A Direct Public Offering (DPO) allows businesses and nonprofits to raise money from community investors! DPOs allow you to
- Offer debt, stocks, and other kinds of investment opportunities to the public
- Advertise the investment opportunity to the public
- Accept hundreds and possibly even thousands of investors
- Raise up to $1 million
- Do all this without breaking the state and federal securities laws.
In general, crowdfunding involves soliciting a large number of people to contribute to your funding campaign. While each person may give a small amount, when there are lots of contributions, the total can be quite large.
Any solicitation of the public to make an investment falls under securities law and requires filings with securities regulators before the offering can be made. There are many crowdfunding platforms like IndieGogo and Kickstarter that avoid this requirement by only allowing donations. No return on investment can be offered on these sites (other than small perks of nominal value).
It is possible to crowdfund investments as long as the required legal filings are done first. This process is often called a Direct Public Offering (DPO). For more information about crowdfunding, click here.
To see a presentation on the history of the crowdfunding legislation, click here.
What are some examples of DPOs that Cutting Edge Capital has worked on?
- Farm Fresh to You is offering loans to California residents – the interest is payable in credits for organic produce
- Quimper Mercantile is offering common stock in Washington state to open a community-owned store in Port Townsend
- Real Pickles is offering shares of non-voting preferred stock to residents of Massachusetts and Vermont
- People’s Community Market is offering preferred stock to California resident to finance the construction and operation of a retail grocery store in West Oakland
On April 5, the President signed the CROWDFUND Act into law. It will allow entrepreneurs to raise capital from the public using intermediaries. For more information, click here.
Why is it better to raise capital from my community than to pitch VCs and angels?
VC and angel investments are very difficult to get. You can spend months perfecting your pitch and never find an interested investor. As our pie chart shows, this kind of investment capital only represents about 4% of the total capital that is available for investment. The rest is in the hands of regular folks.
Even if you do get this type of investment, it often involves giving up control of your company. Many say that when you get VC funding, you’re hiring your new boss. And founders are not infrequently fired by VCs.
When the deal between you and the investor is hammered out, guess who holds all the cards? You will probably be asked to live with some terms that you are not happy with, including a lower valuation than you might feel is fair.
Also, VCs and most angels expect a fairly high return in their investment in a short amount of time. Most of the businesses they invest in don’t make it, so the ones that do have to cover the losses for the others plus make a reasonable return for the wealthy folks that give their money to VCs to invest. You will almost certainly be pressured to put fast growth above all other concerns. The investor will also expect an exit event which usually means you will have to sell your company.
When you raise money from a large number of small “retail” (non-wealthy) investors, you call the shots. You decide on the kind of investment you want, the offering price, and how your investors will ultimately exit. Your investors will not have any control over the business unless you want them to.
What federal exemptions are available from the general requirement that securities offerings to the public must be registered?
What if I want to offer securities to the public in New York?
New York is unlike other states in that it does not have a registration process except for securities offered intrastate (only in New York). If you want to offer securities to residents of more than one state, it is fairly simple to add New York.