Everyone should be able to invest in something meaningful, according to Oakland-based securities lawyer Brian Beckon. Host Lisa Kiefer speaks with Beckon, Vice-President of Cutting Edge Capital, about his life's mission to build a more democratic and just economy by creating community capital opportunities.
TRANSCRIPT
Speaker 1:You're listening to method to the madness, a weekly public affairs show on k a l x Berkeley Celebrating Bay area innovators. I'm your host, Lisa Keifer, and today I'm interviewing Brian Beckon and Oakland securities lawyer who's on a mission to democratize capital. Welcome to the program. Brian, I heard you speak recently and you seem to be on a mission to democratize capital. What is the problem that you're trying to solve?
Speaker 2:The big picture problem that I want [00:00:30] to solve is that all the wealth goes to the wealthy. And so when we talk about democratizing capital, it really is about leveling the playing field and allowing everybody to participate in the economy on the same terms as the wealthy. You shouldn't have a system where the wealthy get the really good investment opportunities and the non wealthy get what's left over. It's not even what's left over. They get virtually no investment opportunities at all under the [00:01:00] conventional system that we have. And I will say it doesn't have to be that way, but that's the way it has evolved in the past few
Speaker 1:is the problem you're trying to solve. So you came out of a kind of a traditional securities lawyer, corporate background. What drew you into this new world?
Speaker 2:Yes. When I finished law school, I went to a law firm, kind of the obligatory path that every law graduate, at least in those days did. And I worked there for about four or five years. And while the experience was great, I [00:01:30] didn't feel like that was really my destiny and I wasn't sure I could articulate why, but I left and went in house. So I became in house attorney at a couple of big companies. I started out in a real estate company, could tell US Development Corporation based in San Francisco. And then I went to Sybase, you know, the big software company thinking that maybe I would find my destiny in the tech world because I thought that was interesting. And I found that while I enjoyed the work, it still wasn't satisfying [00:02:00] because at the end of the day, what was I doing? But helping rich people get richer and it didn't feel as though that was why I became an attorney. And I don't mean to delve too deeply into the past, but I originally went to law school because I wanted to figure out how to make the world a better place and I didn't feel like I was doing that. So I was frustrated and that's when I decided to just leave that world and go into the nonprofit.
Speaker 1:Was that kind of scary to go from, [00:02:30] you obviously probably took a dip in salary, right?
Speaker 2:It took about a 60% cut in pay when I left Cybase that was making pretty decent money there and that, yes, it was very difficult and a hard on my family and you know, hard in a number of ways. But I joined RSF social finance, which is a nonprofit finance organization and I absolutely loved it. I was doing exactly what I had set out to do.
Speaker 1:And what is it that they were doing that fulfills your mission?
Speaker 2:Yeah, so, so they actually did a number of things. They a whole philanthropic [00:03:00] side. So they, they manage philanthropic money mostly in donor advised funds and they do some fiscal sponsorships and so on. And while that was very interesting and I love the general idea of moving money to work and do the most good in the world, what really captured my imagination there or what really inspired me was their community investment fund. So they had an investment fund that everybody could invest in. And you say everybody, you mean? And by everybody, I mean regardless of economic [00:03:30] class, everybody of any level of wealth can invest in their community investment fund. Now, not necessarily in every state. There was a whole security and compliance project that I launched there and managed it until I left several years later. But the idea that everybody can participate on the same terms, there's no special deal for the rich.
Speaker 2:Everybody's as like on a level playing field. That inspired me. I was there for about six years and I absolutely loved it, but eventually I wanted [00:04:00] to expand beyond just debt-based charitable loan fund, which is what that was. And there's nothing wrong with that. It's a wonderful model. I felt that there are things that can be done in that world of democratizing capital that go beyond charitable funds. And so I went to a couple of different finance organizations with the view toward developing crowd funding. Now this was, this was when the term crowd funding was new. Right around 2009 ish. I had [00:04:30] just heard the term crowdfunding, although it turns out that crowd funding is not really new, but the term was new. And so I joined a couple of different companies. I was with one for a couple of years and around 2014 we were getting ready to launch a sort of a peer to peer lending platform for real estate.
