowdfunding

“Artists and

Start-Up

Community” 9,522 backers

pledged $2,437,429

SOLD to FB

March 2014

$2 Billion


Rewards-Based Crowdfunding

Pros & Cons for Issuers: Test the Market (Pro)

“Proof of Concept” (Pro)

Opportunity to generate small amount of capital (Pro)

Helps to Build Community (Pro)

Difficulty raising substantial capital (Con)

Feature: Funders contribute in exchange for “catechize” or

product.


Debt-Based Crowdfunding

“Real Estate and

Business Community”


Debt-Based Crowdfunding

Feature: “Expect the future repayment of a principle

with or without interest” and returns on a fixed schedule.

Pros & Cons for Issuers: Does not dilute or take-a-way any ownership in your company. (Pro)

May be easier to obtain than traditional sources (Pro)

Investors may expect higher rates (Con)


Royalty-Based Crowdfunding

“High Profit Margin

Business Community”


Feature: Expect to receive percentage of future

revenue from the company.

Royalty-Based Crowdfunding

Pros & Cons for Issuers: Does not dilute or take-a-way any ownership in your company. (Pro)

Payments to investors are deductible (unlike dividends) (Pro)

Longer the term, the lower the payout ratio (Pro/Con)

Investors may expect higher rates (Con)


Equity-Based Crowdfunding


Equity-Based Crowdfunding

Pros & Cons for Issuers: Don’t have to pay equity-capital back (Pro)

Leverage equity capital to qualify for traditional debt (Pro)

Investors represent built-in customer base (Pro)

Investor-base become brand evangelists (Pro)

Lower $ requirement allows more people to invest / cast wider net, increase

probability of funding (Pro)

Costs money to Raise money (Con)

Increased financial reporting requirements/increase costs (Con)

Manage your “crowd/community” (Con)

Lots of investors telling you ‘how to run your business’ (Con)

Future funding may be affected by large cap table (Con)


Crowdfunding by Model (2009-2014)

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

2009 2010 2011 2012 2013 2014

Hybrid

Royalty

Equity

Debt

$1.110B

$1.940B

$6,086B

$2.698B $1.381B

$855M $530M

$11.08B

$16.220B

In Millions YoY +167%

Source: 2015 CF Industry Report, Massolutions.Com


Market for Business Crowdfunding

10x

Venture

Capital


THE JOBS ACT OF 2012,

REG D & CALIFORNIA

INTRASTATE OFFERINGS

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Securities & Exchange Act 1933

‘Any offer to sell securities must either be registered

with the Securities & Exchange Commission or

meet an exemption.’

Exemptions:

Federal

State (Intrastate)


Securities Laws

How much you can raise (capped or unlimited)

Who can invest (accredited, qualified, non-accredited)

How you can solicit (general solicitation or not)


Jumpstart Our Business Startups (JOBS ACT)

Enacted: April 5, 2012

What: Most Significant Changes in

the Securities Laws in nearly

80 Years!

Why: Free Up Capital & Create Jobs


Title III – “Crowdfunding”

“Non-Accredited”

Investor Securities

ISSUER REQUIREMENTS:

Offerings Requirement

< $100,000 Certified by the Principal Executive Officer

and most recent Tax Return

$100,000 <$500,000 Reviewed by an independent accountant

$500,000 < $1Million Audited by an independent accountant

Annual reports to the Commissioner;

Resale restrictions, disqualifications

for “bad actors”; contain measures

intended to reduce fraud and conflicts

of interest.


Title III – “Crowdfunding”

“Non-Accredited”

Investor Securities

INVESTOR REQUIREMENTS:

A) Income AND NW < $100,000

Limited to $2,000 per year or 5% (the lesser of)

B) Income OR Net Worth > $100,000

Limited to 10% up to a max of $10,000


Title III: Activity to Date (8/19/6)

Campaigns

Filed

Total

Capital

Commitm

ents

Campaigns

Hit or Over-

Subscribed to

the $1M Cap

Current Avg.

