Well it's been quite a month, and we have a lot to share! 

NEW LICENSES: A round of applause to Nicoleta and Jervis for their new licenses. Nicoleta passed the Financial and Operations Principal exam, and Jervis qualified as a Municipal Securities Principal. Nicoleta is now taking over the bookkeeping for the BD, and David is teaching her how to prepare the Net-Cap computations and Focus reports for his signature. 

Also, kudos to Jervis for getting on the Board of the Georgia Crowdfunding Assoc, which helps set the direction for the new GA crowdfunding program/securities exemption. We'll be attacking this if the SEC continues to delay rules. 

NEW OFFICE: We have new digs in San Francisco! It's a "co-working" space...which is kind of like an executive office suite except way hipper and more collaborative. It's filled with start-ups, some of them VERY high profile (e.g. fwd.us is in the office next to us, Imgur is 2 office down, Buzzfeed next to them, etc, etc). It's near Union Square, so very central. Given the impossibility of office space in San Francisco we got really lucky, as Greg found it while it was still under construction; it opened on May 1st and is now 100% full with a waiting list. You can see pics on Gregs blog - http://www.arcticisland.com/member/profile/view/id/5

PR FIRM: We've hired a firm to start building our PR strategy. This includes working on our Twitter and LinkedIn profiles/connections (which we have really let languish as we've focused on building the software). This is the next step in the positioning of the firm that I started last year. We will do more and more and more as we get launched (they can get speaking gigs at conferences, place success stories in our vertical niches, and a lot more). 

CURRENT: Greg is looking to hire a couple of very select engineers, Jervis & Nicoleta are working on customer service and backoffice processes for the BD, David & Nicoleta are getting the accounting systems perfected, Dave is working on marketing and other projects, and both Jervis and I are engaged in numerous biz dev discussions. 

REGULATORY UPDATE: When? We wish we knew. There is continuing political pressure on the SEC, and the new Chairwoman has said publicly over and over that the JOBS Act is her top priority. So it's not a question of if, but when. For 506(c)-D we are hoping late summer or early fall, fingers crossed. For crowdfunding it'll probably be sometime next year. Regardless, if they continue to delay then we'll simply help BD's launch with online 506-D offerings and, possibly, with crowdfunding in states where it's legal (GA, NC, KS & soon WA). 

That's the latest! Reach out to me anytime with questions, comments, thoughts, advice or anything else.

Cheers, 

Scott Purcell 
CEO 
Arctic Island 
Software for Funding American Businesses 

I get it, no matter what you want to do there will be people who oppose you. And sometimes the people who make the rules are aloof of, or don't care about, the effect those rules will have. 

The securities industry is all about capital formation and economic growth. Everything in the industry exists to serve that.

As such, our securities industry regulators should be focused on how to keep the capital engine functioning and growing. They should be the biggest cheerleaders for the firms engaged in the front lines of capital formation, and they should be on the leading edge of finding ways – both academic and practical – to make the business easier for those it serves.

Now certainly  there are hard working people at the SEC and FINRA who really get it. And who work hard to lobby for and craft rules and solutions that open capital formation. The folks who pulled together the proposed rules for Title II are certainly of that group. And the people who have held up those rules are anything but. Why do those people hate small businesses and small investors?

They say they are trying to “protect” investors. Yeah, right. That’s like the common argument people use anytime they are trying to do something restrictive and stupid, “think about the children.” When you pull that argument out of the pocket, all opposition and all movement for progress is often stopped dead in its tracks. So now that’s the line being used for the JOBS Act delays, "think about small investors".

“Protect Investors” – when ALL evidence points to the fact that there have been few, if any, problems with crowdfunding in this country (e.g. Kickstarter) or other countries where it’s already legal.
“Protect Investors” – when small investors already lose money on public entities (e.g. Enron, Global Crossing, JC Penny, Sears, et al). 
“Protect Investors” – when people have no limits on buying lottery tickets, gambling or shopping.
“Protect Investors” – to sustain an anti-small business agenda.