Speaker 2:And that's when I discovered the folks that cutting edge capital and, and I realized that's really where I belonged. That's where I am now. So I'm an attorney by training as as [00:05:00] most of my colleagues are. So primarily we focus on securities law, compliance. Now that's the big hurdle when it comes to community capital. The reason it's not more ubiquitous is because by and large, most people, including most lawyers, even most securities lawyers think it can't be done. They've never really dug into the securities laws to figure out how to do it. There's just this sort of knee jerk reaction that well that's not what I learned in law school. So it [00:05:30] must not be possible. Did you decide to go on a on this innovative path because you discovered it in your research? Well, I'm not going to take credit for discovering it, but I had done the research, you know, during my days, both at RSF and, and while I was developing this crowdfunding concepts, I had done some research and how to do interesting public offerings and how to take advantage of other exemptions in the law. And so when I met my current colleagues, they were doing that kind of work too. So it was a perfect fit. Together [00:06:00] I think we've been able to, to build a stronger legal and theoretical foundation for our work.
Speaker 1:Look, you just tuning in, you're listening to method to the madness or weekly public affairs show on k a l eggs burglary, celebrating bay area innovators. Today I'm interviewing Oakland securities lawyer, Brian Beckon. You've been doing this for how long? About 12 years. So in that totality of years, what are some of your major challenges?
Speaker 2:The biggest challenge [00:06:30] again is this, this perceived idea that it can't be done, that it's illegal, that you, you simply can't do these, you can't offer an investment to nonaccredited investors. That's crazy. That's, that's sort of the reaction that you get even from professionals that you run into from, from CPAs and, and other attorneys. So what I'm getting at is the biggest challenge I think is really cultural. It's a cultural, it's an educational challenge to, to convey to people that there is much more that [00:07:00] can be done than people even professionals often realize you've got to dig into it and discover what's possible.
Speaker 1:Well, one of the things you said recently was an intrigued me. You said, you know, people invest, you know, stock brokers invest your money and you invest in the Google's or whatever, but you're not really investing in that company.
Speaker 2:That's right. So, so let's talk about the options that are available in the conventional system to non accredited investors. If you're non-accredited, [00:07:30] you pretty much don't have any kind of private offering that you can invest in. So what do you do? You invest your money in a bank CD or you can open up a brokerage account, whether it's an you know, a brick and mortar brokerage or an online account like e trade and you can invest in the stock market. That is the publicly traded stock market. Now does a couple of things to say about that. First, let me, let me talk about where your money goes. If you are an investor who wants to see your money [00:08:00] deployed in a way that's aligned with your values, let's say you want to see your money actually make an impact, do something good in the world.
Speaker 2:Let's say you pick a company and you buy stock in that company via your e trade account. Let's say now what actually happens? What does the mechanics of that transaction you are buying in what's called the secondary market, which means you're actually buying their stock from other shareholders. You are not buying shares from the company whose stock you're buying [00:08:30] is. What does that mean? Who gets the money? Who gets the money that you're trying to put into something meaningful? Other shareholders get it. In fact, not one penny of it goes to the company whose stock you're buying. You're only buying from other shareholders and who always makes a profit no matter whether you win or lose on the deal. The brokerage firm, it's the, it's the, you know, the financial institutions, the Wall Street firms, they always, no matter what, but at the end of the day, have you done anything good with your money?
Speaker 2:No [00:09:00] you haven't. You might feel good because you're not investing in say nuclear power. You're not investing in whatever it may be that you don't like weapons, tobacco or whatever. But the point is you're not actually doing anything good with your money when you're investing in the secondary market. Now that's true. Whether you buy publicly traded shares directly in a brokerage account or whether you go through a socially screened mutual fund, which is what most small investors do with their money, and I don't mean to be critical of mutual funds. I have my money invested in mutual [00:09:30] funds. But again, not one penny of your money invested in mutual funds goes to the companies whose stock your indirectly bide all goes to other shareholders and the Wall Street firms take a cut. But the other thing I will say about these options for non-accredited investors, and maybe you should, let's define that an accredited investor is one that has $1 million in assets excluding their primary residence.
