Republic Investment Services LLCwho acquired NextSeed end of 2020sent nearly simultaneous default notices to investors at three Houston companies: Railway Heights Market at 8200 Washington, shoot the moon at 8155 Long Point and Buff Brew Tap Room (the catering and bar business of Buffalo Bayou Bayou Brewing Co. in the summer of 2101). All were funded, at least in part, when NextSeed was still a standalone company. Two of the businesses, Shoot The Moon and Railway Heights, have been open for less than a year, while Buffalo Bayou Brewing Co.’s restaurant and tasting room are just over two years old.
NextSeed – and now Republic Investment Services – specializes in crowdfunding startups with very low financial barriers to entry. The minimum investment for Shoot The Moon, for example, was $100. As NextSeed, the company raised $1 million for Buff Brew, $409,000 to shoot the moon and $1,112,900 for railway heights with many private investors.
We contacted Republic Investment Services with several questions. For example, why did investors in all three companies receive nearly simultaneous notices? Are distributions expected even when a business is not yet profitable? Is there a grace period to allow time for a company to become profitable before it is deemed to be in default? If we receive any responses, we will update this article.
As it stands, the notices – which all follow the same format (see example at the end of this article) – read: “As collateral agent on your behalf, Republic Investment Services LLC (f /k/a NextSeed Services LLC) has been working with the [company name] team to find a way to maximize return on capital for investors. It is unclear what course of action Republic Investments Services would take to ensure the return of capital.
We spoke with Kevin Floyd from Shoot The Moon regarding the notices Republic Investment Services sent to its more than 400 private investors. “It’s unfortunate. We had a bit of advance notice that this would happen, but not much,” he said. “We’ve been in communication on a monthly basis with Republic. transparent updates to the contributor community so they know where we are at. We’re going to have to hire a lawyer to fix this at this point, which is really too bad because every dollar I spend fixing this is a dollar that I won’t have to spend on payroll, rent, or paying investors If NextSeed gets very aggressive with this, I can see a scenario that forces us out of business, and then there would be no way to repay investors.
We asked Floyd if he knew what the deadline was that triggered the investor notices. “We didn’t have clear timelines,” he said. “Under the revenue sharing ratings we had with NextSeed, we are obligated to use a percentage of gross revenue each month to reimburse investors. Since the day of our opening, we have not been able to make payments. Each month, we submit documents to NextSeed to show what our sales are, and we have a conversation with them about how things are going. In a typical investor situation, companies pay percentages on net profit, not gross.
All three businesses have faced unusual challenges, as have many restaurants and bars over the past few years. Railway Heights and Shoot The Moon were built and opened during the pandemic. Buffalo Bayou Brewing was only open about five months when pandemic-related closures began in mid-March 2020. Ongoing impacts of the pandemic include a mass exodus of workers from the hospitality industry, supply chain shortages and increased material costs. Even in good circumstances, it is not uncommon for companies to fail to break even up to the second year.
A recent visit to Railway Heights Market revealed that road construction had cut off access to one side of Washington Avenue directly across from the facility. When I visited, a salesman pointed out that the building block cut off the direct route to a nearby neighborhood that had previously been a regular source of business.
Buffalo Bayou Brewing Co. and Railway Heights, which is owned by a company called nomadic companywere also highlighted by the @welp_713 Instagram account, which publishes anonymous complaints from industry workers about the two companies. These are posted in the Instagram highlights of the account under “Rassoul Zarinfar(one of Buffalo Bayou Brewing Co.’s co-owners) and “Anh and Liam(two of the co-owners of Company of Nomads). Although the claims are anonymous and unproven, they are available online for anyone to read. It is unclear whether the claims have resulted in reduced business for either company.
Although they may not have reaped monetary gains yet, some investors have received measurable material rewards. When Shoot The Moon’s campaign stalled around the $140,000 mark, Floyd said the only suggestion NextSeed reps had for reinvigorating it was to offer backers free beer like l made Buffalo Bayou Brewing Co. (one free beer a day for life for those who have invested at least $1,000). As a restaurant, Shoot The Moon could not legally offer free beer, so Floyd instead offered free pizza every month. NextSeed investors get a monthly credit of $52, which equates to about two or three pizzas, depending on the selection. The strategy worked and pushed total investments to over $400,000.
However, there were substantial costs involved, including marketing costs for the campaign, postage for shipping supporting rewards, such as pint glasses, and the cost of the rewards. Floyd says he had to hire a developer to create a database to track the free pizza program. The biggest cost, however, was the fees paid to NextSeed, which took a higher percentage of investor contributions that went through its portal instead of Shoot The Moon’s – be it marketing and promotion strategy of Floyd who sent them there. In total, Shoot The Moon only grossed around $320,000, according to Floyd. That doesn’t even include ingredients or labor for the free pizzas given out each month — a program Floyd still intends to maintain for corporate backers unless otherwise advised by a lawyer.
Would these owners use Nextseed or Republic Investment Services again to finance their business activities, knowing what they know now? “I’m not an expert in crowdfunding,” Floyd said. “I don’t know if NextSeed/Republic is indicative of the larger crowdfunding community, or if it’s an anomaly. That being said, I didn’t have many options for accessing capital at the time. Access to capital is probably the number one challenge for small businesses today, especially the restaurant industry.Traditional banks aren’t going to touch us, so we’re left with alternative financing.
The situation, with Republic sending notices to hundreds of investors, also highlights a surprising risk of crowdfunding compared to the more traditional routes of dealing with angel investors, venture capitalists or banks. When there is a problem, it quickly becomes public.
This is a developing story and will be updated as new information becomes available. Below is an example of the notice sent to Railway Heights, Shoot The Moon and Buff Brew Tap Room.