In an effort to curate and organize published content related to DPO’s, we have taken excerpts from a broad range of articles on DPO’s and arranged by topic to help social entrepreneurs research this intriguing and growing funding option.
Definitions
From “What is a Direct Public Offering a.k.a. Investment Crowdfunding? (Cutting Edge Capital)
Direct Public Offering (DPO) (also known as Investment Crowdfunding) is a generic term that includes any offer and sale of an investment opportunity to the public in which anyone (both wealthy and non-wealthy) can invest. Also, the entity that is raising the funds offers the investment directly, without a middleman like an investment bank.
From “What is a Direct Public Offering? Going Public Attorneys” (Securitieslawyer101.com)
A Direct Public Offering allows a company to sell its shares directly to investors without the use of an underwriter. With a Direct Public Offering, the company files a registration statement with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended (the “Securities Act”).
Typically, in going public transaction Form S-1 (”S-1”) registration statements are used.
From “Social Enterprises Raise Money Through Direct Public Offerings” (Forbes, 8/6/2014)
Andy Bamber, Cutting Edge Capital’s business development manager, calls [Direct Public Offerings] “securities-based crowdfunding.” Through DPOs, companies sell securities directly to a lot of unaccredited investors. It’s a way to raise capital without all the regulations, underwriting and expense required for a regular IPO. In some cases, there’s a cap of $1 million; in others, there’s no cap.
While they’ve been around for a long time, DPOs have flown largely under the radar—until now. One reason could relate to the JOBS Act. Although DPOs aren’t regulated by that legislation, the pace of the law’s implementation could be one factor in the stepped-up interest. “I think DPOs are getting a boost from the continued regulatory delays of investment crowdfunding,” says Amy Cortese, author of Locavesting: The Revolution in Local Investing and an authority on the subject of local investing. “It’s a form of crowdfunding that’s legal today.”
This is good news for social enterprises, because DPOs are useful for ventures “with a strong following or appealing social mission,” says Cortese. (That includes businesses that are of interest to investors and consumers looking to support local ventures, as well as many social enterprises).
From “Entrepreneurs- Have You Considered Direct Public Offerings To Raise Capital?” (Return on Change, 1/29/2014)
DPOs allow community members to invest in local business, allowing public offerings of securities (stock, notes, or any other kind of investment) to all investors, wealthy or not.
DPOs are different from IPOs in that they allow business owners to sell stock directly to the public without the registration and reporting requirements of an IPO. However, they must be filed with the individual states and are screened by state-level securities regulators who have a great deal of experience at spotting fraud and overly risky propositions. That is a big advantage over the JOBS Act, which prohibits state securities regulators from getting involved. Vetting by such regulators reduces the need for onerous limits like those imposed under the JOBS Act.
Generally, DPOs do not require audited or reviewed financials, caps on total amount raised or individual investments, ongoing reporting or limitations on communications. There are maximum limits on the amount that can be raised, usually up to $1 million, but this can be flexible.
A major feature of DPOs is that business owners are permitted to advertise and promote to potential investors. There is a downside. DPOs stocks can be harder to sell when investors are ready. This can be a deterrent for investors.
From “Direct Public Offering (DPO): Expanding Your Team of Stakeholders” (California Bank & Trust)
Here’s the process for the creation of a DPO – an ideal capital development tool for many growing businesses:
- Stock is registered with state administrators instead of with the Securities and Exchange Commission (SEC).
- The company generates a prospectus that clearly lays out company financials, fiscal history and reasonable projections for further growth. There are regulations that must be followed in the preparation of a DPO prospectus, so hiring legal counsel to help develop your DPO prospectus is just plain smart business.
- The company makes financial reports and documents publicly available.
- The company provides accurate and timely information about the business to investor-shareholders, usually on a quarterly basis.
- The company is audited by an accredited, independent accounting firm, which means your books must be current, clear and down to the penny so auditors give your business the “thumbs up.”
…
Types of Direct Public Offerings
A DPO falls into one of three regulatory classes:
- Regulation D: The most widely known form of DPO, a Regulation D, also called a Small Corporate Offering Registration (SCOR), equips you to raise up to one million dollars every 12 months. Shares are registered with your state’s securities regulatory administration.
- Regulation A: Enables your company to raise up to five million dollars annually. However, a Reg A DPO requires registration with the Securities and Exchange Commission’s Small Business Office. This increases the costs of compliance and reporting. In addition, it adds another agency looking over your shoulder every 90 days.