Speaker 2:In other words, $1 million in investible assets or [00:10:00] 200,000 in annual income for the past two years and you expect to have the same this year or that number is 300,000 if you're including your spouse. Now, estimates vary, but somewhere between three and eight or 10% of Americans or American families qualify as accredited investors. So when an offering is limited to accredited investors only, you are necessarily excluding a vast number of potential investors. It might [00:10:30] be argued that, well, those non-accredited investors don't have much money to invest anyway. And the other criticism is they may not have the knowledge that accredited as well. We'll get to that. But me talking about who has the money, it is largely true that accredited investors that is those with a million or more have most of the assets but there is a broad category of what they call the mass affluent. These are folks who have between a quarter of a million and a million dollars in assets, so they are what you might consider affluent [00:11:00] and they have money to invest but do they have options and no they don't.
Speaker 2:They're not allowed to invest in anything and if I say my not allowed to invest in anything, I mean again excluding these vehicles of community capital that we're, we're advocating for in the conventional system where you either where you raise capital via private placements until you get big enough to do an IPO in the conventional system, those those folks have virtually no ways to invest. Now let's talk about why is that the theory behind [00:11:30] that sort of what some have called economic apartheid. There is definitely a segregation between between the options available to the wealthy that is the accredited investors and those available to the non wealthy. It's based on this idea that if you are not wealthy, you are presumed to be unsophisticated and unable to protect your own interests. So it's really kind of a proxy for how knowledgeable are you, how experienced are you in [00:12:00] matters of investing?
Speaker 2:Now, the irony of that is it's a very imprecise proxy. For example, a successful entertainer, Brittany spheres is no doubt an accredited investor, but does she have any sophistication to evaluate an investment? Probably not. On the other hand, an economics professor or sometimes even a securities lawyer may have all the sophistication you could possibly look for but not is not actually an accredited [00:12:30] investor and is not allowed to invest in. Do you have any idea what the pool of unaccredited investment money might be that is currently not being invested? If you consider that the total amount of money invested in the United States is somewhere around $30 trillion. That mass affluent category controls about a quarter of that, so we're talking about maybe seven to $8 trillion of investible [00:13:00] assets by non-accredited investors in America based on some statistics I've seen. That's pretty amazing. It's a lot of money.
Speaker 2:What are some of the solutions you've come up with that maybe we don't know about? Well, here's where it gets interesting. As I said before, in the conventional system, a small business, first of all, you know, they will try to tap out their friends and family to raise money from their friends and family. But once they're ready to go beyond their inner circle, they do a private offering looking for angel investors, venture capital [00:13:30] firms, big institutional investors. Those are types of private placement offerings that are available only to accredited investors. And then once they get big enough, then they can do an IPO. So you often hear about these companies doing a series a round a series B, round a, series c, the SMS go up to d or whatever. It just refers to how many times they'd go out and try to raise capital again for, to, to fund their expansion or increase, you know, improved operations or whatever it is.
Speaker 2:And then when they get big enough they do an IPO. [00:14:00] But what all those strategies completely overlook is all the folks who would love to see them succeed and would like to invest if they only had an opportunity. So a company that follows that traditional trajectory is really missing out on their ideal investors. If you find someone who knows how to how to do that, how to jump through the compliance hoops for that. It's not all that difficult to actually do an offering as a smaller business, and [00:14:30] I'm not talking about an IPO by an IPO, I mean a full blown SCC registration doing a nationwide offering. It's, it's what a company does when they go public. What Facebook did a few years ago and raised several billion dollars and IPO is a very expensive process and companies that go public spend a quarter million dollars and up to two times millions of dollars on compliance costs to do an IPO.
