Neuweiler Brewery developers seek Internet investors [The Morning Call (Allentown, Pa.)]
(Morning Call (Allentown, PA) Via Acquire Media NewsEdge) Oct. 20--With their favorite TV show off the air, more than 90,000 "Veronica Mars" fans chipped in last year to finance a feature film based on the short-lived, cult-favorite series about a hard-edged teenage-girl detective.
Developers of Allentown's crumbling Neuweiler Brewery are hoping about a dozen well-heeled fans of urban redevelopment and craft-brewed beer will do the same for their plan to bring a century-old brewing institution back to life.
The Neuweiler Brewery's developers are among the first wave of companies hoping to cash in on a major rule change by the U.S. Securities and Exchange Commission aimed at making it easier for companies to raise private capital by publicizing their search for investors.
Brewers Hill Development Group, which includes executives at New York City-based Ruckus Marketing, has hired ForeFund Capital to help them lure $5.25 million in private equity using the company's crowd-funding website. ForeFund connects investors with real estate opportunities via the Internet.
ForeFund's goal is a far cry from the 91,564 donations averaging $62 that staked "Veronica Mars" creator Rob Thomas to a $5.7 million haul of fan-funded movie cash using the crowd-funding website Kickstarter.
For now, Ruckus is limited to taking investments from "accredited investors," and it's looking for the money in chunks of at least $500,000. But the SEC is working on rules for pitching investments like Ruckus' to the general public.
It's a prospect that has capital-hungry startup businesses dreaming, and consumer advocates warning of a potential nightmare for small investors.
"We are going to bring together inexperienced issuers with inexperienced investors and the power of social media. What could possibly go wrong?" said Barbara Roper, director of investor protection with the Consumer Federation of America.
The Allentown connection
The ambitious $33 million Neuweiler project would take a crumbling, vacant building in desperate need of an overhaul and convert it to a working brewery, cranking out Ruckus' line of beers in addition to contract brewing for other microbrewers. It would also include office space, a business incubator and a brew pub.
The property offers a variety of redevelopment challenges that have bedeviled city officials for years, including its location in a distressed neighborhood and need for environmental cleanup.
Ruckus is expected to finance the bulk of the project using Allentown's Neighborhood Improvement Zone, which allows most state and local taxes generated there to be redirected to paying off construction debt secured through traditional banks.
For private investors willing to chip in at least $500,000, Ruckus is projecting a 15 percent internal rate of return, a measure used to compare investment opportunities.
Ruckus offered the city's Commercial Industrial Development Authority $1.7 million for the brewery in 2012 and signed an agreement of sale on the property in April, but has not closed on the deal.
While Ruckus hasn't talked before about using the Internet to find private investors, it shouldn't be that surprising. Ruckus' Josh Wood and his partners' track record isn't in brewing or real estate development, it's in technology and marketing.
"This is clearly not our primary strategy for the funding, ForeFund reached out to us and we are kind of experimenting with it," Wood said. "This is kind of a new area, it's a Wild West. Our attitude was: Let's give that a shot."
Wood said the company was attracted to ForeFund because it specializes in real estate funding opportunities. Investors browsing the site won't find a mishmash of ventures. ForeFund collects a flat fee plus a charge that varies based on how many investors clients want to reach.
"You can go to ForeFund and that is all you are getting, real estate investments," he said. It's a field with nearly unlimited potential, he thinks.
A new world of finance
If you've heard of crowd funding, it might be via Kickstarter.com, a website that has aided a variety of high-profile efforts to raise money for new technologies, video games, mobile apps, movies and even useful new products like Elevation Dock, which works with iPhones.
"Veronica Mars" and Elevation Dock are examples of "donation-based" crowd funding, in which a business or artist promotes investment in their idea or project online and asks the public to pledge financial support in exchange for a premium, such as a special price on the product or package of accessories.
That model, while intriguing to some, does not yet apply to large-scale financing of startup companies or real estate ventures, which is called equity crowd funding. But it could soon.
