A newly launched online platform called CuttingEdgeX (CEX) aims to make Main Street the next big opportunity in investing. In the age of crowdfunding, CEX hopes to help small businesses secure funds made scarce by the recession.
Until now, for companies that support local communities and entrepreneurs passionate about people and the planet as well as profits, there have been two options: donation-based crowdfunding platforms where individuals get perks like T-shirts, or the usual investment path open only to wealthy "accredited investors" with more than $1 million in net worth. CEX is looking to create a third space, bringing real investing opportunities online while also opening those investments to everyone.
READ MORE: "Down on Main Street," Sustainable Industries, Sept. 16, 2011
The new approach was pioneered by a pair of lawyers who came from very different backgrounds – the nonprofit sector and Wall Street – to meet in the middle. They realized they did not need to build a new model of investing, but there was opportunity to help revive an old one.
"A hundred years ago, communities supported themselves through investments,” says John Katovich, co-founder of CuttingEdgeX and a former chief legal officer for major securities exchanges. “It was common for an individual to own an interest in 5 to 10 businesses in his or her own town."
"It was both good business and a strengthening of common bonds that helped communities," added Jenny Kassan, the other co-founder of CEX, whose legal path brought her through the world of nonprofits, cooperatives and social enterprises. "But today's existing laws make it challenging to simply ask your friends and neighbors for funding unless they are accredited investors – and 93 percent of Americans are not. We've found a way to combine existing yet little-known laws with the connectivity provided by the Internet to revive the time-honored practice of people-to-people investing."
For many small businesses, it's a welcome fundraising solution following the recession.
"The days of multiple mortgages and zero-interest credit cards are long gone," Katovich says. "The entrepreneurs' only known choice up until now has been venture capitalists or angel investors, but both expect high returns and quick exits – something that is not always right for growing a business while maintaining your mission."
CEX showcases a legal but little known tool called a direct public offering (DPO). A DPO is like an IPO but less complicated and much less expensive. DPOs are open to both accredited and unaccredited investors interested in financial returns. The entrepreneur sets the terms of the investment, and, in addition to wealthy professional investors, a local business’ most loyal customers, friends, and neighbors – everyone who wants to see the business succeed long-term – are all potential sources of capital.
[pagebreak]Even though they became a bit dormant when capital was easier to obtain before the recession, DPOs have stood the test of time. In 1984, Ben & Jerry's used a DPO to foster nationwide expansion. Other companies such as Annie's Naturals, Berrett Koehler Publishers and Organic Valley have also used DPOs.
Ultimately, CEX offers the possibility of shifting where investments are concentrated. "Currently, almost all investment dollars go to big public companies,” Kassan says. “But those big companies are only 50 percent of the economy. As CEX helps DPOs become more common and well-known, investors will start to have access to all the opportunities represented by small businesses – the other 50 percent of the economy."