Speaker 2:That's not what I'm talking about. I'm talking about how does a small community scale [00:15:00] business raise capital and it can be a manufacturing company, it can be a restaurant or brewery, it can be whatever. And something that is of a more community scale. What they can do is actually do a local small scale public offering. It's a true public offering, but you're not talking about doing an sec registration at the federal level. You're talking about registering at the state level in a way that is very cost effective. It's not that [00:15:30] expensive to do. This is again what most securities lawyers even don't know how to do because they don't teach this in law school now I took securities law courses in law school and all this got was just the barest mention. Oh yes there is, here's a long list of exemptions that are possible but here are the two that are important and they channel you're the, you know the, the student's attention to the very conventional systems, the, you know, the private placements and then the IPO. You have lawyers coming out of law school who have never heard of these structures [00:16:00] of community capital and they go to the big law firms who have never done it. And if a client goes to one of these big law firms, there'll be told, no, you can't do that because those folks can't think outside the box.
Speaker 1:Okay, so you have found this innovative idea. Yes.
Speaker 2:And you brought it to fruition. Yes. Our firm has done quite a few of those. Now again, I don't want to take credit for inventing it. It was done decades before we do it. Yeah. In fact, this is the way capital was raised for a hundred years, [00:16:30] but somewhere along the way, and I'm not quite sure when that happened. Perhaps the start got started in the, in the sixties and seventies but economic power, financial power became more consolidated. You used to be that people invest in who they know and there's a, there's a thing that happens when you meet someone face to face and you look them in the eye. There's some trust that happens or if there isn't, you don't invest, but when you have a relationship with someone, they're much less likely to try to [00:17:00] screw you over. The thing is there's our current system, the Wall Street dominated system of centralized power and centralized wealth. It puts a premium on anonymity. Anonymity breeds fraud because you can get away with it. Nobody knows who you are. Anyway, I'm curious
Speaker 1:why I can't invest in a fund, let's say a Berklee Fund that is full of all these businesses that I love and that I buy things from and I want them to stay in business and I know they [00:17:30] probably need capital now and then, but a fund that I can invest in every year that supports Berkley, will it ever be available?
Speaker 2:The short answer is no and yes, if I can do something about that. So, so here's the issue. Now, when you're raising capital via via raising money, that's a securities offering, you're raising investment and then turn it around and investing in other companies, you now need to contend with the investment company [00:18:00] act of 1940 that's a federal law that put it simply. It regulates mutual funds. And so anybody who is invested in a mutual fund has seen that fic prospectus. You get, it's about 50 to a hundred pages and lots of fine print, excruciating levels of detail about the fund and how it's managed. Nobody ever reads them. They just sit there and you sometimes turn to the very back to see what it's actually invested in, but that's about it. The reason they do that is because they are complying with the 1940 act, the 1940 investment company act, which is, it's a very [00:18:30] burdensome set of requirements for an investment fund that does what I just described, raising capital via securities offering and then investing in the securities of others.
Speaker 2:Now what you're describing this hypothetical Berkeley Fund is that, but the compliance costs are way, way too expensive for a locally focused fun of say just a few million. You can't do this for a fund unless it's of a size of at least 10 20 50 million. Most of these funds [00:19:00] have, you know, mutual funds have hundreds of millions, even in the billions of dollars. The compliance costs are too high for a community investment fund under the 1940 so there's an opportunity here to find an exemption strategy. The 1940 act like most laws have a variety of exemptions and one of the things that we've been doing lately is identifying those exemption strategies that can work for exactly what you're talking about. You should be able to invest [00:19:30] in F in a Berkeley Entrepreneurial Fund that helps to launch small businesses here in Berkeley. Why not? In fact, there should be one of those in every community across the country.
