Those of you that enjoy beer or securities laws (or both), may have recently seen news articles from various Puget Sound media outlets amorphously mentioning “crowdfunding” when reporting on the development and grand opening of the new McMenamins Anderson School entertainment complex in Bothell. In developing the Anderson School project, McMenamins applied its expertise in creating funky, yet accessible, recreation properties to transform an old, empty middle school building into a complex with a hotel, brewery, restaurants, bars, music and event space and a public swimming pool, in partnership with the City of Bothell.
The project has a successful precedent in the McMenamins Kennedy School complex in Portland, and the early reviews on the Anderson School have been quite positive, so much so, that McMenamins recently announced that it would be moving forward with a similar project at the old Elks Lodge in Tacoma.
However, beyond applying its tried and true aesthetic to transform the Anderson School, McMenamins broke new financing ground by using the Rule 506(c) private offering exemption to generally solicit accredited investors via the internet. The company raised approximately $6.3 million (with $250K as the minimum investment) in four months to obtain the initial equity for kickstarting development in the property. This experiment worked so well, the Company intends to use it again in connection with financing the forthcoming Tacoma project.
For those curious about the completed Anderson School deal terms, the offering website is still up, and you can still access all the LLC unit offering documents here. Additionally, a similar site is now up for the Elks Lodge project with initial information about the project and investment terms, however, the offering documents appear to be forthcoming, and no securities appear to be offered yet. Though it does appear similar to the Anderson School project, in that investors will receive a preferred return of 8% flowing from the proceeds of the long-term lease of the property to a McMenamins entity, among other terms.
Conducting private offerings publicly over the internet may sound like a contradiction in terms, and until recently that was the case. However, as part of the federal JOBS Act of 2012, Congress instructed the Securities and Exchange Commission to implement rules allowing general solicitation in a private offering if securities are sold only to accredited investors. As a result, the SEC amended Rule 506 to create Rule 506(c), which allows for general solicitation in a private offering, so long as the issuer takes reasonable steps to verify that sales are made only to accredited investors.
This “verification” standard is a heightened requirement in comparison to the “old-fashioned” Rule 506(b) exemption, which only requires issuers to have a “reasonable belief” that investors are accredited, which may include self-certification by the investor. Although the SEC has provided a set of non-exclusive safe harbors for 506(c) verification, including by bank/brokerage statements, tax returns or statement by a third-party attorney or accountant, this requirement has had a chilling effect on the use of Rule 506(c), as the admission of even one unaccredited investor will disqualify the issuer from use of the exemption, and if any general solicitation has occurred, the issuer will be disqualified from relying on any other exemptions from registration, which could result in significant civil and administrative penalties. As such, using Rule 506(c) has been described as similar to walking on a tightrope without a net.
But back to McMenamins, who rather than worry about the lack of net, just followed the clear rules set forth by the SEC to make sure they didn’t lose their balance. In particular, even though all of the offering information was publicly available on the internet, each prospective investor had to fill out a questionnaire, and submit it to the company counsel with supporting documentation to meet the aforementioned verification steps. Only once the company had “verified” a prospective investor’s accredited status, would any subscription be accepted.
Although some investors may not wish to undergo such scrutiny, this did not seem to be an obstacle for McMenamins, a brand with significant brand and consumer cachet. The Tacoma News Tribune reported that the company raised the $6.3 million from 23 investors (in an offering up to $8 million, per the SEC filing and company offering documents), and now intends to raise up to $10 million for the Elks Lodge project (with a $150K minimum investment), with preliminary indications of interest already received from prior investors.
The use of Rule 506(c) by a company like McMenamins is instructive. By working with competent counsel to safely stay within the investor verification guidance set forth by the SEC, the company was able to broadly reach out to its natural constituency of fans as prospective investors. Simultaneously, it was also able to avail itself of the broad benefits of the Rule 506 exemption, including the ability to raise an unlimited amount of money from an unlimited number of accredited investors, blue sky preemption and “relaxed” disclosure standards, as sales were only made to accredited investors (that said, the company did provide fulsome disclosure materials to prospective investors).
Accredited “crowdfunding” as a concept is generally associated with technology startups and angel investors, but the success McMenamins has had demonstrates that Rule 506(c) is a viable and potentially attractive, offering alternative for companies across a range of industries that may be able to draw widely upon accredited investor interest, rather than being subject to the limited personal networks required by the “substantive, pre-existing relationship” standard of Rule 506(b).
In addition to monitoring the development of these projects, I intend to personally kick the tires at the Anderson School soon by enjoying a McMenamins Terminator Stout, and the always delicious Cajun tater tots.
Image: detail from McMenamins webpage.