Beer nerds are often not business nerds, so the financial challenges and solutions to running a startup company can be a lot like learning Chinese (Wenzhou dialect). Luckily, there are professionals lining up to help future brewing operations navigate the busy waterways, changing philosophies, new laws and common practices of the brewing business world. Let’s start at the beginning — raising money to start your brewery.
Traditionally, there are three main avenues to consider when trying to raise capital for a brewery:
- Self-funding — This includes your money or family money.
- Investors — This includes giving up ownership in the brewery for money.
- Institutions — This includes banks, venture capitalists (VCs) or other lending organizations.
But those three money streets are changing directions and expanding with new resources and tools. Crowdfunding, in particular, is a new-school way for cash-strapped entrepreneurs to both involve fans in brand expansion as well as gain the funds necessary to reach business goals. Sounds great, right? Well, it hasn’t been that great in America because of the variety of restrictive laws and complex crowdfunding platforms, but that’s changing.
We took the opportunity to sit down with one of those smart business professionals mentioned above, by the name of Ryan Schildkraut, lawyer with Winthrop & Weinstine, based in the Twin Cities. Schildkraut recently spoke on the changing crowdfunding laws in America and other ways to raise startup capital at the Craft Brewers Conference (CBC) in Philadelphia. He also took time to answer a few of our questions and educate us and our readers on clever ways to raise some legal tender.
CBB: Ryan, thanks so much for taking the time. We appreciate it. Winthrop & Weinstine seems to be getting a lot of appreciation these days, helping brewers with their financial and legal needs. What was the onus of your seminar at the CBC?
Schildkraut: Our session was geared toward a startup or early-stage brewery that needs some more capital for growth. The goal is to always showcase ideas on how breweries can go out and get an investor — not just a venture capitalist or private equity firm — but a new kind of retail, individual investor. We’ve tried this approach for approximately 40 to 50 of my brewery clients, and we’ve found success in pooling money from a combination of friends, family and founders to help us take advantage of some of the new crowdfunding laws at the federal and state levels. Granted, we’re lawyers. We don’t raise money for people, but we can help breweries devise a structure that would make it attractive to an investor. Then, we help them navigate the process of complying with the laws and trying to find the investors.
CBB: What are the new crowdfunding laws? I know in Europe, they can actually have investors through crowdfunding, but that’s not exactly true here.
Schildkraut: When a lot of people think of crowdfunding, they’re thinking of donation crowdfunding, like Kickstarter, where you give some money and you get some type of perk in return. What I’m more interested in is investment crowdfunding, where instead of being a donor, you become an owner of the business. The U.S. laws are really playing catch-up in that regard, but there have been a lot of recent, exciting developments. Can I give you the long version?
CBB: Totally. Plenty of time.
Schildkraut: As a reaction to the Great Depression, Congress passed the Securities Act of 1933, which has regulated pretty much all methods by which companies have been able to raise capital from investors for the last 80 or so years. Essentially, what the law says is entrepreneurs can raise money from friends and family, but they can’t advertise the fact that they are fundraising to the general public. In today’s modern age, this has proved to be problematic. Entrepreneurs such as breweries can’t go to the media (like TV or a newspaper) and say they’re raising money and they certainly can’t mention it on social media either (this includes Facebook, Twitter and LinkedIn). It makes it really hard for any entrepreneur to raise the money they need, especially for a brewery, which is very capital intensive.
So in 2012, Congress aimed to fix the problem by passing the JOBS Act. The JOBS Act really had two key components, Title II and Title III. First, let me tell you about option number one, which is Title II. Title II was the first aspect that went into effect in late 2015. That lifted the ban on advertising, but only if you sell to accredited investors, who are essentially very wealthy, rich individuals. It’s basically 1 to 3 percent of the population. We helped pull together a deal for a craft brewery in Minneapolis called Utepils Brewing. While they raised about $1.25 million and did it via advertising and through channels on the internet, it could only be aimed at a limited group of wealthy people. It was portrayed as crowdfunding, but is it really crowdfunding when only 3 percent of the population is eligible to invest?
CBB: That’s a really small crowd.
Schildkraut: Yes. It’s a small crowd. Although, it’s a promising step in the right direction, and my clients and I are encouraged to see that this brewery was able to raise as much money as it did . And they did it within 12 weeks, which is very fast. I’m used to seeing it take 12 to 18 months to raise that much money – if you’re even able to do it.
Now we can talk about the next option, which is using Title II and is considered a true crowdfunding law that allows anyone accredited or non-accredited to invest. This piece of legislation actually went live recently on May 16, 2016.
CBB: What does this new law allow?
Schildkraut: Well, the idea of it is better than the reality. It allows a company to raise up to $1 million from accredited or non-accredited investors, but there are so many restrictions and so many hoops you have to jump through that I’m not entirely convinced that it’s going to be a usable system. Here are three issues I see with Title III:
First: While the million-dollar cap might work for a smaller brewery, in the example of Utepils Brewing, they needed more than $1 million just to buy the brewhouse and the tanks and build out the tap room. Unless they were going to reduce their fundraising goals by 20 percent, this wouldn’t have been an option for them.
Second: Non-accredited investors can participate, but there is a limit to the amount that they can invest. This amount is determined by a formula of their income, and for most people, the formula results in about a $5,000 limit. So if you’re trying to raise the full $1 million, but if people can only invest small chunks of $5,000, it’s going to be harder and take longer to do, plus your brewery could wind up with hundreds, if not thousands, of shareholders, which creates its own issues.
CBB: Now the crowd’s getting too big.
Schildkraut: Exactly! It’s hard to manage down the road. Now third: Your brewery still has to sell these investments through an online portal that’s registered with the SEC and FINRA. And also, participating companies have to provide reviewed or audited financial statements to investors. Yes, there are a lot of hoops to jump through, which gives breweries a lot of reasons to NOT do it, but I’m optimistic. We’re still so early in the roll out of this new law, and it’s hard to know how it will take off. In fact, I saw the first Title III crowdfunding portal was just approved by the SEC yesterday. The floodgates did not open on May 16, but it’s an evolution. We’ll see how it goes.
CBB: Luckily, there’s a third option, right?
Schildkraut: Yes — luckily another option. …
The third option is cool. Click next page to read it and a bunch more advice.