Without a doubt, some people in power really do think there is a risk that’s problematic. They fear...well... {something}. So they turn an embrace into a strangle and choke the life out of that which is good for the masses out of fear of protecting a theoretical few.

A great example of this are the social policies in Europe. It seemed like a good idea to protect young people, and especially women, with various employment regulations. Regulators loved that; it was politically correct. But the impact has been 50% unemployment rate for young people in general, and an 80% unemployment rate for young women in particular. Regulations meant to “protect” actually served to “devastate”…and now there isn’t the political will to fix it.

Here, our Congress showed extraordinary political will to fix the antiquated, broken securities regulations. They passed the JOBS Act. It will serve the masses, enable capital formation, and bring about an economic boom the country has never seen. We now just need the gatekeepers to lead.

The first business plan I wrote for Arctic Island was in December, 2011. Then, with the passage of the JOBS Act I updated it significantly in April, 2012. Now I’ve just done a huge rewrite of the plan, incorporating the latest about the product, our team and our strategy. A HUGE thanks to Jon, my Board member and Angel investor, for all his help with this. He spent so many hours editing, writing and bantering about concepts and ideas that the latest plan is truly a collaborative process between the two of us. Now THAT’s a great Board member!

The financials were a lot of fun (sarcasm). Actually, it’s a fantastic exercise that forces me to think through all the revenue components and expense variables. I created the first model in January, 2012 which was a validation test for me as to whether or not I should invest the time and money into this business (net result = DEFINITELY). Now I've spent time thinking through the operations to layer in the expense-side of the financials, as well as add more detail to the revenue components and take the forecast out 3 years from launch.

So why do this? Well, all entrepreneurs should. The b-plan and financials are the best way to communicate your vision and the plan to the rest of the team. It helps everyone understand exactly what we’re doing, why we’re doing it, and where we’re going. It helps new hires get on board with the fundamentals…and, by the style of writing, it even helps the team assimilate the culture.

An entrepreneur took me to lunch yesterday and asked my advice on how to pitch his company to investors. Seeing as I’ve raised over $100 million in venture capital, millions in Angel funding, and invested my own money in various ventures, I guess I’m a pretty good guy to ask. Here’s the gist of what I said…

The first thing is to take a step back from the infinite amount of stuff you’re doing, and take time to acutely understand why you are doing the business. The best businesses, and the ones most likely to get funded, are things for which the financial rewards are secondary. “The Alchemist” is one of the most translated and widely read books in history, and the main principles ring true here. At it’s core is an observation of a chocolatier; he was incredibly happy and fulfilled, as making chocolate was, for him, the most important thing in life. He was happy, irregardless of the financial rewards. Today we see the same thing with teachers, charity workers, performers, and many others. They do what they do because it fulfills them, they are passionate, and they couldn’t imagine doing anything else.

So why are you creating this business? If it’s only “to make ends meet” or “to get rich”, you stand a pretty good chance of failing. And you stand a lousy chance of attracting investors. So I’ll ask again, why are you doing this? If it was just for money you could get a job, or you could partner up with someone else who’s started a company and already got some financing (since you don’t care about the company).

Oh, wait, you DO care? I thought so. Now…why? What drives you? What motivates you to start or run this business? Why does it matter to you, and why should it matter to anyone else? Think about this for a few minutes, or hours, as it might not be something you ever really considered. But it’s there, that thing which drives you to do this, the thing that keeps you up at night dreaming about what the company will ultimately look like and what it’ll take to get there from here.

It’s called “passion” – you need to articulate it. From that, which is your purpose for existing, flows your company’s mission statement. And once you are consciously aware of your reason for creating this business, you will then be able to articulate it to others, and THAT is infectious. People want to associate themselves with believers, with people who have a mission, and with people they think will be successful in achieving it.

So before you pitch your first investor, first understand why you are doing what you’re doing. Embrace it, own it, and let others see it. Be that guy or girl who people want to help for reasons other than financial. That’s the success of Kickstarter…people get drawn in to stories and ideas so powerfully that they don’t even care that they will never get their money back.

