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A Look at Smart Money Entrepreneurs' Crowdfunding Model [Part I]
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A Look at Smart Money Entrepreneurs' Crowdfunding Model [Part I]

Crowdfunding will not be legal under federal law until the SEC works out all the appropriate rules around it, as mandated by the JOBS Act. But that doesn’t mean entrepreneurs have to wait until then to crowdfund their businesses, says Jeremy Andrews, founder and CEO of Smart Money Entrepreneurs (SME). SME is an equity- and debt-based crowdfunding platform that is creating a streamlined process for entrepreneurs to raise cash from the crowd by complying with state securities laws. Recently, we spoke with Andrews about his platform and how it will help entrepreneurs raise money. Part one of the interview is below, and the second half is here.

Anton Root, Can you start by telling me a little bit about your platform and what it’s all about?

Jeremy Andrews, Smart Money Entrepreneurs founder and CEO: Sure. Smart Money Entrepreneurs (SME) is a broker-dealer, equity and debt crowdfunding platform. The crowdfunding industry has evolved, as I’m sure you know, over the last two years, especially following the JOBS Act last year. Everyone is jumping into this space. There are three kinds of platforms: one is rewards-based platforms, like Kickstarter, where you receive a widget after you pay; and then you have equity- and debt-based platforms, which is where we fall in. We’re trying to establish, for the first time, an individual’s ability to take equity (or debt) in a company. Most Americans were never actually able to invest in businesses – you had to be an accredited investor, meaning you had to have over $200,000 of annual income, or have over $1 million net worth, excluding your primary residence. That applies to less than two percent of the population. So [crowdfunding] is really the first chance to invest in awesome companies like LinkedIn, or Nabisco – I like to mention companies that are profit-oriented, because that’s what our platform focuses on.

When you look at the application process, normally you apply and the platform gets to decide whether or not you’re in. We actually don’t take part in the decision-making process. Our technology and application is pretty rigorous and comprehensive. As long as you get past all the criteria, you can get listed on our platform. The criteria, essentially, is that you have to have a co-founder, because we believe you have to have more than one individual to hold accountable. We take entrepreneurs through the crowdfunding process; let me walk you through the steps.

Say you’re an entrepreneur and you have an idea for the next Chipotle. It’s an amazing idea, but you have no funding, no network, no friends and family [to loan you cash], but you do have a co-founder, someone who is willing to come into this idea with you. You and your co-founder fill out information on our platform. We take care of everything else. We take care of your incorporation, which allows you to have protection – anyone who’s familiar with building a business, to open up a bank account, you need to have incorporation. As an entrepreneur, there are so many things you have to do, and SME attempts to take everything that an entrepreneur has to do from a legal, accounting, marketing, and every other perspective – we do it all, walking you through the entire process.

After the raise, we also have a marketplace with service providers that we’ve chosen, and they’re best of breed. We’ve chosen providers who truly are best at what they do, because we believe that if you’re going to spend $50,000 or $5,000 on marketing, you want to hire the best. That means they’re people who do this day in and day out, not someone who is part-time doing Facebook as a hobby and calls himself a social media marketer. We want your business to succeed, and in order to do that, we have to hire the best people. That’s what our marketplace provides, [access] to best of breed service providers at a discount. Imagine the best [marketing firms], providing services to you as an entrepreneur at heavily discounted prices. That’s the value-add for entrepreneurs coming to our platform: we take care of everything, in addition to providing the services after they’re funded. This is key for businesses to succeed – getting the support after getting funding. In a nutshell, that’s what SME is about.

Great, thank you. When was the company founded?

The company started last June, that’s when we were first incorporated. We’ve been developing our platform ever since. We are set to launch this summer. This platform is a little more complex than some of the others you’ll see out there. We’re going to be the first to market for unaccredited investors. The reason why is that we’ve actually integrated something called ‘SCOR’ [Small Corporate Offering Registration] into our process.

If you’re an entrepreneur today, you can actually raise money, legally, without the JOBS Act, from unaccredited investors using SCOR. A lot of people in the industry say, ‘Well, you can’t raise money from unaccredited investors, it’s illegal.’ Absolutely not. I used to work at several hedge funds and investment banks, and I’ve been familiar with the process of the SEC and investing for years. When people say it’s illegal [to crowdfund], I get a little frustrated because information is being disseminated incorrectly. You can go raise capital from ordinary people today, you just have to know the regulations, rules, and exemptions. That is what we’re currently using to build our platform. The JOBS Act may not be released, I think, until the fall of 2013, and a lot of platforms are not going to operate until then. We’ve integrated SCOR, so entrepreneurs can raise money directly from unaccredited investors using the process – which is very complicated, normally, there is a lot of paperwork and state filings. We’ve integrated it into a streamlined process, online, it’s just a point and click.

Can you tell me more about SCOR? Do companies that want to take advantage of it need to pay for registry fees?

SCOR is actually a state regulation – states regulate [securities] and the federal body regulates [securities]. You have, sometimes, a battle between the two. A state like Colorado allows for companies to file and raise capital online. The de-regulation of this process – which is what the JOBS Act brings – is part of what we’re building our platform on. To take advantage of SCOR in Colorado, for example, you have to pay state fees.

I think sometimes there is a disconnect between the entrepreneur realizing that they have to pay fees just to incorporate. We accept businesses that are trying to grow. We’ve had conversations over the years with entrepreneurs who just want to develop an app, for example, which is great. But it may not be right for our platform if they’re not looking to build a business that’s generating revenue. That’s what really drives us.

