Rocket Your Dollar BONUS: Crowdfunding with a Self-Directed Account

Surprise! Rocket Dollar has launched a crowdfunding campaign on Republic.co, join us as we give you an inside look into our startup's growth. Our guest, Brooke Borden, Rocket Dollar's VP of Finance and Strategy, will also be discussing the benefits of crowdfunding and how to do it with a Self-Directed IRA or Solo 401(k).

Transcription:

Thomas Young: Welcome back, everyone. Today, we're going to have sort of a quick podcast here with Brooke Borden, our VP of finance at Rocket Dollar, and we're going to talk about crowdfunding, which is one of the cool things that you can use your self-directed IRA or 401k to invest in. And we're also going to share some cool news about a crowdfunding campaign we're doing at Rocket Dollar to sort of spread awareness on the space on what people can invest in, and for anybody that has an account or doesn't have an account, give them the ability to invest in Rocket Dollar's growth and future. Thanks for being here, Brooke.

Brooke Borden: Hey, you're welcome. Glad to be here.

Thomas Young: So, let's jump in. At its core, what is crowdfunding?

Brooke Borden: So, a lot of people don't realize, in the United States, our securities law basically say if you want to sell shares in a company, the only way to do it at a high level is you register with the SEC and you do that on an exchange. That is technically the only legal way that you can solicit investment into your company. However, the securities laws also have various exemptions that allow you to do it to private parties. So, there's the Reg A exemption, there's a Reg D exemption, there's a Reg S exemption if you want to sell to overseas investors. And as part of the JOBS Act, a few years back, they created a new exemption, which is you can do what's called a crowdfunding campaign, which has very low minimums. They don't have the onerous kind of accredited investor regulations to qualify investors for who and who cannot invest in these. So, it's basically designed for emerging companies to reach out at a very low level in terms of dollars, be able to attract investment with a maximum cap at 1,070,000 per year that they can raise.

Thomas Young: And, oh, that's a million per year.

Brooke Borden: Per year. Every 12 months, you can just do a crowdfunding campaign up to 1,070,000.

Thomas Young: Oh, fantastic. That's something I didn't know. I thought it was... I thought it was sort of a one time deal. That's good to know. So, how is that different than, say, something like Kickstarter?

Brooke Borden: Well, Kickstarter came around before the JOBS Act and the creation of these crowdfunding portals, and what it was, it was basically a workaround that says, "Well, instead of investing in a company, we'll basically give you a pre-sold, tangible product," which worked fine for those companies that had a tangible product that they could actually sell and deliver and build excitement about, and it helped them create the working capital to actually create those products in the first place, but it didn't really let companies that didn't have a tangible product or service, and also there was really no accountability. And I think we've all heard about some of the stories of either a failed campaign or the campaign raised a lot of money and the people never got the product.

Thomas Young: Right.

Brooke Borden: So, this was a way to more formalize a Kickstarter-type campaign, but to be able to actually sell shares in a company as opposed to just giving someone a product.

Thomas Young: Right. So, crowdfunding at its core is really investing in a company. Kickstarter's pre-purchasing a product.

Brooke Borden: Correct.

Thomas Young: And Kickstarter is great for some companies and crowdfunding is great for other companies, and it just depends on what you're doing with your company. So, if you're thinking about getting into crowdfunding or thinking about making investments in through a crowdfunding portal, what are some ways to understand the investment and why would you do it as opposed to something else?

Brooke Borden: Well, for a lot of companies, as I said before, companies that raise capital seek these various securities law exemptions, which they can realize it's called a safe harbor that they can raise money, and a lot of those are accredited-only investors. And so this is a way to allow people who don't have accredited investor status to participate in a smaller level, and most of those types of Reg D or Reg A placements will have fairly high minimums because of the... just the difficulty of doing the raise itself. And so with the crowdfunding campaign, economics allow is for much lower-level participation, and it's also very flexible. Someone can basically fill in the blank whatever amount that they want to invest in this deal they can do.

Thomas Young: Right. Is there a limit to how much an individual can invest?

Brooke Borden: There is a limit. The SEC has set individual limits. It's a bit complicated. It's based on a formula of the individual's income and net worth. There's kind of a matrix. It's a self-policing kind of thing and there are various limits. They vary, I think, from $1,000 a year up to $107,000 per year, and that's a rolling 12 months. So, if you keep your own, basically your own roster, you can figure out, "Okay, how am I compliant with this?" And if you invest a lot in one particular portal, they will track that also, and they'll tell you, "You're getting close to your limit on us," but that... It's kind of a loophole because if you're investing across several different portals, they don't share that information amongst themselves. So, it's basically a self-policing thing.

Thomas Young: Right, that makes sense. So, it's just important for everybody to sort of keep track of their own. So, when a company is going out and they're going to raise money on a crowdfunding site, what are some of the key parameters of a campaign?

