FAQs from Advisors

We’ve received some interesting questions or opinions from potential DPO clients over the years—mainly coming from their advisors.  Below is a collection of some of our favorites, and our responses.

“Don’t you need audited financial statements?”

The requirements vary state by state, but audited financials are usually not required.

“Aren’t securities laws tricky and expensive to comply with?”

CEC and our sister law firm Cutting Edge Counsel are made up of securities lawyers and financing experts with decades of experience.  We take the fear and guess work out of compliance.

“Doesn’t it take years to get through the process?”

In our experience it takes an average of 6 months to get through the whole process.

“It will cost a lot with no guarantee that it will work.”

It is true there is no guarantee that it will work. This is true of all forms of capital raising.  The cost to do a DPO is relatively low when compared with private placements.

“Don’t you have to be set up to do investor relations and answer tons of questions?”

In our experience, DPO investors do not have a lot of questions—in fact we’ve seen a number of instances where there are virtually none.  This is attributable to the fact that in a DPO, each investor invests a relatively small amount and therefore does not feel the need to micromanage. Of course, this will depend on the kind of business and offering that is being presented.  It is true that you may need to send your investors an annual report and possibly some other information or payments each year, and we encourage communication with investors whenever possible.  We also have a great partner, VertoTrack, that simplifies the process of investor tracking and communication.

“Can’t I only do a DPO if my business is a corporation?”

DPOs are done by corporations, LLCs, Coops, and Non-Profits.  There is no requirement that an entity doing a DPO be structured in any particular way. It is true that the entity should be structured properly and this is something we help our DPO clients with.

“What about the marketing of the offering—won’t that be difficult?”

It may be the case that you will need to put resources toward marketing your offering – that will depend on your business and whether or not you already know who you will offer to and how.  Some of our clients can get the offering to the right people with very little effort, while others know they need to put quite a bit more into marketing the offering. But almost all of them come to understand that marketing their offering is an extension of marketing their business, and they can further capitalize on both with the same efforts.

Our marketing partners help to guide you through this process of first, understanding what you will need to do, and then assisting you with the best approaches based on your company, your target audience, and what has been most effective with others.

“Don’t you have to show that you have successfully run a business before to be able to do a DPO?”

Several of our clients that have had success with a DPO have never run a business before.

“Don’t you have to be extremely organized, detail-oriented, and on top of every administrative detail, all of which is time-consuming?”

A DPO does require good recordkeeping to make sure you keep track of your investors but this is not very burdensome and there are tools, like Vertotrack, that make it easier.

“Doesn’t a DPO open you up to a class action lawsuit from disgruntled shareholders.”

There is no evidence that a DPO is linked to a greater risk of lawsuits.

We are not class action plaintiff lawyers, but this does not make a lot of sense to us for a number of reasons.

  • First, DPO’s typically involve companies raising $500,000 to $1 million.  So the supposed “damage” done to any class of investors is relatively small for a class action plaintiff lawyer to invest time in pursuing.
  • Second, all of the DPO offering materials are vetted by state securities regulators to ensure that risks are properly disclosed.  This reduces the risk that a plaintiff’s attorney would find a flaw in the offering documents.
  • Third, DPOs succeed because the offering resonates with a community of investors who want to support the issuer and what it stands for.  DPO investors are rarely motivated by the desire to make a financial return at all costs and are likely to want to help and support the issuer if it runs into difficulties.

“I’m worried—the public markets are not fun and can be extremely difficult to work with.”

A DPO has nothing to do with the public markets. After doing a DPO, the company remains private and does not become a public reporting company.

“What if I want to sell my business in the future?  I’ve heard that no one wants to buy a company that has done a DPO because there are so many shareholders to deal with.”

Since you have complete flexibility in how you structure your DPO, this should not be a problem.  If you know you plan to look for a buyer, you can structure your DPO as a debt offering or include an equity redemption option with a pre-determined price.

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