Considering a capital raise that you can publicly promote? This overview chart is designed to compare key features of direct offering strategies that permit an issuer to solicit investment from its network. None of these strategies require the use of a broker but all have options to allow you to list your offering on a listing portal like SVX.us.com or a Reg CF listing portal. Some strategies are better suited to issuers trying to raise capital primarily from a large group of community (nonaccredited) investors, others are designed to reach a mix of high net worth (accredited) and community investors and one is limited only to accredited investors. Some are limited to one or a few states while others can be nationwide.
There are many factors beyond those noted in the chart that go into deciding what capital raise strategy is right for your enterprise given the location and makeup of your network and the amount to be raised. Some of these strategies allow for testing the waters before moving forward with a direct offering. Note too that there are a lot of details and nuances to consider for setting up a raise that are not captured on this chart. If you are considering a public raise, we are available to help you choose a strategy and design the direct offering that best fits your goals. Contact us for a free consult call to learn more.
Compare and Contrast: Direct Public Offering Strategies
Suppose your organization needs growth capital and you’ve talked about doing a securities offering of some sort. But you’re reluctant to commit the time and resources that it takes to gear up for a securities offering without having some confidence that it will be successful. What you’d really like to do is to put some feelers out there, at a minimal compliance cost, to see if potential investors would be interested. Then you could make a better-informed decision.
This is what we call “testing the waters.” In addition to helping your organization decide whether to launch a securities offering, a testing-the-waters campaign could potentially also help you choose from among several capital raising strategies.
For example, if you find there is strong interest among accredited investors but less interest among non-accredited investors, you may opt for a Rule 506 offering targeted to accredited investors. If you find the opposite, you might choose a Regulation Crowdfund offering or a direct public offering. You might also gauge interest among out-of-state investors, which can help you decide whether to do an intrastate offering or a multi-state offering.
Legal Strategies for Testing the Waters
It has always been possible for organizations to speak privately with potential investors to test the waters. But the last few years have given us some new ways of doing this publicly. For example, the expanded Regulation A, which went into effect in 2015, has its own testing-the-waters provisions in Rule 255, for organizations contemplating a Reg A Tier 2 offering.
Then last November, an SEC final release gave us two new testing-the-waters pathways: Rule 206 for organizations contemplating a Regulation Crowdfund offering; and Rule 241 for organizations that haven’t yet decided on an offering strategy.
This trio of testing-the-waters rules has some similarities. All of them generally require the following:
No money may be solicited or accepted when testing the waters.
Testing-the-waters materials must state that:
No money is being solicited or will be accepted;
Offers to buy securities will not be accepted; and
Indications of interest are non-binding.
The issuer must keep a copy of testing-the-waters materials, and any such materials that are made publicly available (or otherwise used in general solicitation) must be included with a subsequent filing under Reg A or Reg CF.
There are some important differences, which we’ll break down in the table below, to make it easy to compare them. But first, we’ll add one more: Rule 506(c) under Regulation D is not designed as a testing-the-waters strategy, but rather as a strategy for raising capital from accredited investors (with verification). But it can be advertised, and that opens the door for its use as a public testing-the-waters strategy.
Comparison of Testing-the-Waters Strategies
With four testing-the-waters options now, it can get a little confusing. So here’s how we break them down:
Subsequent offering strategy
Reg A Tier 2 only
Reg CF only
Requires standard TTW disclosures
Can take investment money
Yes, but only from investors verified as accredited
Other key elements
May do TTW before or after filing Form 1-A
May not do TTW after filing Form C
May not use Rule 241 after deciding on a strategy
Requires 30-day waiting period after TTW to avoid integration with any subsequent offering
We’ll draw attention to one critical differentiator among these rules: preemption of state laws. Most testing-the-waters rules preempt state laws, which means that an organization can safely test the waters under those strategies, even publicly on the organization’s website, without worrying about violating state laws.
But Rule 241, the testing-the-waters rule for organizations that have not decided on an offering strategy, does not preempt state law. Many (and perhaps most) states’ securities laws do not permit testing-the-waters publicly, or allow it under only limited circumstances. So an organization should be very cautious in planning a Rule 241 testing-the-waters campaign so as to ensure it does not inadvertently violate state laws. As a practical matter, Rule 241 may not be very usable for this reason. Instead, organizations who want to test the waters but have not yet settled on either Reg A or Reg CF as their intended offering strategy may be better off using Rule 506(c).
With all of these strategies, there are some important nuances, and no organization should test the waters without first getting legal advice. Naturally, this discussion should be regarded as informational only and not as legal advice. If you’d like to talk with us about testing the waters or other securities strategies, don’t hesitate to reach out to us.
In the aftermath of the protests and marches of the past year or so, community wealth building has emerged as an often-discussed strategy of economic justice. Community wealth building is really another term for community capital, and it’s been at the core of our work at Cutting Edge Counsel since our firm’s founding. It’s also the focus of the National Coalition for Community Capital (NC3), where I’m on the board.