Brooke Borden: So, the campaigns can be summed up basically in three terms. They boiled it down to be very, very simple. First of all, almost every campaign on a particular platform will use the same documentation. And what you're getting is not actually stock in the company. What you're getting is called a safe agreement, which is a simple agreement for future equity. And so what it basically says, if certain things happen in the future, then we will be issuing new shares in the company. And so when you take that agreement, you can boil it down to, okay, there are only three key parameters that define that safe. The first parameter is what is... what's known as the cap rate. So, that means that's the dollar value that if a company does future financing, then it kicks in and this happens.

Then there's the hurdle amount, which is, say, a million dollars, $2 million. So, if a company issues a safe that has, say, a 10-million cap with a $1,000,000 trigger... So, that means if that company does any future round of financing at more than a million dollars with more than a $10,000,000 valuation, then the safe kicks in and then those people are issued shares, whatever that share is specified to be within that safe agreement. Some of those safe agreements allow for actual direct ownership of shares. Some will group all of those safe owners into a special class of equity. So, it differs from platform to platform, but you can basically look and see what are the key parameters are, what is the minimum size investment, what does that cap rate at which triggers that investment, and then what is the trigger amount, whether it's one-million, two-million that qualifies for that.

If the company were to do a round of financing at lower than that cap rate, then something kicks in, which is called the discount, and you'll see that on the websites that advertise these deals, what the discount is. So, that basically means if the cap rate is 10, the company does a round of financing at nine-million. So, instead of us converting in at nine-million, we get a discount of 10% because the company did basically less than what they said they were going to do.

Thomas Young: Right, that makes sense. And it's important to understand these things before you make an investment or when you're considering an investment through a crowdfunding site. So, let's talk a little bit about Rocket Dollar and why is Rocket Dollar doing a crowdfunding campaign now?

Brooke Borden: Republic.co is the platform that we're doing ours on. If you want to check ours out, it's republic.co/rocket-dollar, and you can see our campaign, which is life right now. But we've wanted to do a deal with them for a long time for a couple of different reasons. Number one, as you had alluded to in the preamble to the show, we think self-directed IRAs are a very excellent vehicle in which to make these investments because obviously if you hit it big, there are no capital gains on that. The other one is we also think because of that relationship, that the customer base of Republic's would grasp that concept and say, "Oh, well I should go get a self-directed IRA. I can invest in these deals through a Rocket Dollar account."

Brooke Borden: So, part of it for us is raising money as a startup. We're always happy to raise money, but the other part is very strategic in terms of getting that exposure to like-minded people that we think that would kind of be predisposed to do investment on a crowdfunding deal through a Rocket Dollar account.

Thomas Young: Right. It's kind of like the inception of fundraising for us because we're actually providing the vehicle that gives people the ability to invest in us [crosstalk 00:08:43] platform. It's kind of cool.

Brooke Borden: It's either... Yes, it's either that or you could say it's some other adjective about it. But yes, people can open a Rocket Dollar account and use that to invest through Republic back into Rocket Dollar, the company.

Thomas Young: Right. So, it's great. For our customers that are happy and are having a good experience, it's a great ability for them to own a part of it and really share in not only the customer story but in the success story of Rocket Dollar and it's, frankly, a great sort of marketing tool for us because it really allows us to get the word out about what we're doing and some of the opportunities that you can participate in. Whether you believe that Rocket Dollar is going to make it or not, you can use a Rocket Dollar account to invest in companies that you do believe in or are in sort of your realm of what you want to invest in.

Brooke Borden: Yeah, and it is very interesting... A lot of our evangelism about Rocket Dollar is about investing in alternative assets and alternative asset classes. And very often for the typical person out there, they may be doing alt investments, say, in real estate or through some other kind of asset class that they like, and they really just don't know how to crack into that kind of angel investing world. How do I be an angel? And a lot of times even, they don't have quite the bankroll to do that because angel investments are typically 25 or $50,000, and that's quite a large check. And when you're doing angel investing, you really should be investing in 10, 15, 20 of these to get enough diversification. So, this allows someone with a fairly modest bankroll to invest in as little as $100 in some of these deals on crowdfunding sites. And so they can build up a portfolio of private equity holdings of 10, 20, 50 different companies.

Thomas Young: Right.

Brooke Borden: And place their bets and spread them around.

Thomas Young: Right. And it's great for people that are below the accreditation threshold. It's a great way to start sort of flexing that muscle, doing due diligence, thinking about investing, thinking about what your investment thesis is if you will. And one of the great things about crowdfunding is, as it picks up steam, is there are some fantastic companies raising money this way. I mean, it is... It's becoming a mainstream way to raise money because of all of the benefits. It's like a... It's a little bit of why a lot of companies go on Shark Tank, for example, and half the time it's to raise money. Half the time, it's just to get on TV or just to get that exposure. So, there's a lot of benefits to the company, and there's a lot of benefits to the investor.

Brooke Borden: Well, I would also add... You had mentioned individual investors being able to do some measure of due diligence about these companies. Because these crowdfunding portals are regulated by the SEC and all the companies that are listed on these funding portals have filed forms and financial statements with the SEC, there is an amount of validation there that you're not going to file a Form C with the SEC that has incorrect information because there are very real penalties for doing that. So, when you look at the documentation that these companies provide on these funding portals, you can heavily rely on them that they are going to be factual and somewhat accurate.