Speaker 2:The reason that they aren't more ubiquitous is because nobody's figured out how to navigate through the 1940 act at that level. So here are some ways to do it. First of all, is your mission too. This is my mission now. Thank you for asking because this is, this is actually where we're spending a lot of time because it's one thing to do a direct public offering, raise community capital for a single [00:20:00] company. That actually, as I said before, that's been done many times since the 80s that's what my firm does every day. You need to get someone who knows what they're doing, but I will say it's not so daunting that as to discourage anyone from doing it. That's a well trodden path. Now when you get into the funds, now we're getting into some innovative stuff because people have generally not figured out how to do these things.
Speaker 2:So let me just mention a couple of exemption strategies under the 1940 act and then we're, we're working on finding some other ones. [00:20:30] I've talked to a staffer from a well-placed senator who, you know, we're hoping we'll maybe introduce a new law that will create a new strategy that's available, but, but let me talk about the most commonly used strategy by far and that is the charitable loan fund. So one exemption under the 1940 act is 583 charities and that is the most commonly used because that makes it easy. You don't have to jump through any hoops. You just have to be and act as a true charitable organization. There are many charitable [00:21:00] loan funds, like for example, RSF ATFC. That is actually a really good example. They are a charitable loan fund that operates in Lake and Mendocino counties up in northern California and they are doing exactly that.
Speaker 2:They're raising capital via a direct public offering of debt securities to their community. And then they aggregate that money and invest via loans to projects. And so they've, they've done some really great stuff up there. There are 583 charity. Yeah. And so that is a great [00:21:30] strategy. There are many charitable loan funds. So again, that's the most commonly used exemption strategy on the 1940 act that allows for community capital. I won't get into a discussion about other strategies that are used by the venture capital firms and the private equity firms that allow say up to 250 investors, but they all have to be accredited. I'm not interested in those that are only open to accredited investors. I'm talking about strategies that are available to funds that want to raise capital via a direct public offering that anybody can invest [00:22:00] in. Again, it's about getting out capital.
Speaker 2:So another strategy that you can use as real estate. A real estate fund has its own exemption from the 1940 act and so you can set up a fund that anybody in your community can invest in, turn around and invest that in perhaps blighted urban properties or rural properties, but revitalize them, improve them, lease them out, charitable as well. It's not charitable and that's the thing. This is now a for-profit fund I'm talking about [00:22:30] that can raise capital from investors who are going to be owners of the fund. They'll invest in stock. If it's a corporation, they'll invest in membership. If it's an LLC, these investors are getting equity. They're getting a piece of the action. When that fund does well, when it generates profits, those profits can be shared with investors. Now, that's an important distinction from the charitable loan fund because in a charitable loan fund, they are actually forbidden from sharing profits with their investors.
Speaker 2:They will simply [00:23:00] pay interest. Investors can only invest in debt when you're talking about a charitable loan fund, but these for profit structures, this is where it can get interesting now because you have that upside potential and this is where you can perhaps leverage the whole capitalist system to bring in more money by offering the prospect of real profit that can, you know, stay ahead of inflation. So a real estate fund is a great strategy and then there are some other strategies and here's where it gets a little bit more challenging [00:23:30] but also potentially more interesting. You can actually have a fund that invests in companies and and takes in investment from equity investors. But now the trick is is that since there is no exemptions specifically for that kind of model, we find another exemption strategy where such a fund is supplemental to another principle line of business.
Speaker 2:I'll give you, yes. Okay, [00:24:00] let me, let me back up. The exemption that I'm talking about says that you're not covered by the 1940 act. As long as the investing insecurities that he's invested at work you're doing in other companies is not your primary business, but you have some other primary business. Now, how would that actually work in real life? Well, let's say you're operating a coworking space or an incubator or an a business accelerator or some other other service provider [00:24:30] type of operation, and in the course of doing that work, you think it'd be great to also be able to invest in my clients. Well, this allows you to do that. Again, not as your primary business, but as a supplemental business. For example, you've got a coworking space, and by the way, I'm working with a project in Concord, California. It's going to do exactly this, so I'm actually describing a real project here.