Investment

Commitment

Actively Receiving

Funding

82 $7.2

million

3 $810 61

Source: Crowdfunding Insights. Quarter 1 for Regulation Crowdfunding Results


Title III: Top Sectors by Capital Committed &

# of Offerings(8/19/16)

Sector Capital

Committed

Wine & Spirits $2,071,608

Technology – Hardware $1,626,257

Entertainment/Media $1,192,573

Food & Beverage $736,300

Real Estate $411,600

Source: Crowdfunding Insights. Quarter 1 for Regulation Crowdfunding Results

Sector # of

Offerings

Technology:

Software/Games

16

Technology:

Hardware

14

Wine & Spirits 9

Food &

Beverage

7

Retail 6


Intrastate Crowdfunding Laws

Source: crowdfundinglegalhub.com


California Crowdfunding… Attempts

Proposed

Regulation

Bill #

Introduced

Status

AB 722 2/25/15 Died

SB 577 2/26/15 Withdrawn

AB 2178 2/18/16 Died


How Private Companies Raise Capital

REGULATION D - PREFERRED

SECURITIES EXEMPTION


Regulation D

Purpose: to allow small, private companies the advantage of

offering equity without register with the Securities & Exchange

Commission.

Importance of market magnified when considering that

approximate 2/3 of Regulation D offerings represent New

Capital, which is a more permanent source of capital than debt.


Regulation D: Rule Comparison 504 (d) 505 506 (b) 506 ( c )

File Form D 15 days after first sale in each state an

investor resides

File Form D 15 days after first sale in each state an

investor resides

File Form D 15 days after first sale in each state

an investor resides

File Form D 15 days after first sale in each state

an investor resides

Raise Limit of $1,000,000 in a 12-month period Raise Limit of $5,000,000 in a 12-month period No raise limit No raise limit

General solicitation allowed so long as sales are to

only accredit investors No general soliciation allowed No general soliciation allowed

General soliciation allowed as long as all

purchasers are accredited investors

Can sell to non-accredited investors

Unlimited number of accredited investors and up to

35 non-accredited investors

Unlimited number of accredited investors and

up to 35 non-accredited investors /

sophisticated

Accredited investors only (Must take

"reasonable step" to verify status)

Pre-existing relationship not required Pre-existing relationship required Pre-existing relationship required Pre-existing relationship not required

PPM not required PPM recommended PPM recommended PPM recommended

Restricted Securities, no resale of securities for at

least one year unless registered in a state or sold

under an exemption allowing general solicitation

Restricted Securities, no resale of securities for at

least one year

Restricted Securities, no resale of securities for

at least one year

Restricted Securities, no resale of securities for

at least one year

While companies using the Rule 504 exemption do

not have to register their securities and usually do

not have to fi le reports with the SEC, they must fi le

what is known as a "Form D" after they sell their

securities.

Companies using the Rule 505 exemption do not

have to register their securities and usually do not

have to fi le reports with the SEC, however, Form D

and state notice fi l ings are required.

Companies using the Rule 505(b) exemption do

not have to register their securities and usually

do not have to fi le reports with the SEC, however,

Form D and state notice fi l ings are required.

Companies using the Rule 506(c) exemption do

not have to register their securities and usually

do not have to fi le reports with the SEC,

however, Form D and state notice fi l ings are

required.

Form D is a brief notice that includes the names

and addresses of the company's owners and stock

promoters but contains l ittle other information

about the company.


California Securities Regulations

Intrastate Exemptions:

S.C.O.R.(Form U7)

CA 25102

• CA 25102(f)

• CA 25102(n)

CA D.P.O.

General Rule: Issuers need to qualify the offering and sale of

any securities in California, unless there is a specific exemption

that applies to the offering.


Why Crowdfund?

Strategic

Financial


Reasons to Crowdfund - Financial

Greater and potentially quicker access to capital

Self-funding; vendors and customer can be investor base

Creates stronger borrower for traditional bank lending

(hybrid funding)

The market is growing


Reasons to Crowdfund - Strategic

Investors become customers and brand evangelists

Validate ‘proof of concept’

Creates market "engagement" for companies

Boost company reputation and marketplace profile, if

successful


Case Study – Mill Valley Beerworks (Start-Up)

Raised nearly $200,000 CA §25102(f)

Creative pitch to people they knew in their

“Community”

Sponsor one bottle of beer for $5,000 and receive

a note paying 10%

For each beer bottle sponsored, the company

donated $250 to a charity chosen by the investor


Case Study – Camden Town Brewery

Initial target: $2.4 million

Raised nearly: $19 million

“WE engaged with them because they asked interesting questions rather than financial

questions, they were interested in where we wanted to go… also, we've got now 3,000

ambassadors who ultimately want us to succeed because in our success they'll reap

the benefits.”

