Walk south from Broadway on Fourth Avenue and you’ll find it—a sprawling red brick warehouse built in 1936 as a Coca-Cola bottling plant. Groups of four and five people cluster in the courtyard outside. Twinkle lights cast warm orbs of light. A disc whooshes across a shuffleboard. Misters release a stream of cool fog—“Actually, we’ve gone back and forth on that one,” says Chris Squires, the builder behind this dreamscape and the cofounder of Ten 55 Brewing. “Probably no misters.” No misters. Instead, patrons press cold pints to warm foreheads while they await orders of house-made artisanal sausage—“Probably not at first, but we plan to pack our own sausages within the first year or two,” says Squires. Inside the exposed-brick warehouse, below vaulted wood ceilings, bartenders pull taps and fill pint glasses with beer fermented 50 feet away.
Squires stops and looks around the empty 11,000-square-foot warehouse. Today, there are no taps, no fermentation tanks or chattering patrons. There’s only the vision that Squires and John Paul Vyborny, Ten 55’s cofounder and head brewer, have for this space and for the brewery they founded four years ago.
They just have to raise $1,999,363 before they can build it.
A month before Squires had walked me through the quiet warehouse—which is still on the market—I’d sat with him in two camp chairs crammed in the back of their tiny brewery in an industrial park near South Dodge Boulevard. “The crux of it is that we are constrained by capacity,” says Squires. “Demand has outpaced our ability to produce supply.” So, half an hour later, I signed a contract authorizing the purchase of 500 Series A Preferred Membership Units issued by Ten 55 Brewpub LLC. And just like that—quicker than I could finish my pint of cherry-infused XOXO Coffee Stout—I became an investor.
Ten 55 is the first and only company in Arizona to utilize an intrastate crowdfunding exemption to fund an investment offering. Passed in April of 2015, H.B. 2591 allows companies to raise up to $2.5 million in equity capital through crowdfunding.
“This is the strangest subject to most people. You can go online and raise money for your church group, or to launch a project. But as a general rule, you’re not allowed to sell shares of stock in a company,” says Jonathan Frutkin, the founder of the Phoenix-based Frutkin Law Firm and the author of Equity Crowdfunding. “That surprises people.”
That’s been true since 1933, when the United States passed the Securities Act, the first major federal legislation to regulate the offer and sale of securities. (A security is an intangible investment, like a stock or bond.) The logic behind this regulation is obvious—to protect the public from investing in shady offerings and losing all their money. Companies that sell on global exchanges like the New York Stock Exchange are subject to strict regulation and accountability standards. But for a small business—a local brewery, say, or a hair salon—the legal fees and paperwork required to register an investment offering with the U.S. Securities and Exchange Commission are cost- and labor-prohibitive.
The SEC has long offered regulatory exemptions with these very small businesses in mind. Each exemption comes with its own set of rules—namely, how much money a company can raise, and how and to whom they can advertise the offering. Most of these offerings are accessible only to accredited investors—that is, someone with an annual income of at least $200,000 for a single person or $300,000 for a married person, or a net worth of more than $1 million. The U.S. House of Representatives recently included as accredited those investors who pass certain “measures of sophistication” in their financial knowledge.
Basically, to be an accredited investor—to have access to most of the investment offerings in the United States—you have to have money to lose or the knowledge to lose it smartly.
Most of us are nonaccredited investors. My net worth hovers somewhere around the sticker price of a new Subaru Outback; my business credentials include an E-Trade account and a dog-eared copy of Suze Orman’s The Money Book for the Young, Fabulous & Broke. People like me are mostly excluded from investing in anything except the stock market—no matter how we might feel about sending all our savings to Wall Street.
In 2012, President Obama passed the Jumpstart Our Business Startups (JOBS) Act, which included a provision to allow equity crowdfunding, or the sale of securities to nonaccredited investors through a publicly solicited crowdfunding campaign. When the rule-writing required by this new legislation stalled, states took matters into their own hands and passed intrastate exemptions.
“We thought it was a very unique idea to allow these smaller companies, or even bigger companies, to be able to get funding and not go into debt right away,” says Arizona Representative Jeff Weninger, who introduced Arizona’s equity crowdfunding law. He says that the current investment structure is elitist: “They’re basically saying, let the big boys handle this; you just sit there and you can invest in stock, but you’re not sophisticated enough to invest in this”— to invest in your own community. Under the law, businesses can only accept money from Arizona residents. “This is a huge buy-local program,” says Weninger. “You’re being forced to stay within the state and invest in companies in the state. We’re growing companies here.”
