Elizabeth L. Carter is a crowdfunding securities attorney who represents investment companies, small businesses, nonprofits, cooperatives, and other social enterprises with the legal strategy and compliance of raising capital from both accredited and non-accredited investors.
Her most recent work includes assisting a driver-owned ride-share cooperative with the legal compliance of its $1.07 million debt crowdfunding offer through Regulation Crowdfunding (Reg CF). Similarly, she assisted a consumer cooperative with the amendment of its by-laws and articles of incorporation in order to prepare it for an upcoming capital raise from non-member investors.
She also assisted a number of investment funds with the securities legal strategy and compliance of a SEC Rule 506(c) crowdfunding offer, including a cooperatively-owned investment fund that offered $2 million in equity to accredited investors, as well as a community development financial institution that offered $1 million in slow equity to mission-aligned accredited investors
What You’ll Learn In This Episode
- Legal Fund
- The importance of representative legal services for underrepresented entrepreneurs using crowdfunding
- Legal matters in crowdfunding
This transcript is machine transcribed by Sonix
Intro: [00:00:06] Broadcasting live from the Business RadioX Studios in the Bay Area. It’s time for Bay Area Business Radio. Now here’s your host
Lee Kantor: [00:00:17] Lee Kantor here, another episode of Bay Area Business Radio and this is going to be a good one. But before we get started, it’s important to recognize our sponsor, Leah Davis, coaching inspiring women of color to claim their wealth legacy. Today on Bay Area Business Radio, we have Elizabeth Carter with Elizabeth L. Carter, Esq., LLC. Welcome, Elizabeth.
Elizabeth L. Carter: [00:00:39] Thank you. Thanks for having me.
Lee Kantor: [00:00:41] Well, I’m excited to learn about your practice. Tell us a little bit about your practice. How are you serving, folks?
Elizabeth L. Carter: [00:00:46] Yes, thank you. So Elizabeth L. Carter, Esq., LLC is a crowdfunding securities law firm that represents investment companies, small businesses, nonprofit and cooperatives with the legal strategy and compliance of raising capital from investors.
Lee Kantor: [00:01:02] So for folks who aren’t familiar, can you talk a little bit about crowdfunding? I’m sure everybody’s, you know, heard of Kickstarter or Indiegogo or go fund me where there’s, you know, people go out to the crowd or grow it to people they know and say, Hey, I got this project or I got this thing. But there’s also a place for it in, in business and in the investment community as well, right?
Elizabeth L. Carter: [00:01:24] Yeah. So crowdfunding is a particular area or specific area of the law concerning capital raising and to be more sort of specific. So you have the business law, right, which is an area of law and underneath business law, it’s securities law, which is more specific in the area of business law. And then underneath the securities law is crowdfunding law. So security securities concerns the legal rules and federal state rules regarding private fundraising from investors. So not the GO Fund Me, which is more donation and not the Indiegogo with your rewards, but actual securities or when you’re giving money with the expectation of significant return. Right. So that’s the difference between a donation. You’re giving money. You’re not expecting things. Return rewards. The only thing you’re expecting in return is sort of a small token, really. You’re just there to support the business. But the investment piece as an investor, you are actually expecting some type of return, whether it’s in no time is guaranteed. But the idea is that I’m giving you money so that you can work hard and provide some return or money back to me, plus whatever gave you plus interest or something, right? And so with crowdfunding does is basically is that area of the law. But there are exemptions under the Securities Act, which is the securities law that we’re speaking about, that allows that business to raise capital from investors without having to register with the SEC or do ongoing reporting requirements, which again can amount to hundreds of dollars a year. So crowdfunding designed for small businesses to cost effectively raise capital from investors.
Lee Kantor: [00:03:08] Now this type of raise is kind of new, right? Because historically, the only people that can get involved with investing in small businesses in this manner were kind of accredited investors. And those are people who had, you know, a certain amount of wealth that was kind of vetted and kind of deemed that they were able to take this kind of risk. But now through this vehicle, people that aren’t accredited can invest as well, right?