In particular, there is a growing interest in community investment funds as a tool for community wealth building – something we’ve been writing and talking about in recent years. In this blog, we wrote about why these vehicles represent the ultimate impact investment – in short, because instead of seeking to remedy the harmful impacts of the prevailing system, they represents a systemic change in who invests and where profits go.
In the conventional system, only the wealthy can participate in the most profitable investments, which means the wealthy can grow their wealth at a rapid clip. The rest of us are generally stuck with investment options that, on a risk-adjusted basis, pay less than inflation. So instead of growing wealth, these options tend to erode wealth, which means the non-wealthy are effectively penalized for investing while the wealthy are generously rewarded. Naturally, this system contributes to a widening wealth gap.
But community capital (and community investment funds in particular) represents an entirely different approach to moving capital that decentralizes it, democratizes it, and recognizes that wherever your investors are, that’s where your profits go. If you want to get profits into the hands of non-wealthy people in your own community, you need to source capital from those same people.
However, community investment funds must be structured to comply with the Investment Company Act of 1940 – a rather restrictive federal securities law that hasn’t been updated significantly in a very long time. Previously, we wrote about four ways of building a community investment fund under current law. These included a charitable loan fund, a real estate fund, a supplemental fund (aka diversified business fund), and a business development company. Then, in this blog, we added another to that mix, a pooled income fund – which is generally considered a planned giving device, but can also serve as a type of community investment fund.
Then last year, the National Coalition for Community Capital published this handbook on community investment funds, which I co-authored along with Michael Shuman, Amy Cortese, and fellow NC3 board member Janice Shade. The handbook covers a lot of territory that would be useful for anyone who is thinking about launching a fund in their own community. In the chapter on legal strategies, we dug into a number of ways it can be done – again, right now, under existing law – including those mentioned above and a few more.
And yet, despite all the legal strategies that are currently available, there is still a big gap, which we discussed in this blog. What’s still missing is a way to build a simple community-scale equity fund – meaning a for-profit fund that can take investment from the community (including, of course, non-accredited investors) and deploy it in debt, equity, or revenue share investments into local companies, with the profits distributed among community investors – and all this in a cost-effective vehicle with a minimal compliance burden under the securities laws.
NC3 has recently taken the lead on an initiative to expand the investment fund options under the 1940 Act – advocating both a legislative change by Congress and rulemaking by the SEC. We have already had discussions with key people in the SEC about this. While securities regulators will, of course, apply a healthy dose of skepticism to any new ways of doing things (that’s their job!), the SEC specifically reminded us that they have created new exemptions for new types of investment vehicles in the past and could do so again. The door was left open for us, and NC3 is continuing to push on this front.
In the meantime, if you want to launch a community investment fund as a wealth-building tool in your own community, there are great options available now. There’s no need to wait, though we hope the menu of options will expand soon. Don’t hesitate to reach out to us at Cutting Edge if you’d like to talk about what might work for you.
Finally, I want to give credit to the late Sam Cooke, who penned the song referenced in the title above. And if you haven’t seen the movie One Night in Miami, I recommend it. You’ll see the connection. The struggle for equal opportunities for all Americans clearly didn’t end in the 1960s. I see our work to expand community wealth building options as within the arc of change that Mr. Cooke foresaw all those years ago. It’s been a long time coming. But a change is gonna come.
Charged with exploring sense of ownership strategies for economically-disadvantaged communities in California, Cutting Edge Capital worked in partnership with the West Oakland Environmental Indicators Project (WOEIP) to identify strategies and business models that encourage the development of equitable community solar projects in West Oakland, California. WOEIP is a resident led, community-based environmental justice organization dedicated to achieving healthy homes, healthy jobs and healthy neighborhoods for all who live, work, learn and play in West Oakland.
As a result, Cutting Edge presented three strategies:
cosponsorship and development of a project awarded to participate in the Community Solar Green Tariff Program;
cosponsorship and development of a large-scale solar project that provides electricity to a site host or municipal utility (e.g., Port of Oakland); and
development of a solar commons model in which a cooperative owns and develops a solar project on a host site and shares in the utility savings generated.
Watch the full presentation above or download the presentation file below to learn how the framework presented promotes equitable community solar projects that support a “just transition” to a regenerative economy in alignment with WOEIP’s mission.
In our previous blog, we heard from MedFire Innovations’ Founder and President, Greg Christmas who spoke about MedFire’s mission to protect the lives of patients, emergency and healthcare providers through innovative, safer products. Now, check out part two of our discussion to hear why MedFire chose a direct public offering (DPO), what new projects are on the horizon and future opportunities for investors.
Interested in investing? Learn more about MedFire Innovations here.
MedFire Innovations’ mission is straightforward: to discover simple solutions to some of the emergency services industry’s most challenging problems, and to develop products that protect the lives of patients, emergency and healthcare providers. Since launching their direct public offering last fall, MedFire has expanded their broad range of service to support medical device development and innovators.
Listen to part one of our discussion with MedFire Founder and President, Greg Christmas to hear more about MedFire’s mission and the problem they were created to solve.
Stay tuned for Part II of our discussion where Founder/President Greg Christmas provides us with an update on new services being offered by MedFire and future investment opportunities. Part II coming May 1st.