Source: http://www.cnbc.com/2015/05/14/


Case Study - Yao Family Wines, Napa

“Inviting U.S. wine and basketball

enthusiasts to own a piece of his

Napa Valley winery, for as little

as $5,000 per person.

Yao Family Wines plans

to raise $3 million

Depending on the size of their

investment, people will enjoy

perks that include exclusive

events and private dinners.


Equity+Debt = Hybrid Funding

Expansion Capital (2016)


Harvesting Your Social Capital - Example

Wine/Beer Club Memberships 2,000 2,000 2,000

% converted to owners 10% 20% 30%

# of New Owners 200 400 600

Investment per Owner 1,000$ 1,000$ 1,000$

Total Capital Raised - Memberhip Network 200,000$ 400,000$ 600,000$

Equity Capital Raise thru Membership Network 200,000 400,000 600,000

Bank Financial Avail - Req's 20% Equity 800,000$ 1,600,000$ 2,400,000$

Total Capital Raise - Hybrid-Funding Model 1,000,000$ 2,000,000$ 3,000,000$


Harvesting Your Social Capital - Example

Wine/Beer Club Memberships 2,000 2,000 2,000

% converted to owners 2% 5% 10%

# of New Owners 40 100 200

Investment per Owner 2,500$ 2,500$ 2,500$

Total Capital Raised - Membership Network 100,000$ 250,000$ 500,000$

Equity Capital Raise thru Membership Network 100,000 250,000 500,000

Bank Financial Avail - Req's 20% Equity 400,000$ 1,000,000$ 2,000,000$

Total Capital Raise - Hybrid-Funding Model 500,000$ 1,250,000$ 2,500,000$


Convert Social Capital

Financial Capital

Benefits and Beauty of Community Capital


Getting Started

1. Business Plan

2. Security Type

3. Security Exemption

4. Exit Strategy

5. Investor Buy-In


Most Important Element of Your Raise


Want More?

Breakaway Funding

2658 Bridgeway, Suite 203

Sausalito, CA 94965

Phone: (415) 729-9482

Website: BreakawayFunding.com

Email: [email protected]

Connect With Us:


Pressures on the Alcohol Industry

Evil Spirit that contributes the to delinquency of people that

should be outlawed

according to the Prohibitionists

The 3 Tiers keep any Tier from becoming a

controlling interest

Producer/ Supplier

Distributor -- not in reality

On/Off Sale Retailer

Consumer

winelaw.net/KC Branch Firm 707 204 9593


The California ABC Act

The laws seek to avoid the evils and

excesses of disorderly marketing

conditions that plagued the alcoholic

beverage industry prior to prohibition.

ABC Act

3 tier system

Control of promotions

Licensing and

permitting

Control of sales




The Act seeks to remove the manufacturer’s

influence over the retailer.

ABC Act

3 tier system


Licensing and

permitting

Control of sales



The Act is intended for the protection of “the

safety, welfare, health, peace, and morals of

the people of the State, to eliminate the evils

of unlicensed and unlawful manufacture,

selling, and disposing of alcoholic

beverages, and to promote temperance in

the use and consumption of alcoholic

beverages.”

ABC Act

3 tier system


Licensing and

permitting

Control of sales


Free Goods

TITLE 4. BUSINESS REGULATIONS DIVISION 1.

DEPARTMENT OF AL COHOLIC BEVERAGE CONTROL

ARTICLE 16. SIGNS AND NOTICES.

§ 106. Advertising and Merchandising of Alcoholic Beverages.

(a) Free Goods. No licensee shall, directly or indirectly, give any premium,

gift, free goods, or other thing of value in connection with the sale,

distribution, or sale and distribution of alcoholic beverages, and no retailer

shall, directly or indirectly, receive any premium, gift, free goods or other

thing of value from a supplier of alcoholic beverages, except as authorized

by this rule or the Alcoholic Beverage Control Act.


What is Something of Value

Giving a retailer or customer things of value beyond

samples and advertising specialties.


What about services? – yes of course

Building a Bar? Advertising?


Retailer Advertising Specialties

Giving items to the retailer that the retailer can use in the

establishment, but is valued at over $100.00.


Giving Out Consumer Advertising Specialties

(A)Consumer advertising specialties furnished

by a distilled spirits supplier to a retailer

or to the general public shall not exceed $5.00 per

unit original cost to the supplier who purchased

it.

