Direct Public Offerings: Legal Investment Crowdfunding – Without The Wait
This is a guest post from Jenny Kassan, the CEO of Cutting Edge Capital and an attorney at Katovich & Kassan Law Group.
Can’t wait for the new crowdfunding securities exemption created under the JOBS Act?
It may be awhile before the SEC and FINRA finalize the regulations for Title III, the section of the JOBS Act that allows companies to use crowdfunding campaigns to offer investment opportunities to both accredited (wealthy) and non-accredited investors.
What many startups and investors may not know is that the new crowdfunding exemption is not the only way – or even the best way – to legally raise investment capital from the crowd. Just ask Ben & Jerry’s, Annie’s Homegrown and Real Goods, three companies that successfully raised capital from the crowd using a tool called a Direct Public Offering (DPO).
A DPO allows companies to self-underwrite and self-administer public securities offerings to both accredited and non-accredited investors in one or more states. A company can market and advertise its offering publicly by any means it chooses – through advertising in newspapers and magazines; at public events and private meetings; and on the internet and through social media channels. Sounds a lot like crowdfunding right? That’s because it is.
There are several legal compliance pathways that can be used to conduct a Direct Public Offering. Depending on various factors, a company or nonprofit organization can use a DPO to raise up to $1 million per year and in some cases more.
While start-ups wait in anticipation of the SEC and FINRA to finalize crowdfunding exemption rules, companies across the country are raising much-needed capital using DPOs:
Farm Fresh to You in California’s Yolo County, has raised over $1 million from its customers and is continuing to raise capital on an ongoing basis. Interest on the notes purchased by investors is paid in credits toward organic produce rather than cash.
Greenfield, MA-based Real Pickles reached its goal of $500,000 in just two months by offering non-voting preferred stock to investors in Vermont and Massachusetts and converted to a worker-owned co-op.
People’s Community Market in West Oakland has raised almost $1.2 million and will open a neighborhood grocery store that helps West Oakland families thrive by offering quality fresh foods, affordable groceries, health services, and a place for community building and recreation.
Quimper Mercantile in Port Townsend, Washington, raised about $750,000 by selling common stock to Washington residents and opened for business, ensuring that local residents could continue to buy essentials in their own community.
No matter what happens with the JOBS Act, Direct Public Offerings will continue to be an increasingly popular tool for raising capital, and in many cases may be a better option for many businesses. Here’s why:
Issuers may be able to Raise More than $1 Million Using a Direct Public Offering: Under the new crowdfunding exemption, issuers can only raise $1 million in any 12-month period, whereas a DPO allows companies, in many cases, to raise more than $1 million.
No Investor Caps with DPOs: The new crowdfunding exemption caps investments at 5% of an individual’s net worth or income. Direct Public Offerings have no such limit, thereby allowing a broad range of investment sizes.
Single State Offerings are More Appropriate for Community-Based Businesses: Many small businesses simply do not need to conduct an offering in all 50 states. Community-based companies looking to raise capital can find investors in their own back yard, within their local community and state. Ben and Jerry’s, for instance, raised capital for its first ice cream plant from Vermonters who knew and loved their Health Bar Crunch.
Unrestricted Marketing Efforts for Issuers: With DPOs, there are no required middlemen and there are no restrictions on marketing activities for issuers. Contrast that with JOBS Act restrictions that prohibit companies from advertising the terms of the offering “except for notices which direct investors to the funding portal or broker,” and prohibit direct communication with potential investors.
No Reviewed or Audited Financials: The crowdfunding exemption requires reviewed or audited financials for offerings over $100,000 – an expense that can be prohibitive for small businesses with minimal operating capital. On the other hand, most states don’t require financials for a DPO, and of those that do, many allow companies to waive the requirement under certain circumstances.
State Reviews Provide a Safety Net: The JOBS Act intends to make offerings easier by eliminating regulatory review, but the fact that state securities regulators must review each Direct Public Offering can provide investors with much more comfort and assurance, knowing that a regulatory body has vetted the offering prospectus.
Ultimately, the new crowdfunding exemption (when it becomes legal) will provide companies with another option for accessing securities-based capital from the crowd. In the meantime, the original crowdfunding model, the DPO, continues to provide companies with an effective way to conduct a self-underwritten and self-administered public securities offering.
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