The other thing that's very unique about the way that a lot of the portals are set up, it's also very interactive. They have open discussion boards where you can post questions and the CEO or someone from the company will answer, and you can... If you have done your due diligence and you have questions that remain unanswered, you can just directly ask the company and they reply in a public forum that everyone gets to see what the whole question and answers were.
Thomas Young: Yeah, it's a fantastic way to engage with the leadership team of that company. And I know you've been personally very active responding to all of the discussions on our personal page. And speaking about our personal page, we launched the campaign about 10 days ago, roughly.

Brooke Borden: Nine days ago, yeah.

Thomas Young: Nine days ago. And how's it going?

Brooke Borden: So far, it's gone fairly well. There are several different milestones that you look at hitting along the way and we think in benchmarking ourselves to some of the other transactions that launched at about the same time, we're doing as good or better than a lot of those. We still have a long way to go. These things stay open for a maximum of 90 days. So, we would close the deal either upon hitting our funding target, which is the 1,070,000 or the 90 days, whichever comes first.

Thomas Young: Right.

Brooke Borden: So, hopefully, we can get to the entire amount. If it's not that amount, we'll be happy with raising whatever, two, four, seven, $800,000. It'll certainly help and it'll get us that exposure that we talked about.

Thomas Young: Right. Is there anything else that we should talk about? We really just wanted to take a quick episode, talk about crowdfunding, talk about our specific campaign, but is there anything, Brooke, that we should touch on?

Brooke Borden: I would say if there's a company out there that's thinking about doing this, it's a very low-risk exercise for the company. And actually, the process does make you stop and think about a lot of things about your business model. Because like I said, we had to put financial statements together, they had to get reviewed by an outside CPA. We had to put together this legal document that gets filed with the SEC that's a public document. So, inputting those together, it makes you stop and think about your company and think about, "Okay, what are the risks of our company that we should be disclosing to people?" And then you have to kind of say, "Well, how are we managing that risk ourselves?"

Thomas Young: Right, right.

Brooke Borden: The other thing that is actually very interesting too, a lot of startups... I know ours is not much different than the others. The capital raising part of that typically falls to the CEO, the CFO. We're out having discussions with people all the time, talking about raising capital, but it's a very small group of our company that's involved in that capital raising.

Thomas Young: Right.

Brooke Borden: Whereas this has involved... I would say three-quarters of our team is actually actively involved in this and has a vested interest in doing it, and everyone sees when someone new invests and they're just kind of high-fiving each other. It actually, internally, has been a very good team-building exercise, and it's created internal engagement around raising capital whereas before, raising capital is just Henry and me flying off to somewhere and having a meeting with someone, and the team really was disconnected from that. So, it's been very good to get the whole team involved in it.

Brooke Borden: It's been, I think, exciting for some of them to kind of see how the sausage is made- [crosstalk 00:14:59].

Thomas Young: Right. Right.

Brooke Borden: And also, there's a sense of reward if we're hitting that target.

Thomas Young: Right. I mean, for me personally, it was a great exercise to sit down and write a lot of the copy that's on the page, and it forces you out of your sort of normal day-to-day operations and think about your company as a whole, which is, I think, important for anybody, whether you're an executive, a founder, an employee, it's nice to think about. And speaking about the documentation that we had to provide, you also have to pass the due diligence of the platform, and the platform has a vested interest in not just throwing up any deal because if they earn a reputation as someone that loses a lot of money cause their deals are bad, they're going to fail pretty quickly. So, they also put us through their own internal due diligence-

Brooke Borden: They did challenge us on certain numbers, like "Where did this number come from? What's your source for this?"
Thomas Young: Right. We had to provide not only documentation to SEC, but we had to back up our numbers to the platform itself, which is a good exercise. So, I think we've gone through kind of a good primer here for a lot of people. Some of the listeners may be wondering why we haven't talked about any specifics of our particular offering. Well, we're prohibited from doing so. The only thing we can really do is point you to the official campaign page, which is located at republic.co. As I said, it's republic.co/rocket-dollar. So, you can check out all the details there. Unfortunately, we can't give you a full sales pitch here.

Thomas Young: All right. But as Brooke said, you can ask any question that you have directly on the page, and they will get answered within, normally, a business day is-

Brooke Borden: Yeah, we try to do a 24-hour turnaround, yes.

Thomas Young: Right. So, go on the page. Check it out. Give us your thoughts. Let us know what you think about it. And if it's something you're interested in, invest.

Brooke Borden: We hope you do. And there... Even though we can't say exactly what you can get, there are some very nice rewards for people that do invest at various levels.

Thomas Young: Right. Cool. Thanks, Brooke.

Brooke Borden: All right.

Thomas Young: Thank you for listening to this episode of Rocket Your Dollar. If you enjoyed this episode, please subscribe and share the podcast with your friends. To learn more about self-directed investing or to get started with your own account, please visit us at rocketdollar.com. See you next week.