(B)Consumer advertising specialties furnished

by a wine supplier to a retailer or to the

general public shall not exceed $1.00 per unit

original cost to the supplier who purchased it.


Giving Out Consumer Advertising Specialties

Giving consumers or retailers consumer advertising specialties valued

over $1.00 and giving retailers more than $50.00 worth in any

calendar year.


§ 25505. Ban on interest in certain licenses

or businesses by on–sale licensee; Exemptions

No on–sale licensee, or any officer, director, employee, or agent of that

licensee, shall hold any ownership or interest, directly or indirectly, in any

manufacturer’s, winegrower’s, rectifier’s, importer’s, or wholesaler’s license,

the business conducted under that license, or the property used in the

business.

Not for Certain Kinds of People


Not for Certain Kinds of People

23952. Additional contents

The application shall also contain a statement to the effect that the

applicant has not been convicted of a felony and has not violated and will

not violate or cause or permit to be violated any of the provisions of this

division or any rule of the department applicable to the applicant or

pertaining to the manufacture, sale, or distribution of alcoholic beverages.


Don’t Ask Don’t Tell -- Hmm

10 % reporting requirement

Change in Control Cleans House

Even if you do it, it violates the law, even if no continuing

reporting requirement

Equity vs. lender


It is Not a Sweepstakes

25600.2. Consumer sweepstakes

(a) An authorized licensee may conduct or sponsor consumer

sweepstakes, subject to the following conditions:

(1)(A) No entry fee may be charged to participate in a sweepstakes

authorized by this subdivision. Entry or extra chances in a sweepstakes

shall not be made available via the purchase of an alcoholic beverage.


Now that you know some of the rules….

You say what can I do, why did I come today?

Perks and Reward

Lenders

Vetting of CrowdFunders


Accept Overpayment for Perks and Rewards

–samples ….just be sure no free things – other than samples:

Notes from Distiller

Jewelry

Special Overpriced Product

Special Bulk Pricing

Tour/Tasting/ Room Packages

Blend your own wine or concoction

Naming rights

As long as the payer does not get a direct or indirect beneficial

or financial interest and as long as small no accounting for

source was necessary and make sure no retailer gets involved.


Accept Loans

Traditional Financial Institutions

Private Loans – Including Family and Friends

Not a debt to equity type loan

Arms Length, documented

May be subject to 3 tier - analysis

No security interest

Applications process and vetting by lender helpful.


Statement as to ownership directly or indirectly of any

assets who possess, maintain, or otherwise have an

interest in an alcoholic beverage license/permit issued

by Federal, State and/or County, partners.

Vetting the CrowdFunder: Doing Your due Diligence to Save your License


If individuals are not the crowd funders, you must drill down to the

principals of proposed investor’s investments in other assets down

to the 5th level to determine if any entity exists that who possess,

maintains, or otherwise have an interest in an alcoholic beverage

license/permit issued by Federal, State and/or County.



Obtain specific information of issuing agency, license/permit

type, license/permit number, copies of permit/license, if any.



Obtain statements under oath as to criminal records

(misdemeanors/felonies) of principals of proposed

Investors, if any and consent to run background check

(be sure to get information necessary).

Obtain statement as to all jobs held by principals of proposed

Investor in the last 10 years.



Obtain statement as to all home addresses of

principals of proposed investor in the last 10 years.

Obtain social security numbers and driver’s license copies of the

principals of the proposed transferee.

Obtain the names, addresses, employment history of all current

and former spouses or domestic partners.




Analyze all information to determine whether the

proposed investor qualifies to invest:

three tier issues

criminal issues

spousal issues

living abroad issues

interstate issues



Require continuing obligations by investors to report material

changes in the vetted issues.


Thank You

This is for Educational Purposes only and is not meant

to be legal advice to be relied upon by anyone.

KC Branch, A California Law Firm

Yountville, CA

(707) 204-9593 | [email protected]

.


Kim Kaselionis,

Managing Partner

Breakaway Funding, LLC

K. Christopher Branch

KC Branch Law Group

Food, Wine & Spirits

Jeff Clark

Live Oaks Bank

Domain Expert

The End – Thank You for Attending.

Crowdfunding for Craft Beverage Producers: Harvesting the Social Capital in Your Community

Investor Relations

Transcript of Crowdfunding for Craft Beverage Producers: Harvesting the Social Capital in Your Community