By Philip Trevvett, of Urban Greens Food Co-op in Rhode Island
When we published the two-part piece One Co-op Opts for Direct Public Offering, our readers had questions. Philip takes the time to answer them here. Part 1 centered on Planning and Implementing their DPO campaign, and Part 2 on Lessons Learned and Next Steps.
Food Co-op Initiative staff understands that a capital campaign can be one of the most stressful yet rewarding activities a startup undertakes. We offer many resources for startups planning a campaign, but in the last few years we have seen increased interest in the direct public offering (DPO) of shares. Our website and webinars are full of great info on running a successful owner-loan based capital campaign. For any type of capital campaign, you will find useful resources in our Capital Campaign Workbook. Our thanks to Philip for answering your questions and and to Urban Greens for sharing this information.
Question: Can you expand on the e-portal you used? Investors could complete the offering, but could they also submit the investment online via e-fund transfer? e-portal is very important for a DPO.
Answer: Wee worked with Cutting Edge Capital (CEC). They offered an e-portal at a fee of $300/month, which for our purposes was well worth it. We inserted a link from our site that redirected people to the actual portal page.
The portal page contained all documents we were required to submit as part of the offering memorandum, available for viewing or download, as well as areas for customization on the landing page:
We created the text describing the investment campaign for the landing page, and also including a slide deck. CEC also had a premade video about DPOs for small businesses that helps some up the message of why investing this way can be impactful.
One downside was that we couldn’t edit the portal pages ourselves. We had to submit our materials to CEC, and they updated our information.
The subscription agreement (investment form) could be completed through the portal. Once completed, payment instructions would be displayed. Payment, however, could not be made through the portal. We encouraged folks to pay by check, because there is generally a cost to wire transfers, and we didn’t want anyone transferring funds without realizing that and then being upset. If anyone asked about transferring, we shared the info and made sure they were aware of potential fees.
The portal also included an investment total tracking section. This was updated manually, based on a spreadsheet we shared with CEC through Google Drive. Because of the nature of a short campaign, we decided this total should represent pledged commitments, because there would inevitably be a lag on some deposits, and it was critical to build momentum. One challenge with this part of the portal is that the investment totals are manually updated by someone on the CEC team. Normally they do weekly updates, but for our purposes—building momentum within each week—it was critical that they updated it more frequently. They were able to support that, but it was a bit of work to establish a rhythm.
FCI note: We encourage startup co-ops considering a DPO and online options for offering them to first consult with a certified public accountant in their own state, as laws may vary. A local lawyer experienced with securities should also be consulted. Consider networking with other businesses in your area, not necessarily co-ops, to locate these resources. See also the final question, below.
Question: Do you have any idea how many of your owners actually bought shares through the DPO? And do DPO owners have any voting rights in the co-op?
Answer: DPO Owners do not have voting rights. They have liquidation rights above member-owners, which means if we go out of business, but can pay off all debt, preferred shareholders would be next in line.
The majority of our investors are also member-owners. We have had 88 investors to date, and around 80 are members. We found that when we actually connected to members during our phoning, we got pretty good results, but there were a couple hundred members who we were never able to connect with.
Question: You mentioned that doing a DPO give you broader marketing access. Can you explain this and give examples? Do you have examples of how you advertised your DPO?
When doing any kind of private offering (or traditional member loan or preferred share structure used by co-ops), you are not allowed to advertise. With a public offering (a DPO), you can advertise within any state where your DPO is registered, in our case Rhode Island. Advertisement language still may need to be approved by the state securities office, but as long as it’s based in the language you’re using in the offering docs, it shouldn’t be a problem. (As long as you’re being truthful about the investment, really).
We didn’t do a huge amount of advertising, but we did some, and equally importantly, we were able to be more direct in our messaging on facebook and in our eblasts to non-members than if this were a private offering.
In addition, DPO meant I can talk to anyone in the state about it. That is making a big difference, now as we’re working to fill our remaining gap through a few investment focused presentations that will include primarily non-members who are interested in impact investing and/or social entrepreneurship. In the case of a private offering, my understanding is that I would need to recruit someone to be a member and then invest. A while this is not necessarily a massive barrier, each step that slows the process to investment is less than ideal.
Question: Did you need an outside lawyer, accountant, and/or broker to help you get this started? How did you determine the cost per share?
Answer: Yes! We definitely needed lawyers. No matter what form of capital raise you do, you should have a lawyer working with you. Costs will vary dramatically by state and by structure of the investment. We got proposals from a few lawyers that Ben Sandell of CDS Consulting Co-op recommended, as well as from Cutting Edge Capital. Each quote had similar info and pretty similar prices: basically each said that it was not clear whether Rhode Island laws allowed for the most traditional type of member loan (where exemptions can be used at both Federal AND state levels). If it was possible, it would cost 5-10k, and if not, then the work to register with the state would increase costs to around 20-30k.
We decided to move forward with Cutting Edge Capital both because they had experience being a bit more hands on in the planning than a traditional lawyer would be, and because they offer an upfront evaluation for 1k, which would determine our paths, and the cost of which could be rolled into our full fees if we moved forward with them. (In other words, if we moved forward with CEC after the initial evaluation, then the 1k would count as payment towards the overall cost of services).