Step 1: Decide what to offer
This is often the most important decision you will make as an entrepreneur because the terms you set can have major implications for the direction of your business. If you offer an investment that requires fast growth and the sale of the company for your investors to get paid, for example, you can guess what your investors will be pressuring you to do. If you offer an investment that promises a reasonable interest, dividend, or royalty payment without the possibility that the investment can ever appreciate in value, your investors will be rooting for your current and long-term success rather than pushing you to grow at all costs.
There are many options for what can be offered to investors. These include equity, debt, revenue share/royalty (payments to investors based on revenues for a defined period), memberships, and pre-sales of products and services. Each of these investments can be structured in an infinite number of ways. For example, equity can pay dividends or not, have limited or no voting rights, appreciate in value or not, et cetera. Payments to investors can be set in advance or can vary based on the company’s performance.
Of course, the type of investment an enterprise can offer depends somewhat on the structure of the enterprise and how it is taxed. So it’s a good idea to consider your capital raising plans before choosing your business structure.
Part of choosing the type of investment you will offer is deciding how your investors will be paid and when. This should be based on a realistic projection of what the company will be able to afford, as well as what investors are likely to be interested in. Keep in mind that many investors are very unhappy with their investment options these days and are looking for an alternative investment opportunity aligned with their values that pays a reasonable return of about 3-5%. If your customers love your products and services, it’s likely they will want to invest in your company.
Step 2: Decide on an offering strategy
The Direct Public Offering (DPO) tool requires you to register your offering in every state where you want to accept investors (unless exempt which may be the case for a co-op or nonprofit depending on the state). So it’s important to decide which states are the best targets for your offering.
You will also need to determine whether or not you qualify for a federal exemption from the requirement to register your offering with the SEC. Most of our clients at Cutting Edge Capital qualify for either Rule 504 or the Intrastate Exemption or both.
You will qualify for the Intrastate Exemption if, at the present time, most of your revenue comes from a single state, most of your property is located in that state, you plan to spend most of the money you raise in that state, and your company was formed under the laws of that state. The Intrastate Exemption allows you to raise an unlimited amount of money from residents in your home state and doesn’t require a federal filing.
If you don’t qualify for the Intrastate Exemption or if you want to raise money from multiple states, Rule 504 is another option. This exemption allows you to raise money from as many states as you want, but you are capped at $1 million per year total. This exemption requires a simple federal filing. Note that investments from non-US residents don’t count toward the $1 million maximum.
There are also exemptions available for nonprofits and some agricultural coops.
So, you should decide how much you need to raise and which exemption best fits your goals.
At this point you should also decide on the minimum amount you will accept from an investor. This is another opportunity for creativity. One of our clients, for example, set a minimum of $5,000 for accredited (wealthy) investors and a minimum of $1,000 for unaccredited (non-wealthy) investors.
Step 3: Draft your prospectus
The prospectus is a document that describes your business and the investment you are offering. It should disclose everything you think an investor would want to know before deciding whether to invest in your company.
Step 4: Submit your materials to the state regulators
The prospectus, along with some backup materials, such as your financials and formation documents, will be filed with the regulators of each state where you want to be able to accept investors.
Since each state requires a slightly different set of documents, you should contact your state securities regulators. They should be able to tell you what the state requires. The securities regulators will also require a filing fee, which can range from $100 to $2,500.
Step 5: Design your marketing plan
While you are waiting to hear back from the state regulators, you should start planning how you will offer the investment to the public. Who will you target? What media will you use? There are generally no limits on how you can advertise your offering, although the state regulators will often want to pre-approve your advertising. You can use press releases, websites, email blasts, social media, events, phone calls, et cetera; attend events where your likely investors will be and promote your offering; and advertise to your existing customers, offering special perks like an invitation to a VIP event or membership in a club that offers discounts and special deals.
Step 6: Launch your offering
Once you get the okay from the state regulators, you can launch your DPO. You can use our Online Investment Tool (OIT), our proprietary software that automates the investment process. Watch a video of how it works.
CuttingEdgeX is the nation’s only online marketplace for DPOs that are currently accepting investment. You can use this marketplace to reach potential investors.
You generally have one year to raise capital, but the filing can be renewed each year, which means you could raise money this way indefinitely!
Step 7: Manage post offering compliance and investor relations
The good news is that ongoing reporting requirements following a DPO are minimal, but you will need to check with each state that you registered in about what is required. An update of the federal filing for Rule 504 may be required when you complete your offering.
In addition, you will want to do a good job of tracking your investors and keeping them up to date on your progress. Vertotrack is a tool that can be used for this purpose.
It is often difficult and, because of the many strings attached, even undesirable to raise capital from traditional sources such as banks and accredited investors (a.k.a. angels and venture capitalists). Moreover, the mainstream models for raising capital leave out vast, untapped numbers of people who want to invest in the businesses and organizations that provide real value in the real world. DPOs provide a powerful tool for companies to raise capital and engage their biggest fans and customers as investors and company stakeholders.
At Cutting Edge Capital, we take passionate entrepreneurs step-by-step through the DPO preparation, filing, and launch process. Our software and web-based tools simplify the process of conducting DPOs. Please contact us directly for more information about our services.