- Intrastate DPO: This class of DPO isn’t capped on allowable sale of stock but you must raise funds within your state, be incorporated in that state and do at least 80% of your business in that state, hence the term “intrastate” DPO.
- This type of DPO is ideal for growing businesses with a clearly-defined, regional service area. Planning on going global? An intrastate DPO is not the way to grow.
The Upside
From “Direct Public Offering (DPO): Expanding Your Team of Stakeholders” (California Bank & Trust)
- Stock sales raise capital you are not required to pay back, as you would a commercial loan. Investors accept and share both risk and reward generated by your business.
- Because DPO investment capital isn’t a loan, you don’t make interest or principal payments on the funds you receive. Investors grow wealth through appreciation of share price.
- Selling shares of stock through a DPO won’t require your company to give up as much equity as it would using venture capital (VC) investors. A DPO keeps greater control of the company in your team’s hands.
- Marketing shares of stock simultaneously “sells” your company brand to customers, clients, vendors, contractors, subs, suppliers and others with whom you conduct business regularly.
- Since the legal and accounting requirements for a DPO are relatively simple, a DPO measures investor interest – a critical metric when you decide to take the company public.
- Employees, customers and suppliers who purchase an ownership stake in the company have a vested interest in seeing your company succeed. You expand the team outside the four walls of your facility.
- Capital loans are easier to obtain when lenders recognize that investors participate in risks faced by the company. This enables you to leverage the good name of your business to raise more capital at better rates and terms.
The Risks
From “Seeking Capital, Some Companies Turn to ‘Do-It-Yourself I.P.O.’s’” (New York Times, 7/31/2013)
On the downside, business owners must be prepared to invest a substantial amount of time and effort in the process and to deal with hundreds or even thousands of small investors. And most direct offerings require assistance from a knowledgeable lawyer. Not surprisingly, however, cutting out the middleman and streamlining the process lowers the cost considerably. A direct offering might cost around $25,000 in legal fees, while a formal initial public offering can cost $1 million or more. That makes direct offerings an increasingly attractive option for companies that need a substantial amount of capital — typically between $500,000 and $5 million — but not enough to justify the cost of an initial public offering.
From “An IPO route for the little guy, but full of risks” (CNBC, 12/4/2014)
“Almost 100 percent of entrepreneurs grossly underestimate how tough it is to get financing from third-party investors, even when they’re selling shares,” said Voskuil, adding, “Where do you find investors willing to put $10,000 or $25,000 of capital into your company without the help of a financial professional’s access to deal flow?”
Voskuil said any company pursuing a DPO on its own that reaches even one-third of its target amount is doing well.
This year, Cutting Edge Capital has worked with more than 40 companies to launch DPOs, and it expects to double that number in 2015. It doesn’t come cheap, though: Cutting Edge Capital charges $14,000 for its DPO boot camp.
The Downsides of Internet DPOs
According to Brad Sinrod, president and chief executive of Philadelphia-based IPO.com, DPOs are often not all that they’re cracked up to be. In Sinrod’s experience, he has found that many early-stage growth companies are not ready for the scrutiny of a public offering, let alone the responsibilities that go along with conducting a DPO. “An entrepreneur may do a good job of building their business, but may not be able to play the role of securities lawyer, investment banker, stockbroker and investor relations professional — all of whom you’d normally include in a full-blown public offering,” Sinrod explains. In fact, Sinrod, whose company reports on the IPO market, says a small- to mid-sized firm should rely on sources like friends and family for start-up funding.
If firms do undertake a “do it yourself” DPO, Sinrod advises working with professionals who will truly assist in the offering process. “[Not only do they] bring experience to the table, but investors are much more comfortable when professionals are involved,” he says. “Investors feel that there are actually professionals involved who have done some due diligence – because an investment bank or a broker/dealer needs to do due diligence and take liability for the companies they raise money for. There’s also a better chance that the stock will be priced at fair market value. We’ve seen a lot of entrepreneurs who think their garage-based business is worth $100 million, and they may be correct, but they need to go through the normal process to determine the true value of the company.”
Sinrod adds that one primary reason that companies go public is to possess a publicly traded security that provides liquidity for investors and a potential exit strategy for investors. “Unless a company is working with professionals with experience in the process, it’s not an easy task to accomplish,” he advises. “There have been a few companies that have done DPOs with some success, but any company that can find an investment bank should.”