Elizabeth L. Carter: [00:03:40] Right, exactly. So crowdfunding in a nutshell, there are two aspects to it. One is the fact that now, as you’re mentioning, a business can raise capital from non accredited investors just as they would accredited investors. So accredited investors are defined as investors, individual investors as people who have over $200000 in income, annual income, or over a million dollars in excluding the value of someone’s home. So these are just people who have investments elsewhere that are amounting to more than $1 million and then not accredited. That’s basically 90 percent of the rest of the population, right? Most people are not accredited investors. They do not have over many dollars a net worth, nor do they have possibly over $200000 in income and so would allow a small business to publicly advertise. That’s the other quality so publicly advertised to non accredited investors without having to register previously. And this is since 2012 Jobs Act of 2012. Allow for that. Previously, the business would have to have known that that investor privately. So whether a friend, family or business associate to then be able to ask them for money, what without violating any securities rules, right, whether they’re credit or non accredited. You have to know them. And so it kind of. Right, so only people who actually had wealth and people who were that, you know, right, so there’s a network thing that you are able to support, have them able to support your business. So now today, though, with crowd funding, you can go online. You don’t have to know this investor. You don’t have to be friends with them or have a long relationship with them. You can publicly advertise to them and they do not have to be wealthy, right? Just so long as you disclose properly, let them know what the offer is that they know will be businesses and do not misrepresent. So that’s what the legal or securities legal lawyer comes in to help you communicate that effectively through your disclosure documents.
Lee Kantor: [00:05:39] Now, does crowdfunding in this way have to only be equity in the company or can it be debt as well?
Elizabeth L. Carter: [00:05:48] That is included? That is a security as well as membership interest in an LLC operating agreement when you have that agreement and people are signing on. That is also considered a security. So right in equity can include stocks, but it also can include, again, like I said, that that operating agreement where you’re agreeing to provide money for some type of ownership stake, but that is also very commonly used. And the reason why that is included is because even though you’re not getting an ownership stake, there still is an expectation of return in the form of interest rates.
Lee Kantor: [00:06:21] And are your clients contacting you before they’ve begun this or after they began it and realized they were in over their head? And it’s too complicated?
Elizabeth L. Carter: [00:06:31] Ideally, before most of the time is before, and this one is more cost effective because before I have people who have gone either gone through the process by themselves and and we’re told that they need a securities lawyer or found out later like one one case. Actually, the SEC denied their filing and said it was actually fraudulent, even though the founder didn’t intend for it to be fraudulent or or misrepresenting. That’s really what it is because fraud is more intentional, but they all run in the same category. There’s a rule against misrepresentation, fraud, and so misrepresentation can simply be that you’ve been disclosed properly or you didn’t disclose fully. You miss some information, you admitted something. And so that is more costly because that particular person pay for an attorney to do that work, and the attorney didn’t do it properly. So now they have to go find another attorney and almost pay double right because the new attorney is saying, Well, I have to review everything with to start over. And so ideally, they should come before they make the offer, before they file anything, before they start asking people for money. You’ll save a whole lot of money just getting that advice and strategy going and then later.
Lee Kantor: [00:07:35] Now is this something that somebody should contact you at the very kind of beginning of their business if they’re thinking of launching? Like, should startups contact you if this is one of the ways that they might try to access funding? Or is this something that they have to have already established a business with clients? And it’s kind of ongoing and they’re trying to get it to a new level. So then they’re going to explore crowdfunding and then they would contact you.
Elizabeth L. Carter: [00:08:01] Yeah, I think both legally, both. I mean, legally, so long as you have a strong business plan that shows the really lay out lays, lay out your plan to a operate, be bringing revenues and see generate returns for your investors. You have to lay that out. There should be some formula. There should be some visualization that shows the investor that if I give you X amount of dollars, which is what you’re asking for, that over time, some amount of time and that should also be laid out. You will get X amount of dollars in return or X amount of percentage in return that should be laid out. So usually the founders should have access to someone that can really work through those numbers and those financials for them, right? Whether it’s an accountant or a financial advisor that can guide them through really coming up with numbers that are more accurate. Now again, these are projections. So they’re not they’re not truly accurate or facts. They’re more saying. More likely than not, this is what you can expect. And so for me, that’s what I’m going to ask. They’ll they’ll say, I want to raise X amount of dollars and I want to know just how much I’m going to give them time.
Elizabeth L. Carter: [00:09:04] So I’ll ask them, Well, how do you what did you come up with that number? How do you what was your basis? What’s your standing behind that? It’s not just you can’t just say that, right? And so I do help guide, but the idea is for them to come up with a strong team marketing accounting lawyer to then be successful. So legally, we can draft the documents, make sure they’re not misrepresenting or misrepresenting anyone. But for me, as an attorney who represent underrepresented founders where it’s already difficult to obtain capital, the traditional means, I want to make sure that they’re more successful than not. So I to the team, call them what I call the ecosystem around me so that we can make sure that they’re more successful than not. And in crowdfunding, what makes you successful is the crowd, right? Is your particular investors right or your who are also your friends, family or neighbors and then strangers that just want to support you so you want to be able to build that prior to or sooner than later when you’re starting to make your offer.