Got it? Great, now you’re ready to start working on your pitch to investors. Which is, simply stated, the following;

1. The Story – why you are doing what you’re doing, and why you’re the person to do it; and,
2. Financial Perspective – if the investor buys into your vision, then you get to proceed to this 2nd step. If they don’t, which is often the case (maybe they just don’t like chocolate), then you’ll likely be wasting your time in pursuing them further. This step is where you lay out the size of the market, the sales/expenses/profit projections of the business, and why it makes sense for them to trust you with their money.

There are always exceptions to these two rules. Sometimes someone totally buys into your vision but doesn’t believe your financial model and so doesn’t invest, but does become a customer and/or a brand evangelist. Other times they don’t really care about your vision, but greedly love your financial model and so invest anyway (typically these investors are the biggest pain in the ass, as they constantly push you to grow faster, to sell the company quickly, to go in unfocused directions,  and do other things you really won’t like). But the vast majority of the time, these two steps are the truth about finding investors, the ones who will be your partners and evangelists, who will stick with you and defend you during tough times and who will celebrate with you when good things happen. So stick to it, follow your dreams, and push forward to success however you definite it.

On an unseasonably hot May 1st in San Francisco, we moved into our new office in the historic Golden Gate Theatre:

This building is not only the destination to some of the amazing culture that The City has to offer, but is now home to many new startups and small businesses trying to change the way we live our lives.

Amazing common area for collaborating and meeting other entrepreneurs

Small touches to inspire creativity 

There are an incredible number of moving parts in bringing a high-tech, financial services business to life…well, that’s true of any start-up. From the vision in my head, to articulating that on paper so others can understand it, to building a team, to creating operational processes, to understanding the regulatory, legal, and competitive landscapes, and to getting funding. It’s an unreal amount of work, but a complete adrenalin rush for the entire founding team when it starts to come together.

Our mission is simple – help small businesses get funded and create American jobs.

Building a financial services company to get that done is not so simple.

We’ve come a long way since Nov, 2011 when I started writing the business plan. V1.0 of the platform is articulated and designed. Coding of the designed elements is happening daily (by our own engineers, 0% outsourced overseas unlike some of our competitors). The broker-dealer is ready to rock and completing registrations with all 50 states. Jervis (President of the BD) relocated his family to Atlanta and is busy creating operating proceedures and building strategic partnerships. David (our FinOp and operations guru) opened the new office and is putting in place the control and compliance systems.

If rules for 506(c)-D were issued today would we be ready to launch? Nope. There’s still a LOT of work to do. So the delay, although bad for the economy, has been good for us from a competitive standpoint. The guys (and gals) are working their asses off doing their jobs which collectively will bring this business to life. The software will soon be ready, and the BD will soon have approved rules to operate under. 

5 years from now, this will (I believe) be a billion dollar company and have helped create over 1 million US jobs by assisting thousands of businesses in getting the funding they need. It will have executives, systems and operations which to new employees will seem like they must have been around forever. Google, Amazon, Dell, HP, Apple, Intel, E-Bay, Etrade, et al were just a couple of guys with an idea not so long ago. I’m proud of what we’re building.

Scott has been bugging me now for about 8 months - I could hear him every day: "You got to take that test! You can't do anything with Arctic Island Financial (the broker dealer) if you do not take the FINOP exam." He was right - I could not even get a signature card for our account.

But finding the time to lock myself in a room for a few weeks was nearly impossible. So many commitments, so little time! It's been 10 years since I had to take a test, I seemed to have forgotten how to study and memorize data since graduating from business school. The first week was brutal - I could not sit on a chair for more than couple of hours at a time. The terminology was almost foreign language - and that was tough to digest at first considering I have a BS and an MBA in Finance. I thought it would be a piece of cake, how hard could it be to learn a few rules?! Well, the rules were not that hard, but the exceptions to the rules were. It seems that there are exceptions to the exceptions to the exceptions. And the interpretations can be quite confusing.