But, like I said, there are state regulator fees – if you’re establishing a business in New York, you have to pay the state fee. Our application fees are the lowest you’ll find. Most platforms will come in around $200 to $300 for the application, based on [our research]. Our application fee is $25. And if your grandma can’t loan you $25, maybe the idea is not worth pursuing. (laughs) So it’s a $25 application fee, and everything else is taken at the back end. That is the only up-front cost for the entrepreneur – assuming they have incorporation documents, and the [rest of the paperwork]. If they don’t, we do that for them at the cost of whatever the state charges. But other than that, it’s really just a $25 fee.

I saw on your platform you have four groups involved – startups, investors, services, and the analysts. You explained services, but what is the role of the analysts?

We have two customers: entrepreneurs and investors. If you’re an entrepreneur, you’re concerned about compliance and also the service marketplace, who are going to help build your business. From an investor’s point of view, the analysts are the ones providing the reviews and ratings on the startups. When I say ratings, it’s not something like, this entrepreneur is great, or this entrepreneur sucks. What they’re doing is taking your business plan and everything else you give them and giving each section a rating, which allows the investors to make a decision. For example: you may have built a great team, but you’re a little weak on marketing. You may be great with financials, but you may be in a competitive marketplace, going up against Google.

Every part of the plan is rated by the analyst, and they give you a raw score. The score by itself does not affect your ability to fundraise, but it provides the investors with some overview of where you’re strong and where you’re weak. It also provides entrepreneurs with an opportunity to strengthen their application, in all aspects of their business. A lot of times you’ll hear investors decide based on the management team, they’ll invest in people. We’re not saying this is good or bad. We’re just saying, this [part of the business plan] is above average, average, or needs improvement. That is what the analysts do, and there are about 50 analysts, so any industry you may be entering is pretty much covered. Two analysts review your plan independently. You may be familiar with investor groups making decisions by committee – I was never a believer in a committee making a decision, because everyone kind of leans to the same side, even if they disagree.

So that’s what the analysts do, and that provides investors with one judging metric to decide whether they want to invest in your business or not. They’ll do all the due diligence, as well. Investors are actually provided something that’s called an RIA, a registered investment advisor. Say, I was providing investment advice to you, as a former hedge fund trader, I would have to be registered with the SEC and FINRA in order to give you advice on what to put your money into. On our platform, we have RIAs, so you can actually get advice from a person who looks at the startups on the platform and decides what is right for your portfolio. We see startups as one type of investment. It's a riskier investment, but if you look at different asset classes – real estate, stocks, bonds, mutual funds, all the different types of investments – it’s one type of investment that may fit into your portfolio.

And that’s where the broker-dealers come in, right?

That’s correct. A lot of platforms are not interested in becoming broker-dealers because there is a cost, but the SEC has made a ruling last month saying that all platforms will eventually have to become broker-dealers. So I don’t know what my colleagues – whom I know and love dearly – are going to do, because there has to be a broker-dealer. If you’re not a broker-dealer, you will lose out in this game. You’ll see a lot of platforms merge or close down this coming year. There will be a lot of attrition.

Our goal is to make sure investors are protected. The way we actually do that is, if I’m an investor in you, say I’m going to give you $100,000 through SME, what happens is that when I fund you, I give you 60 percent of the capital up front. You have to reach your milestones within three months [to receive the rest]. So you tell me, “Hey, Jeremy, I’m looking for $100,000,” and you have a great business plan, we’ll give you $60,000. In three months’ time, you come back to me and say, “Look, we’ve reached our numbers,” which means either sales or users – you either have to have customers or sales. If you reach your sales target, the system will actually release the funds to you automatically.

But let’s say you don’t reach your milestone. If you almost made it, I can say that I believe in you and give you the 40 percent. Or, if I see that you weren’t even close to reaching your milestones, the 40 percent that’s held in escrow, investors get that back. They know that they don’t lose their entire investment and their shirts. That’s how we provide investor protections on our platform.

One final question about broker-dealers – does implementing their services into your platform allow you to do anything else, practically speaking, compared to the non-broker-dealer platforms?

That’s a good question. Yes, essentially, you can do anything. I can raise $100 million, whatever I want, and I don’t have to do it through crowdfunding. I can do it through an investment bank, outside the platform. In crowdfunding, as you know, the limit is $1 million, which the SEC may raise in the future. But as a broker-dealer, I’m not beholden to the same rules that other crowdfunding portals are, because as a business, I’m creating transactions outside of crowdfunding. So if you’re looking to raise $4 million, you can still come to our platform because you can raise that amount. You won’t notice, as an entrepreneur, the process to be any different, but from a legal and regulatory perspective, we built a technology where it is different, and abides by different rules and regulations.

Will you be able to accept foreign startups, or investors, on your platform?

Investors, yes. If you’re a C-corp (which is what we require all our startups to be, and if you’re not, we can convert you), you can have foreign investors. It’s well documented since the 1930s. Foreign startups are a little different. We have to do background checks, all the due diligence. Each country has their own check to see whether an entrepreneur is valid or not, and all of that. We’re working on it. We’re actually working with a bill in Congress called the Startup Visa Act, which we’re really excited for.

The Startup Visa Act enables foreign-born entrepreneurs to come to the country and build their business. They will actually get their green cards over the course of five years if they do two things. Two years into their business, they need to employ, I believe, two to three American workers. Five years out, they need to employ at least five American workers, full-time. If they do that, they can get their green card. Anyone who is foreign-born knows how difficult it is to get citizenship. If you’re building a business and generating revenue in the American economy, it’s even more important, I think, to reward the efforts of entrepreneurs. It’s one of a few pieces of legislation in Congress that, like the JOBS Act, has support from both parties and is innovative. So, investors, yes, but if you’re a foreign entrepreneur, you cannot raise money on our platform. But we are looking to partner with two platforms abroad that have the capabilities to connect with our system.

Continue reading the interview here.

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