Investors in 3 Houston Businesses Receive Default Notices From Crowdfunding Company

Republic Investment Services LLC, which acquired NextSeed in late 2020, has sent nearly concurrent default notices to investors in three Houston companies: Railway Heights Market at 8200 Washington, Shoot The Moon at 8155 Long Point and Buff Brew Tap Room (the restaurant and bar endeavor of Buffalo Bayou Bayou Brewing Co. at 2101 Summer). 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 less than a year, while Buffalo Bayou Brewing Co.’s restaurant and tasting room is 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 for Shoot The Moon and $1,112,900 for Railway Heights from numerous private investors.

We’ve contacted Republic Investment Services with several questions. For example, why did the three companies’ investors receive nearly concurrent notices? Are distributions expected even when a company is not yet profitable? Is there a grace period to allow a company time to become profitable before its regarded as being in default? Should we receive answers, we’ll update this article.

As it stands, the notices — which all follow the same format (see example at the end of this article) — state, “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 path to maximize the return of capital to investors.” It’s unclear as to what course of action Republic Investments Services would embark upon to secure returns of capital.

We spoke with Kevin Floyd of Shoot The Moon regarding the notices Republic Investment Services sent to its over 400 private investors. “It’s unfortunate. We were given a little advance notice that this would happen, but not a lot,” he said. “We’ve been in communication on a monthly basis with Republic. We post transparent updates to the backer community so they know where we’re at. We’re going to have to hire counsel to deal with this at this point, which is really a shame, because every dollar that I spend to deal with this is a dollar I’m not going to have available to spend on payroll, rent or to pay investors. If NextSeed gets very aggressive with this, I can see a scenario that forces us into bankruptcy, and then there would be no way to pay the investors back.”

We asked Floyd if he knew what the deadline was that triggered the sending of the investor notices. “We didn’t have clear deadlines,” he said. “Under the revenue sharing notes we had with NextSeed, we’re obligated to use a percent of gross revenue every month to pay back the investors. We’ve not been in a position since the day we opened to make payments. Every month, we submit documents to Next Seed to show what our sales are, and we have a conversation with them about how things are going.” In a typical investor situation, businesses pay percentages from net profit, not gross.

All three businesses faced unusual challenges, as did many restaurants and bars over the past few years. Both Railway Heights and Shoot The Moon were built out and and opened during the pandemic. Buffalo Bayou Brewing had only been open about five months when the pandemic-driven shutdowns started in mid-March of 2020. The pandemic’s ongoing impacts include a mass exodus of hospitality industry workers, supply chain shortages and increased material costs. Under even good circumstances, it’s not uncommon for businesses to not reach a break-even point until year two.

A recent visit to Railway Heights Market revealed that road construction had cut off access from one side of Washington Avenue — right in front of the establishment. During my visit, a vendor commented that the construction block cut off the direct route from a nearby neighborhood that previously had been a regular source of business.

Buffalo Bayou Brewing Co. and Railway Heights, which is owned by a business called Company of Nomads, also have been highlighted by the @welp_713 Instagram account, which publishes anonymous complaints from industry workers about both companies. These are published in the account’s Instagram highlights under “Rassul Zarinfar” (one of the co-owners of Buffalo Bayou Brewing Co.) and “Anh & Liam” (two of the co-owners of Company of Nomads). While the allegations are anonymous and unproven, these are available online for anyone to read. It’s unclear as to whether the claims have led to reduced business for either company.

Although they may not have yet reaped monetary gains, some investors have received measurable material rewards. When Shoot The Moon’s campaign stalled around the $140,000 mark, Floyd says the only suggestion NextSeed representatives had for reinvigorating it was to offer backers free beer like Buffalo Bayou Brewing Co. did (one free beer a day for life for those who invested at least $1,000). As a restaurant, Shoot The Moon could not legally offer free beer, so instead Floyd offered free pizzas every month. NextSeed investors get a $52 monthly credit, 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 backer 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, though, were the fees paid to NextSeed, which took a higher percentage of investor contributions that came through its portal instead of Shoot The Moon’s — regardless of whether it was Floyd’s marketing and promotion strategy that sent them there. All told, Shoot The Moon only netted approximately $320,000, according to Floyd. That doesn’t even include the ingredients or labor for the free pizzas given out every month — a program that Floyd still intends to maintain for the company’s backers unless he’s advised otherwise by an attorney.

Would these owners use Nextseed, or Republic Investment Services, again to help fund their business endeavors, knowing what they know now? “I’m not an expert in the field of crowdfunding,” said Floyd. “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 a lot of options for access to capital at the time. Access to capital is probably the number one thing that presents a challenge to small business today, in particular, the restaurant industry. Traditional banks aren’t going to touch us, so we’re left to alternative financing.”

The situation, with Republic sending notices to hundreds of investors also highlights a surprising risk of crowdfunding versus more traditional routes of dealing with angel investors, venture capitalists or banks. When there’s a problem, it quickly becomes public.

This is a developing story and will be updated as further information becomes available. Below is an example of the notice sent to Railway Heights, Shoot The Moon and Buff Brew Tap Room.

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