The Securities Training Corporation manual was very well organized in 10 chapters – finally, after weeks of heads down endless studying I thought I had a grip on all the concepts and was ready to sit for the examination – 150 questions in 3.5 hrs. I then realized how much more I needed to practice – the next few weeks I did nothing other than taking tests and re-reading the manual – everything was making more sense with each new read. In the last week I ordered another barrage of online tests to make sure that I have all the concepts very clear. I was ready!

Scheduled the exam and the big day arrived! It’s amazing the feeling you have when you push the final button and wait to see the result! For a split second you are breathless and then all that time you put in, all the long nights spent in a quiet room have paid off! Passed! Got home to a nice congratulations cake and flowers and balloons! That was the sweet taste of success! 

Thank you to my wonderful husband for taking care of me and the household while I was studying! He’s been cooking and running errands just so I could spend all that time with my books!
Now time to get back to work and apply all the great stuff I just learned!

Fraud is a concern people have about crowdfunding, and appropriately so. It should be a concern people have with just about everything in life, whether using an ATM machine (which might have a scanner attached), handing a credit card to a waiter, or keeping your computer safe from malware. 

When it comes to securities fraud, and specifically to fraud potentially orchestrated on the Arctic Island platform, there are a large number of things we are doing to deter and detect it. 

First, though, we want to outline what's NOT fraud...

INVESTMENT LIMITS: The government allows people (all people, regardless of whether they are rich or not) to play lotteries, visit casinos, shop at stores and otherwise spend money in an unrestricted way. If you gamble your entire paycheck, the government does not stop you from doing so, nor does it hold the state lottery commission responsible. In these things they allow for personal accountability. However, if you aren't rich and want to, say, help some local businesses in your community by investing in them, the government has decided that this is something you shouldn't do very much of. Thus they put severe limits on what you can invest (I guess they'd prefer you go shopping, visit a casino or play the lottery). So your "at risk" money in crowdfunding private companies is going to be fairly small even if you invest 100% of what you're allowed.

MISTAKES: In their offering, businesses have to post financials, a business plan, and other info. Everyone makes mistakes, and if it's unintentional then they need to just own it and say they screwed up. If it wasn't premeditated then it likely isn't fraud. That's not to say it doesn't incur potential liability for the business owners, as their representations to investors have to be accurate and truthful; but the cause was a genuine mistake and not criminal intent.

IT DIDN'T WORK OUT: Many businesses make it, some don't. If you invest in a company and the owners work hard but just can't get it profitable, then you'll obviously lose some or all of the money you put into it. This happens, and it isn't fraud. Sometimes "shit happens" and things don't work out. It sucks for you, but think of the people who put their time, energy, emotion and resources into running the business, it's likely far worse for them...you're all in it together.

SO, WHAT ABOUT CROWDFUNDING FRAUD? There are 2 things funding portals need to do:

First, deter potential fraud, and,

Second, detect fraud

We aren't idiots. We know scammers would love to use our platform, just as they want to use Craig's List, Ebay, and Charles Schwab. And there are many things we are doing about it. First, we charge businesses a small "data hosting" fee for posting an offering on the platform; not many scammers want to pay to try to run a con, let alone provide a real name and real address as required to run a credit card transaction. Second, we make the fee a recurring monthly charge; thus if someone used a stolen credit card, it would likely be caught in the next billing cycle. Third, we don't host the credit card data on our servers (our merchant bank holds that data). Fourth, we check IP addresses, as well as proxies, and disallow people outside the USA from posting a deal. Fifth, we require a LOT of company information and disclosures before any deal can be seen or invested in; making this a huge hassle for anyone looking to run a con.

And all that is just "fraud deterrence". While we make it easy for legitimate businesses to use our platform, we make it a real pain in the ass for con artists to do so.

And for those that do anyway? Well that's where "fraud detection" comes in. First, we plan to use industry databases as they come into being in order to check for people who are trying to post offerings on other platforms. Second, we run background checks on the business and on key people associated with it. Third, all investor money is held in escrow until the deal is funded, and at success it can only be wired to a bank in the USA and only in the exact name of the business. Fourth, other brokers in the selling syndicate have to review the due diligence material, putting a lot more professional eyeballs on a deal. Fifth is "the crowd"; by letting all users comment and rate deals, it will generate quite a bit of vetting from people with a vested (or even just curious) interest in finding fraud and other inaccuracies in an offering. When a fraud is detected we kill the deal and report the specifics to the authorities.

