June 2014

Direct Public Offerings and Capital Raising for Your Business


 Drew Tulchin and Jenny Kassan


Many entrepreneurs, even those gaining traction through sales, can get stuck in a holding pattern, wanting to grow their business but lacking sufficient cash flow to get ahead. Many are challenged to go outside the company for capital due to barriers to investor financing. For others, bank loans are difficult to get, entrepreneurs worry about taking on debt, and/or offered interest rates are high. Many are interested in investors or the right type of outsiders, but lack understanding of how to go about raising this type of capital—particularly the rules, regulations and costs involved.


So, what are the options? While the SEC deliberates about crowdfunding provisions of the JOBS Act, one method of raising capital from many people often goes overlooked: Direct Public Offerings (DPOs). DPOs are not new. In fact, they have been around for decades and work under existing law. There are several New Mexico businesses taking advantage of DPOs. Perhaps the most well known is La Montañita Co-op’s LaM Fund (see sidebar).


DPOs allow community members to invest in a New Mexico business, allowing public offerings of securities (stock) to all investors, wealthy or not. These are different from Initial Public Offerings (IPOs). They allow business owners to sell stock directly to the public with much fewer registration and reporting requirements. They still must be filed in New Mexico and are screened by state-level securities regulators, who have a great deal of experience at spotting fraud and overly risky propositions. That is a big advantage over the JOBS Act, which prohibits state securities regulators from getting involved. Vetting by such regulators reduces the need for onerous limits.


Generally, DPOs do not require audited or reviewed financials, caps on total amount raised or individual investments, ongoing reporting or limitations on communications. There are maximum limits on investment, usually up to $1 million. A major feature of DPOs is that business owners are permitted to advertise and promote to potential investors. There is a downside. DPO stocks can be harder to sell when investors are ready. This is good for business owners, but can be a deterrent for investors.


As an example, Arroyo Food Co-op (www.arroyofoodcoop.com), a startup cooperative grocery store in California, is using a DPO to raise money from its community to open. The co-op is offering loans that pay a competitive rate of return. Because Arroyo registered the offering with California securities regulators, there is no cap on the amount it can accept from each investor, and it was not required to provide audited or reviewed financials. Arroyo currently has 660 members and has raised $200,000 in member-owned loans.

With final rules yet to come, the ultimate fate of the JOBS Act crowdfunding exemption still remains to be seen. Fortunately, DPOs are a powerful way to raise significant amounts of capital from the crowd. DPOs make investing in Main Street possible today. This is a way to put crowdfunding to use and Americans back to work.


Looking for a way to invest locally in New Mexico? Invest Local Inc. is a national consortium of financial professionals offering affordable services to advance local and community projects. Based in Santa Fe, Invest Local Inc. helps connect local investors with hometown businesses seeking capital. Investlocalinc.com



Drew Tulchin is managing partner at Social Enterprise Associates, based in Santa Fe. Jenny Kassan is chief executive at Cutting Edge Capital in California. Leigh Mathews also contributed to the article. info@socialenterprise.net, www.socialenterprise.net





New Mexico Examples


La Montañita Co-op


Perhaps New Mexico’s best example of a successful DPO is La Montañita’s LaM Fund. The LaM Fund is a grassroots member-investing and micro-lending program designed to grow the local food system and strengthen the local economy. Formed in 2010, this fund sells interests in a fund that is used to provide small loans to farmers, ranchers and other food-system projects that might not be eligible for conventional loans.


Española Community Market


Española Community Market is a cooperatively owned market in the heart of downtown Main Street. The market features locally grown organic and pesticide-free produce, dairy products, bulk grains and nuts and baked goods. Check out its crowdfunding campaign on GoFundMe.com/360e0g and watch for an investment opportunity coming soon.





Print Friendly, PDF & Email

Related Articles

Check Also