Lee Kantor: [00:09:59] Now, when you’re working with a client? Are you coming in just as this expert in crowdfunding or do you also take on some of the kind of general business law issues they might have?
Elizabeth L. Carter: [00:10:11] Oh yeah. So so I do. I do the general business law. And then what that looks like is I help with the strategy of choosing what type of entity or entity. Sometimes there’s a strategy to create one entity that will be the parent company. Another would be a subsidiary, especially if they’re interested in becoming an investment company or fund. Because the other part is we’re looking for an exemption. There’s two statutes that we want to make sure we exempt from the Securities Act of 1933, which concerns the act of asking people for money. And then there’s the Investment Company Act of 1940, which concerns the entity itself. So if you’re saying I want to create a fund that will then ask people to invest and then reinvest in other companies. My mind is saying, OK, you’re trying to invest in or investment fund. So if you want to prevent that sort of yearly, ongoing, costly reporting requirements, we need to find an exemption. So part of that is looking at the strategic way of structuring these entities, these companies, so that they’re exempt from both the from both acts or, you know, just generally in securities, but also just depending on what their needs and wants are right. They may have certain membership privileges for certain people, certain classes. So we do that sort of structuring the governance and then we go into the particular investment specific and structured the term sheet, the subscription agreement, the offering statement or disclosure documents in times call the Form C. And so, yeah, so it’s both so the general business governance and then the contract surrounding investments.
Lee Kantor: [00:11:37] Now, can you share a kind of one of your success stories of one of your clients that have been able to get that escape velocity and make a go of this?
Elizabeth L. Carter: [00:11:46] Yeah, yeah. So I’m happy to share one of my clients called the drivers pull up. Based out of New York City, created an alternative rideshare company alternative to like Uber or Lyft, right? And their model is designed to allow the drivers to be owners of the company, right? So unlike Uber or Lyft, Uber, Lyft, the drivers are more independent contractors. They’re not they don’t receive any equity. They have to have their own sort of business business model or business costs and in revenue. So it’s costly for the consumer because the profits are going to certain shareholders that are or that are not necessarily the drivers, but the drivers co-op. The drivers are actually co-owners of the Co-op or the company. And so what they did was in addition to the equity piece, which are owned by the members member drivers they. Created an offer a debt offer based upon the revenues of the company and up to two point five million, they raised over one million and they barely raised up fairly quickly, I’ll say in a couple of weeks. They raised one million dollars through regulation crowdfunding. So through that exemption, they’re able to raise from both accredited non accredited investors and they receive a lot of support all over the country. People are very interested in the co-op model, but also the fact that they’re providing an alternative to sort of this conglomerate. Big, big corporations write over and live.
Lee Kantor: [00:13:15] So that was said, they were able to kind of use that those funds to launch and then maybe are they only in New York? Are they around the country now?
Elizabeth L. Carter: [00:13:23] Right, so they were so the funds were designed to be set to launch to hire new staff and then to eventually to expand to other cities. That is the goal they want to expand across the country with the same model.
Lee Kantor: [00:13:35] So now you use the term co-op. Can you explain what that is and why that entity might be kind of better for these kind of projects?
Elizabeth L. Carter: [00:13:46] Right, right, right. So co-op is any entity that is owned and controlled by those that use the services. So if we’re talking about a worker co-op sort of with the driver’s co-op is it is owned and controlled by its workers, those that that provide labor to the company. If we’re talking about a housing co-op, we’re talking about the tenant owning, controlling the residential building where they reside. Sort of like a condo, but instead of individual deeds, it’s only one master d, so to speak, or blanket mortgage on top of the building. And then the members own a share of the company that then owns the building. And in terms of a consumer co-op, a lot of them are grocery stores. Those who consume or credit unions. Those who bank at the credit union are also co owners or, if it’s a nonprofit, just have the ability to control and vote on decisions within the entity. So that is attractive because it counters sort of this disconnect between particular worker co-op sense this power imbalance and disconnect between the owners or the employer and the employees and the workers, right? So now take away that power imbalance and the workers are the employers. They’re wanting the same.
Lee Kantor: [00:14:54] And that’s something that you help firms with as well, right?