For decades, companies seeking to raise capital outside the traditional system of bank loans had two primary options. They could make a public offering of securities providing investors a potential return, but that required strict disclosure, monitoring and voluminous reporting to the SEC.
The other option was to offer private shares in their venture, a course that avoids the need for public disclosure and reporting requirements, but since regulations were passed in 1933, has limited issuers to one-on-one sales to people with whom they have established relationships.
Some 16,000 U.S. companies took that route in 2012 with offerings averaging $1 million, Roper said.
The Jumpstart Our Business Startups Act of 2011 changed that by allowing offerers to publicize their investment opportunities. But it took two years for the SEC to write regulations making the change.
As of Sept. 23, the SEC has allowed companies to publicly advertise unregulated private investment opportunities, including real estate ventures such as the Neuweiler Brewery. But there are limits. They can only accept money from "accredited investors."
That means selling to established investors such as trusts or private equity funds, or individuals with demonstrated financial wherewithal -- at least $1 million in assets or annual income of more than $200,000.
That means efforts like Ruckus' aren't true crowd funding.
But that's coming. The SEC is expected to propose crowd-funding regulations by the end of the year that would eventually open private-equity investment to general public.
The JOBS Act limits companies to raising $1 million a year through crowd funding, and restricts what the average "non-accredited" investor can put into any one startup based on their annual income. Web portals offering such investments would be licensed.
Details of how all that will be implemented will depend on final regulations, which are months away.
Despite the current limitation to "accredited investors," the change opens up a whole new universe of potential funding.
The cousin Vinny method
Without the ability to advertise them, developers or entrepreneurs seeking investors in their development schemes or product ideas were forced to rely on relatives and friends as a bankroll. ForeFund founder Todd DiPaolo calls it the "cousin Vinny" method.
"You had to set up a meeting with someone, a closed network of angel investors," DiPaolo said. "Your limits weren't how good your ideas were, they were who you knew."
DiPaolo, who founded two previous Internet marketing companies, plans to connect developers like Ruckus, who lack the deep Rolodex of investors that are a product of a career in construction, with real estate investors who are looking for quality investments.
"We are taking a system that has been flawed for a long time and been in the shadows and had gag orders against it and bringing it into the light," he said. "You get more value and meritocracy as to the way the capital is allocated."
There is an existing community of well-funded financiers known as angel investors who specialize in funding risky, startup ventures , but it's a bit of a closed loop, DiPaolo said..
Not everyone is convinced these initial changes will do much to expand the pool of potential investors. While public promotion of investments may "smooth the road a bit," angel investor Jamie Lynchbaugh said the kind of investor who is looking to put money in an alternate investment vehicle like a startup company has plenty of existing avenues available to do so.
"At the end of the day, if someone is serious about doing angel-like investing, they can find some way to do it, whether it's through somebody, or investing in a fund or joining a group like the Lehigh Valley Angel Investors," he said.
Lynchbaugh is more concerned about the SEC's plan to open such investments in the future to the general public, exposing them to "hucksters" without the kind of protections and disclosure requirements placed on standard investment vehicles.
That's also Roper's concern.
"Venture capitalists, angel investors who do this for a living and have extraordinary access to the books and the records and have experience in evaluating startup companies, they expect to lose money on most of their investments," Roper said.
The average investor, even one who is considered "accredited" with an income of more than $200,000, won't have access to that kind of detailed information about most of these private securities and probably isn't looking at it that way, she said.
Small businesses and startup companies have high rates of failure, making them a risky investment, she said.
The safeguards prohibiting the public advertising of private investment vehicles were put in place for good reason in 1933, right after the stock market crash when millions of Americans lost everything and the economy fell into the Great Depression, Roper said.
When the regulations are loosened, it's likely the public will be presented with a multitude of new, largely unregulated investment vehicles, she said. Anyone considering an investment in a privately offered security should look at it as a casino wager, not a retirement investment plan.
"I really like the crowd-funding guys. They are creative, they are optimists," she said. "I think there will be some great things done as a result of crowd funding, projects that [otherwise] would not be able to be funded, but I think that is going to be the exception, not the rule. People need to know that."
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