What is a Direct Public Offering?
You know that raising money from investors could help you take your business (or entrepreneurial nonprofit) to the next level of success. But you’ve heard horror stories about what it’s like to raise money from professional investors, like Venture Capitalists and Angel Investors, and you’re worried that’s not a good fit for you. You would like to raise money from regular folks – your community, customers, and fans. But you’ve heard that it might be illegal to do that.
Good news! There are legal ways to raise investment capital from the crowd. One of the names for this is doing a Direct Public Offering, but it is also sometimes called by other names like investment crowdfunding.
What is a Direct Public Offering (DPO)?
A DPO is legal way to offer an investment opportunity (equity or debt) using public advertising and open the opportunity to anyone, whether a wealthy professional investor or not (in legal parlance, you can open your investment offering to both unaccredited and accredited investors).
What are the legal hoops I have to jump through to be able to do a DPO?
You have to make sure you are complying with the federal securities laws AND the laws of every state where you plan to offer your investment.
The good news is that there are several options for complying with the federal law that require very minimal effort. The primary federal compliance strategies you use when doing a DPO are
- The intrastate exemption which allows companies to raise an unlimited amount from investors within a single state if the business is located in that state
- Rule 504 which allows companies to raise up to $5 million from an unlimited number of states
- The nonprofit exemption which allows nonprofits to raise an unlimited amount from an unlimited number of states
- The agricultural coop exemption which allows agricultural coops to raise an unlimited amount from an unlimited number of states
- The Crowdfunding Exemption under the JOBS Act which allows companies to raise up to $1 million from all 50 states without having to do state-by-state compliance
- Regulation A which allows companies to raise up to $50 million from an unlimited number of states (this option requires an extensive federal filing so is more expensive to comply with than the others)
Once you’ve determined your federal compliance strategy, you will need to determine the compliance strategy for the states in which you’re offering your investment opportunity. In some states, this means you will register your offering with the state securities regulators. Many states have special exemptions from this registration requirement for companies raising smaller amounts (often called crowdfunding exemptions). Sometimes nonprofits and cooperatives may have special state exemptions as well. And with some of the federal exemptions, state-by-state compliance is not required (e.g. the crowdfunding exemption).
Once I’ve done the compliance part, what’s next?
Once you’ve ensured both federal and state compliance for your offering, you can go ahead and look for investors using social media, press releases, your web site, events, etc. You can set the minimum amount per investor low so that more people can afford to invest.
I am a start-up – can I do a DPO?
Yes! Some of the most successful DPOs have been done by start ups.
What are some examples of successful DPOs?
- Farm Fresh to You, an organic produce delivery business, offers their customers the opportunity to make them small loans and the interest is payable in credits for organic produce – they have raised several millions dollars
- People’s Community Market offered nonvoting preferred stock to California residents to open a grocery store in Oakland they raised approximately $1.2 million
- Quimper Mercantile offered common stock in Washington state to open a community-owned store in Port Townsend – they raised approximately $750,000 and the store is now operating successfully
- Real Pickles raised $500,000 by selling non-voting preferred stock to Vermont and Massachusetts residents – they reached their fundraising goals in just two months
- A nonprofit organization in the San Diego area raised money from its community to develop a commercial real estate project called Market Creek Plaza – 450 community residents now receive dividends from the profits of the center
Click here for a recent article about a successful DPO completed by a recycling and composting company in Massachusetts.
How can I do a DPO?
DPOs require careful planning and the assistance of an attorney with experience conducting successful DPOs. Here are some questions you can ask yourself to decide whether you may be a good candidate to do a DPO:
- Do I have a clear vision of the future of my business and how I might be able to compensate investors? (note that DPO investors are often happy with annual returns of 5% or less; they will usually want to know how they can get their initial investment back out in case of an emergency)
- Do I have resources or can I find them to conduct an outreach campaign to potential investors?
- Do I have a great story to tell about my business that will attract investors? (note that lots of investors love to support businesses that not only can provide a reasonable financial return but are also contributing to the well-being of their workers, their community, and the planet)
- Do I have the resources to hire experts to make sure I design my investment offering in alignment with my goals and to complete the required legal compliance needed to do a DPO?
If you can answer yes to these questions, a DPO may be a great choice for growing your business!
For more information about DPOs, legal compliance for raising capital, and how to structure an investment offering that is in alignment with your goals, contact us.