Direct Public Offerings: Allowing the Community to Invest

By Andy Fyfe (Community Development at B Lab)

We’ve all heard of crowdfunding and the passing of the JOBS Act is certainly exciting to watch as it develops. However most crowdfunding opportunities do not offer return on investment. (But they may offer a fair trade soccer ball or ethically made hammock in return.) So how can crowdfunders, who aren’t high net worth individuals, actually purchase stock or other kinds of securities and make a return on their investment?

Emails were turning into lengthy questionnaires and phone calls were turning into long conference calls. After all was said and done, the number of rejections was far outweighing the amount of capital raised. Enter the struggle of a start-up seeking capital.

Brahm Ahmadi, CEO and Co-Founder of West Oakland’s People’s Community Market, was seeking capital for his business. Brahm originally sought out Investors Circle, Slow Money, connections at SOCAP and angel investors, but was unsuccessful. He raised about $150,000 but wanted around $1M. Knowing the return of investment in the grocery industry is not as attractive, even less so for a grocery startup not looking to scale beyond one store (for now), after six months of searching, Brahm decided to look elsewhere.

In the meantime, crowdfunding opportunities sprouted and continued to develop and Brahm had hoped there was a way he could take advantage for People’s Community Market. At the same time, his community was reaching out to him. They wanted to support the market, with their money. However, they did not know the way in which they could since most of them were not accredited investors.

He then knocked on the door at Cutting Edge Capital in February of 2012. Cutting Edge Capital, a Certified B Corporation, helps entrepreneurs and nonprofit organizations solicit non-traditional sources of funding in a way that fits with their unique business model and long-term goals. Jenny Kassan from Cutting Edge Capital spoke with Brahm about a Direct Public Offering (DPO).

According to Jenny Kassan, it is possible to raise money from the public legally by doing a state-level securities registration and identifying an appropriate exemption from federal registration requirements, a process called a Direct Public Offering.

People's Community Market was a perfect fit for this method of raising capital. Non-wealthy 'retail' investors often have lower expectations for financial returns than wealthy professional investors and are more likely to factor in non-financial community benefits in their investment decisions. Plus, there are a lot more of them out there!

A less traditional source of funding, a DPO allows businesses and nonprofits to raise money from community investors. A company can reach out to hundreds and possibly even thousands of people in the community and offer them investment opportunities such as stock, notes, and revenue sharing agreements. Depending on which federal exemption a company qualifies for, there may be no cap on the total that can be raised, though, in some cases, there is a $1M cap.

Brahm was thrilled by the idea of allowing the community to invest in People’s Community Market. Instead of focusing on high return rates and exit plans, Brahm could now focus on value-alignment and community building. Brahm said, “Since being inclusive and accessible is an important value to us, we’re very pleased to see that ‘average folks,’ in addition to more affluent investors, are investing in us and becoming shareholders.” Instead of fearing the need to sacrifice control for capital, Brahm said, “It allows us to sell a story that we get to write.” More than half of the people who are now investing in People’s Community Market were never in their network before.

With community investors, the risk is more modest since the amount each one is investing is relatively low and the tone of the conversation starts with excitement rather than skepticism. Rather than selling shares through a broker, People’s Community Market is directly offering preferred shares to California residents. They launched the program in October of 2012, and have since raised around $10,000 a week ranging from $1,000 investments to over $10,000. In total they have raised almost $200,000. But with the opportunity to advertise publicly, they’ve tracked about three "hits" per day and have been graced with increased traffic.

Brahm has been pleased with the process. “Our theory in launching this community investment campaign was that lots of people are ready to participate in supporting alternative ways of creating locally-owned, mission-driven business.”

Another company working with Cutting Edge Capital to raise capital through a DPO is Farm Fresh To You. Farm Fresh To You, a Bay Area produce home delivery service and also a farm, sought capital through accredited investors as well. They found about $1M over five years but wanted to find a way to include their customers in their financial development. Yet 99 percent of their customers were non-accredited investors. They asked their lawyers how to get their customers involved and they shrugged their shoulders. In came the support from Cutting Edge Capital and in five months, Farm Fresh To You’s Marketing and Sales Manager, Noah Barnes and Jenny Kassan set up a DPO. According to Barnes, “It was a win-win. They get better than market rate on their investment and they can get more fresh produce from us.” Farm Fresh To You can even pay the interest back with produce credits through their Green Loan Program.

Accessing VC, angel investment, and even bank loans is very difficult, especially when you are running a triple bottom line business. In fact, this type of investment makes up a very small percentage of what is available out there. Where’s the rest? In the community. Not only is funding difficult to access, but taking on VC funding can also be scary for mission-aligned business owners. More often than not, the investor will expect the business to focus on maximizing profit because they want high return, fast. By inviting the community to invest in your business, you continue to call the shots without sacrificing your mission. Additionally, you can advertise DPOs publicly. Check out People’s Community Market page and you can see just how they do it, and invest.

Andy Fyfe is the Community Development Coordinator at B Lab in the San Francisco office. B Lab is a nonprofit, certifying and supporting B Corporations: companies that are competing to be not just the best in the world but the best for the world.