Use Cases
From “Can a DPO grow your business like Ben & Jerry’s?” (Greenbiz, 6/16/2014)
Ben & Jerry’s, Annie’s Homegrown and Real Goods are examples of social enterprises that have used DPOs to raise capital.
…
So far, Cutting Edge has completed 10 DPOs, raising nearly $5 million, with 20 or more in the pipeline. Arroyo Food Co-op, Calvert Foundation, Farm Fresh to You, People’s Community Market and RSF Social Finance are among those that have listed DPOs there.
Right now, the platform is only available to California residents and the minimum investment is $1,000.
Most famously, in 1984, two young entrepreneurs raised a first round of capital for their fledgling ice cream company in an intrastate offering. With the slogan “Get a scoop of the action,” Ben & Jerry’s raised $750,000 from 1,800 ice-cream-loving Vermonters, allowing them to build a new plant and expand, and setting the stage for a $5.8 million initial offering the following year.
Annie’s Homegrown, the maker of packaged macaroni and cheese, raised $3 million in 1996 through a direct offering, advertising the offering in coupons tucked into each box. And more recently, tight credit markets and the rise of social media have fueled interest in the alternative financing system, especially among companies that have enthusiastic customers who can be converted into shareholders.
From “Social Enterprises Raise Money Through Direct Public Offerings” (Forbes, 8/6/2014)
Consider Cutting Edge Capital. Launched four years ago, the Oakland, CA,-based company is really hitting its stride. It has facilitated 11 DPOs, raising just over $5 million–with 25 in the pipeline.
…People’s Community Market, for example, which is trying to build a full-service grocery store in Oakland, raised $1.2 million in a DPO in 2013. (The offering is still open, though the enterprise isn’t doing any more active outreach, according to Brahm Ahmadi, CEO and president). Because it had already been trying to get established for a number of years, “A lot of people knew us and what we were doing,” says Ahmadi. “A DPO seemed like a good fit.”
As an example, Arroyo Food Co-op, a startup cooperative grocery store in California, is using a DPO to raise money from its community to open. The co-op is offering loans that pay a competitive rate of return. Because Arroyo registered the offering with the California securities regulators, there is no cap on the amount it can accept from each investor and it was not required to provide audited or reviewed financials. Arroyo currently has 660 members and has raised $200,000 in member-owned loans. Other successful examples include People’s Community Market, Real Pickles, and Quimper Mercantile.
From “Direct Public Offerings: Allowing the Community to Invest” (Triple Pundit, 1/22/2013)
Another company working with Cutting Edge Capital to raise capital through a DPO is Farm Fresh To You. Farm Fresh To You, a Bay Area produce home delivery service and also a farm, sought capital through accredited investors as well. They found about $1M over five years but wanted to find a way to include their customers in their financial development. Yet 99 percent of their customers were non-accredited investors. They asked their lawyers how to get their customers involved and they shrugged their shoulders. In came the support from Cutting Edge Capital and in five months, Farm Fresh To You’s Marketing and Sales Manager, Noah Barnes and Jenny Kassan set up a DPO. According to Barnes, “It was a win-win. They get better than market rate on their investment and they can get more fresh produce from us.” Farm Fresh To You can even pay the interest back with produce credits through their Green Loan Program.
From “Raising Cash via Direct Public Offering” (Entrepreneurship.org, 2006)
Adamis could have gone the venture capital route. But venture capitalists pay less per share in return for the five-to-eight years they typically wait for potential return on a high-risk investment. That, in turn, would have required us to sell many more shares to get the money we need.
In the past year, this environment has led many companies, including Adamis, to explore various financing options known as alternative public offerings (APOs), such as reverse mergers. In a reverse merger scenario, we would acquire a public shell, e.g., a publicly traded company that is no longer a functioning business. This would save time and effort to register with the U.S. Securities Exchange Commission (SEC) and deliver a shareholder base and publicly tradable stock.
However, public shells are quite expensive. In addition to legal and accounting fees, people who control a “clean shell” with few liabilities generally demand ownership of five to ten percent of outstanding shares plus cash ranging from $250,000 to $750,000.
Based on our “make-versus-buy” analysis, we chose to raise public money by creating our own shell through direct registration (also known as a direct public offering) with the SEC.
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