CircleUp is a Potential Source of Capital for Idaho Entrepreneurs

"CircleUp is an online social marketplace where individual investors can invest in small private consumer companies and be part of their success" https://circleup.com/

Idaho-based company Prosperity Organic Foods (www.meltbutteryspread.com) recently concluded a successful raise of equity capital using CircleUp. Disclosure:  I am an investor in Prosperity.  Prosperity produces and distributes a line of delicious and healthy substitutes for butter under the brand Melt® Organic.

Prosperity CEO Meg Carlson reports the process was quick and easy.  It was about eight weeks from the time Prosperity first submitted documents to CircleUp until it received the funds.

I visited with CircleUp COO and Co-Founder Rory Eakin. CircleUp was founded with the vision of providing the means for small consumer products companies to efficiently reach accredited investors.  Growing consumer products companies need capital to support their inventory and receivables, but it is often extremely difficult for small consumer products companies to raise expansion capital. 

Companies most appropriate for CircleUp’s services already have some traction in the market place and are seeking equity capital to support expansion.  In the case of Prosperity, this was the company’s third round of investment capital and will support national expansion from about eight hundred stores to several thousand.

Companies seeking capital submit an on-line application.  CircleUp reviews the application, does a background check on the entrepreneurs, and conducts its own research on the company and the industry.  They accept around 2% of the applicants.  Once accepted, the investment opportunity is opened up to potential investors.  Companies must declare a minimum and maximum raise.  Unless the minimum is reached, the company does not receive any funds.  After the minimum is reached, the company can continue to raise capital until the maximum is reached. 

For investors, there is a simple process to join CircleUp.  You must certify that you are an accredited investor. Once your account is set up you can then browse the potential investments. Each potential investment has a deal room where documents have been posted.  Potential investors can ask questions of the company management and exchange comments among themselves. 

Once an investor decides to make an investment, money is sent to CircleUp’s escrow account and held until such time as the company achieves its minimum raise. Then the funds are transferred to the company and the company issues its investment certificates to the new shareholders.  CircleUp withholds a commission for their services.

CircleUp is similar to the coming crowd-funding platforms authorized by the JOBS act (The JOBS act will change fund raising for startups).  Unlike the anticipated crowd-funding platforms, CircleUp is limited to accredited investors only. Accredited investors have a net worth of more than $1 million exclusive of the equity in their primary residence or meet an income test.

Based upon Prosperity Organic Food’s successful experience, other Idaho entrepreneurs in the consumer goods space may want to consider CircleUp for a portion of their capital needs.

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Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center (www.idahosbdc.org) at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is past- president of the Boise Angel Alliance (www.boiseangelfund.com), and is a principal in Loon Creek Capital (www.looncreekcapital.com), which assists angels in forming angel funds. He can be reached by email to kevinlearned@boisestate.edu or by phone at 208-426-3875. 

The JOBS Act Should Make Early-Stage Capital More Accessible by Idaho Entrepreneurs

On April 5 the President signed into law the JOBS act, which stands for “Jumpstart Our Business Startups.”  The Angel Capital Association, to which the Boise Angel Alliance belongs lobbied in favor of the act. This law, which will be implemented over the next nine months, radically changes the laws as they pertain to raising equity capital in the United States.  In my opinion, the changes are for the better, although we must be mindful of the potential for abuse.

This is a complicated law.  The SEC is charged with writing a number of regulations. Until they are written, we can’t know exactly how the law will affect entrepreneurs and angels.  But there are key changes that have the possibility of making it easier for Idaho entrepreneurs to sell stock.

First let’s review pre-JOBS law.  Under those laws, you may not sell stock unless it is registered with the SEC (an expensive and time consuming process) or qualifies for an exemption.  Broadly speaking, there are two exemptions that are commonly used:

1.  Offer stock only to accredited investors (generally a net worth of more than $1 million excluding the equity in the primary residence) in private transactions. A private transaction means there can be no general solicitation including advertising or the use of the Internet.

2.  Offer the stock only to residents of one state in which case state law applies but federal law does not.

I wrote earlier about these two exemptions (see "State Small Corporation Registration" posted December 29, 2011).

The JOBS act removes the need for both of these exemptions for many businesses.  It

1.  Allows equity-based crowd funding.

2. Removes prohibitions on general solicitation.

Crowd funding is where an entrepreneur uses the Internet to solicit relatively small amounts from the universe of Internet users.  Until the JOBS act was passed, this was illegal in that offers were being made to individuals who were not accredited investors, and of course, the Internet is a means of general solicitation.  There are crowd funding platforms, but they ask for “donations,” not for the purchase of stock.

The JOBS allows up to $1 million of capital to be raised from non-accredited investors, so long as each  individual investor does not invest more than the lesser of $10,000 or 10% individual investment on all such investments during any one year. It also allows general advertising and preempts state law so this device can be used to raise money from throughout the US. 

It's not clear how the issuer will make sure a non-accredited investor has not invested more than $10,000 in all crowd-funded investments in any one year. The funding platform will have to be registered with the SEC, but it's not yet clear what this means or what obligations will be imposed upon the platform.

For offerings of more than $1 million, or where the company does not wish to be restricted to $10,000 per investor, a company may still use the accredited investor exemption, but is now allowed to advertise so long as the ads are focused on accredited investors.

We won’t know for sure how these new permitted activities will impact local entrepreneurs until the regulations are written. But generally I believe they will have a positive impact, making it easier for local entrepreneurs to raise equity capital.

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Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center (www.idahosbdc.org) at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is a member of the Boise Angel Fund, and is a principal in Loon Creek Capital (www.looncreekcapital.com), which assists angels in forming angel funds. He can be reached by email to kevinlearned@boisestate.edu or by phone at 208-426-3875.