Squires and Vyborny always knew they wanted to brew big. They were both working business jobs—Vyborny in I.T., Squires in corporate recruiting—when they caught the homebrewing bug. In 2011, Vyborny and his cousin entered a Double IPA in the Oktoberfest Homebrew Challenge. Out of 87 entries, their beer won first place. Although they’d been brewing together for years, “It was the first time that other people also said, ‘Whoa, that’s good beer,’” says Vyborny. “Once that happened, we were like, ‘Let’s go.’”
Squires and Vyborny traveled around the western United States looking at other breweries and comparing concepts. They knew they wanted to build a large production facility with the capacity to distribute beer across the state, but they soon realized that they also wanted to build a gathering spot in downtown Tucson. “When you’re at a brewery, you’re drinking beer,” says Squires. “Which makes you want to talk to people. And your friends and neighbors are the people there with you. Breweries fill this unique role that I think the community has an interest in supporting. There is a social value outside of the purely economic value.”
In 2012, they rented a small space in an industrial park and started churning out beer. This small startup was intended to be a proof of concept, a way for Squires and Vyborny to gain valuable experience and expertise. It was quickly proved. “Almost immediately, within six months or a year, we were working this poor little three-barrel system harder than it was designed to do,” says Squires.
They were debating how to capitalize their expansion when Squires went to a craft brewing conference in Portland and learned about equity crowdfunding. “We liked the idea of raising money in our own backyard,” he says. “The people that stand to gain the most from having a brewery downtown are our most likely investors.”
To some extent, they’ve been a crowdsourced brewery from the beginning, starting with that first Double IPA. “I have a lot of friends who do research and development for us,” says Vyborny. Their Betts’ Brown Ale began when Vyborny’s friend brought in a recipe he’d tested at home. They honed the recipe over four more rounds of home brewing; a year later, it’s one of Ten 55’s bestsellers. “There’s no recipe I haven’t tweaked in some way, but it’s still important for us to incorporate others in our recipe development,” says Vyborny. “Both on the small scale with homebrewers and friends and family, and also on the large scale with collaborations with other breweries.”
So as soon as Arizona passed its crowdfunding legislation, Squires and Vyborny jumped. They hired a lawyer, wrote a 132-page prospectus, and launched an online investment portal. They set the minimum investment at $10,000, which is also the maximum a nonaccredited investor can contribute. (They’ve offered numerous exceptions to this minimum, including to beer-loving reporters with $500 to spare.) If they raise less than $1.6 million—80 percent of the offering—all investors will have to reauthorize funds before the project can proceed.
By late August, they’d raised almost $950,000.
There have been two kinds of investor so far, says Squires. The first is already connected to Ten 55—to the beer and taproom, and to Squires and Vybrony. “They don’t care about the financials,” says Squires. “They know our beer, and they saw us going places. A lot of these investors just came in and handed me a check.”
The investors that do dig into their financials find a small brewery breaking even or losing money. That’s common for a company at their stage and scale, says Squires. “We were never going to make a lot of money at our size,” he says. “We break even most of the time. Last year, on a balance sheet of $200,000, I think we lost five grand.”
Instead, these investors ask, “Are we adding value to the marketplace?” says Squires. “And will we act in the best interest of the company?” In this sense, what most investors, accredited and nonaccredited alike, are assessing is Squires and Vyborny. “People are assessing J.P. and me before they look at any financial statement,” says Squires. “Someone told me early on that people weren’t going to invest in the plan. They were going to invest in us.”
The criticism that’s been leveled at equity crowdfunding is that it enables unsophisticated investors to sink their savings into risky and illiquid offerings. But if what Squires says is true, and that most investors simply want to know if they can trust the people behind a business, then what equity crowdfunding does is democratize access to community capital. Assessing trustworthiness is a skill most of us practice every day—except when it comes to investing our money. With new, localized options for investing, we can again decide whom to believe in, and to what extent. We can either see the vision, or not.
“What these community capital projects enable is shared expertise,” says Squires. Someone in the final investor group might know a lot about media relations, while others might contribute project management skills or marketing expertise. “The group will learn together,” says Squires. Investors are owners forever; we can sell our shares back to Squires and Vyborny after five years, but there’s no buy-out clause in the offering. As Ten 55 grows, so do we.
“This concept of fundraising is not unique. The concept is the same as it’s always been,” says Squires. “Have a good idea, convince people it’s a good idea, and find ways to prove it.”
The idea is patio games, craft sausage, and a historic warehouse in a thriving downtown. But for Ten 55, the proof is in the glass. ✜
Ten 55 Brewing. Invest.1055Brewing.com.
Megan Kimble is the editor of Edible Baja Arizona and the author of Unprocessed: My City-Dwelling Year of Reclaiming Real Food.