Speaker 2:They're going to build a coworking space in Concord. And in addition to providing access to various [00:25:00] services and providing some educational services, they're going to actually invest in local businesses. And the community will offer, will be offered an opportunity to invest in this collective company that includes both the coworking operation and this other investment portfolio. And when that portfolio throws off profits, those profits will be shared with investors. Wow. Yeah. We're in the early stages of it. The design has all been mapped out and, and right now [00:25:30] we're raising some capital to, so it's been approved and everything, but it has not been approved by the regulated, we haven't submitted it yet. Uh, but, but we've developed a plan and right now we're, we're raising some, some initial seed capital to pay for some of the expenses of launching the pilot coworking space and then taking care of some of the regulatory expenses for the direct public offering.
Speaker 2:So that would be something like I described, being able to invest in your own, in most cases, [00:26:00] these types of funds will be focused on a local community that will be sort of the purpose or the mission behind it. But you could also create one that has a broader mission that says, we'll invest in biodynamic agriculture, or we'll invest in education, or we'll invest in, you know, it can be more conceptually based. I think in most cases, these will have a geographic focus, some metropolitan area, I'm working on one for example now that that's gonna serve the Philadelphia area. [00:26:30] It'll be partly real estate, but partly a kind of business incubator as well. So it'll be the problem of the massive amounts of capital you need for a fund by diversifying you kind of even out the cash flow needs. And it also helps to attract investors who might be interested in something that's locally based, but is in itself kind of diversified.
Speaker 2:Well, what's the future going to bring the end game is that [00:27:00] when we can change the culture so that a typical non-accredited investor who has say five or $10,000 in their account ready to invest, the first thing they think about is investing locally before it ever crosses their mind to invest in a Wall Street traded firm. So, so there's a cultural shift. We want to get to educational shifts. It's an educational shift. We have to con, we have to, we have to share with the world that this is possible. [00:27:30] And when that happens, wealth will begin to circulate more in the community. Again, I'm talking about the end game. What does it, what's the, the final vision. We want to have wealth circulate within communities. In other words, community investors invest in community businesses. Those community businesses are able to grow, hire more local workers, more local employees, and generate more business from the community, generate profits, [00:28:00] and then repatriate those profits into the community.
Speaker 2:So you get this cycle of wealth building and that will help build wealth organically in any community. And that works just as well as low end, healthier communities, healthier, more resilient, more self-reliant. They won't require or rely as much on infusions of capital from outside. This can really transform communities, particularly some of the more [00:28:30] marginalized communities and empower them. Ultimately, at the end of the day, we want communities to hold and wield and actually exercise the financial power that is inherently there is everybody has financial power, but many people feel marginalized. They don't, they don't exercise that power. So we want to empower people.
Speaker 1:You have a very interesting background. You grew up the son of missionaries.
Speaker 2:True. My great grandfather was a missionary to China. My [00:29:00] grandfather was born and raised there and my father was born and raised in China. My parents went to Taiwan after the communist revolution. So that's why I was born and raised in Taiwan.
Speaker 1:And you spent many years there. So why do you think that growing up in this way informed this idea of the necessity of a healthy community?
Speaker 2:You know, it's funny that you asked that because in a way I'm kind of an evangelist for community capital. So in that sense I'm following in my ancestor's footsteps, although it's not religiously motivated. Yeah, [00:29:30] but I do think it's good too to see how other people live and what they struggle with and what are the barriers to success and yes, I think that did help a sense that community is really what we should be supporting. If somebody wants to get ahold of you, what's the best way for them to reach? You? Probably would go onto my firm's website, so it's www.cuttingedgecapital.com and there'll be ways to connect with us and you individually for me and [00:30:00] me individually in any speaking, anywhere in the well my partners and I try to go out and speak to whoever is interested in hearing about community capital. I will be given a talk to the Richmond Chamber of Commerce, I believe on June nine
Speaker 1:well Brian, I really want to thank you for being on the program. My pleasure. Thank you for come and join in and you've been listening to method to the madness on k a l x Berkeley Celebrating Bay area innovators. You can find all of our podcasts [00:30:30] on iTunes university. We'll be back next Friday at noon.
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