Elizabeth L. Carter: [00:14:57] Yes. Yeah, so I actually thought co-ops is something that I have particular knowledge and expertize and actually was part of forming a nonprofit back in 2016 that was designed to create and support co-ops, which is why I have affiliation with a Sustainable Economies Law Center based in Oakland, which is also designed to do the same thing not only just co-ops but other economies to help support legally these new sort of alternative business structures that are more supportive of social enterprise or more supportive, supportive of something beyond profits for your business going beyond profits. And so that’s what co-ops are really known for. And yes, I have a particular expertize in creating and being being creative in coming up with unique structures to create that model.
Lee Kantor: [00:15:44] Now let’s talk about that work in Oakland. Can you talk about that Black Capital Matters legal fund and the work that you’re doing to help in that area?
Elizabeth L. Carter: [00:15:54] Yeah. So as I mentioned before, my firm is a mission based firm specifically to support the legal strategy and compliance of small businesses, investment companies that are owned and controlled by underrepresented founders, namely black black entrepreneurs. And the reason being is that, for instance, black women are the fastest growing group of entrepreneurs and the least likely to be supported by Venture Capital Bank financing or just generally philanthropy and et cetera. Right? And so the idea is to be able to be a resource, a representative representative resource to these companies and businesses so that we can come up with unique strategies like the co-op model, right? Or like forming ecosystems with credit unions to be able to offset or counter those disadvantages. So so the the Black Capital Matter’s legal fund is one way that the firm is doing that. We decided to create the fund to offset the legal costs of raising capital, so the firm itself already provides one of the most, if not the most affordable legal rates when it comes to securities law. But even then, it’s still the law firm and law firms. Billable rates can be out of reach for many small businesses. And so even with that in mind, we’re thinking, Well, how can we be more accessible or have you more democratized so that more businesses who are, you know, equally talented have great ideas if need that legal support and marketing support to be able to shine through and grow? How do we best do that? And so as a law firm in this space and its law firm that is particularly designed to be accessible, we want it to be able to be creative and unique to partner with a nonprofit organization, to be a fiscal sponsor to help put forth this legal fund designed to again provide subsidized legal costs while they’re raising capital. Otherwise, what happens is these businesses just go along and do it wrong or just risk doing it wrong and risk being flagged by the SEC, which could amount to financial fines or criminal penalties, right? And so we want to prevent that.
Lee Kantor: [00:17:51] Now, what type of firms should think about going the crowdfunding route, or is that you think any firm that’s thinking about getting into business that this is appropriate for them?
Elizabeth L. Carter: [00:18:04] Anything, anything. So crowdfunding is a means of acquiring investors. So even today, venture capital, which is has historically always been a private equity space but historically have been a type of investor that controls the deal. Right. They’ll come in and they’re the ones who provide the term sheet. They’re saying this how much are we going to invest and how much control we’re going to have? So historically, that was sort of the way these startups to get funding because again, banks thought it were too risky, like, what are you? You don’t have any revenues. You just have a business plan, right? They didn’t trust it. But the venture capital wasn’t a professional investor. And to do their own due diligence and see farther ahead in the future and say, actually looking at the market, looking at your traction, your mailing list, whatever we know, we can value this company a certain kind of way. And so we’re going to see ahead in the future, but we’re going to make sure we put terms in there that are more favorable to us so that, you know, we can cash out at some point or we can go make this company go public at some point.
Elizabeth L. Carter: [00:18:57] So with crowdfunding, did was actually said no, actually, the business is going to actually control the terms they’re going to put in their own term sheet with what’s best for the business, for the long term longevity of the business and then Venture Capital Fund or others. If you want to invest, you have to agree to these terms, right? So it flips the control a bit with the investor and within investment space. And so really any business can get involved. But I say the business was a startup or small business, but I will say that it’s a startup is really interested in traditional route and going through the investment or VC funds that invest. Traditionally, they may be they may not be attracted to the crowdfunding means because again, it terms of the terms where the business is actually in control and the VC may not like that. So so yes and no, it just depends on who is that particular investor and what they’re interested in.
Lee Kantor: [00:19:50] Now, if somebody wants to learn more, have a more substantive conversation with you or somebody on the team, what’s the website w-w-what ELC?
Elizabeth L. Carter: [00:19:58] Yes.
Lee Kantor: [00:20:00] Well, Elizabeth, thank you so much for sharing your story today. You’re doing important work and we appreciate you.
Elizabeth L. Carter: [00:20:05] Thank you so much for having me.
Lee Kantor: [00:20:07] All right, this Lee Kantor. We’ll see, y’all. Next time I’m Bay Area Business Radio.