SUMMARY: Will fraud occur? Yeah, probably. It happens in the stock market (think Madoff, Zzzzzz Best, Enron, et al), so it'll happen in crowdfunding too. But the thing is, it won't happen very often as we, and others, do a LOT to deter and detect it. With all these safeguards in place, the overwhelming majority of offerings are very real businesses that need your help to get the capital they need to grow and create jobs. So don't let an incredibly small fear overwhelm your passion to help get companies funded and drive the American economic engine to new heights. The future is incredible, help it happen!

Here's a quick recap to catch you up on the last year...

Nov 2011 - I read something in the news about H.R. 2930, the "Entrepreneurs' Access to Capital Act" in the House of Representatives and its' focus on enabling securities-based crowdfunding. The last time I was struck with a bolt of lightning like that was in the early 90's when I read about a kid named Marc Andreessen and his little program called Mosaic. I immediately started writing the first business plan and putting together the foundation for Arctic Island.

March 2012 - I have Wilson Sonsini incorporate Arctic Island, LLC (in DE). Dave and Greg are on the team. I've storyboarded a number of pages for the app, and Dave is starting to design them.

April 5th - after passing Congress with massive bi-partisan support, President Obama signed the JOBS Act into law, which eliminates the general solicitation ban on 506-D offerings and creates a revolutionary “Crowdfunding” exemption of the Securities Act of 1933. This new legislation will dramatically improve access to capital for small businesses as they can now use SEC registered, FINRA member internet-based “Funding Platforms” to raise capital. Jon invests $200,000 in seed financing.

May - I join the Board of the Crowdfunding Intermediary Regulatory Advocates, become a founding member of the Crowdfunding Professionals Association, give my first 3 industry speeches (in San Francisco and NYC), and have Doug Ellenoff's team do a first regulatory compliance review of the application design and business rules.

August - we create Arctic Island Financial, LLC (DE) as a wholly owned broker-dealer subsidiary of Arctic Island. This is where all business will flow, while the parent company is able to focus on software development and high level business relationships. Jon and I invest another $150,000 into the company.

October - we receive SEC approval for the new BD and change the logo of the company. By now I've authored or co-authored numerous CFIRA position letters, spoken at several conferences, and become chairman of the broker-dealer committee at CFIRA.

November - seminal event as the Funding Portal Best Practices, which I authored, are approved by CFIRA and forwarded to the SEC and FINRA.

December - Greg hires 2 developers, and takes a step back on the code and design so he can take several steps forward. Such is the joy of software development. I write 27 pages of MarCom content for the general sections of the site, which Dave is now designing (we are, I think, way ahead of our prospective competitors on the application, but way behind them on pre-launch marketing). Jon and I agree to put another $250,000 into the company and strategize about going out for a major fundraise.

Looking forward to 2013, it's going to be an incredible year!

It's exciting to finally have a blog up for the site. We've been focusing so much on developing the application that very little time and energy has gone into the site in general. That's changing now that we have more people and resources.

I (Scott, the founder of Arctic Island) am going to write this blog from the perspective of starting a company. There's enough ink out there on crowdfunding in general, so this will be about the adventure of creating something that will...literally...help change the world.

In the early 90's, when I was starting my internet company, I'd tell attorneys and accountants that they needed to communicate with me via email; they said "no way". I'd meet with senior executives of majors businesses, including the CEO of Flour Corp, who told me categorically "this company will NEVER have a connection to the internet!" I just smiled and said "yes you will, you just don't know it yet."

The same thing is about to happen again. The JOBS Act, especially the Title II and Title III provisions (506-D general solicitation and crowdfunding) will monumentally change and democratize capital formation. It will lead to an explosion in small business growth and create an unprecedented engine for new jobs. It changes everything, but people don't see it yet. They will. Giant new companies will be created as service providers to this new sector, the next Salesforce.com's and PayPal's. It changes everything.