DPO, SCOR Form, and LION – Oh My!

by Amy, Posted Feb-1-2012 in Community Finance, Enterprise Design, Springboard News, Startup

Seriously? Can all those letters mean something useful? Yes! Together they are actual examples of what could move in and help to solve Peak Oil. Let’s call it “Community Fuel.”

This post is about fostering a new kind of economy – one that nurtures new kinds of enterprises that won’t kill us and the planet, actually add to the collective good, AND are financially viable creating jobs and economic health. These enterprises – new enterprises – start out small. Many people accept the fact that small businesses create jobs and economic stability, but the debate has surfaced again. For more on the final answer, see Michael Shuman’s article, “Small Thinking About Small Business: A Rebuttal to Jared Bernstein.” 

So, we have a dilemma. While we have to work on the early stages of enterprise development better than we have in the past, we also have to promote (1) new ideas to increase their numbers and success rate, but also (2) make them better enterprises for our communities.

These “better” enterprises would start out with a more community-minded legal structure (see B Corp Push in Oregon), they would be sustainable, community focused, and community fueled!  We have a lot to learn if we are to shift the practices of the past (and the present) into something better for all of us. There’s no doubt we must, but the word we isn’t trivial. We need to understand what that “better” could be and what our role is. We need to learn new strategies and methods.

Let’s start with the particulars of the letters DPO. It stands for Direct Public Offering (see wikipedia’s definition here). Briefly, it’s a way to legally offer shares for investment in an enterprise to people who don’t usually get to invest directly in anything. That would be you and me, (certainly me). We’re called “non-accredited” investors. And we are the 99%… (96% actually, according to Jenny Kasssan of Cutting Edge Capital) who are actually beginning to think of ways we might help generate better businesses for better communities. From the entrepreneur’s point of view, we could make beautiful music together. 

But, alas, there is a catch. The law won’t let you unless you fill out legal paperwork. One way is a DPO. So, what is it? 

A DPO is a sale of shares in an enterprise offered “directly” to potential investors – people like you and me. There are no professional middlemen doing the selling of shares – potential investors talk directly to board members or principals in the company.  This means you build a relationship with each other, investor and investment. (Hence the word “share”.)

There are two kinds of investor classes (generally) one group who have a lot of money, enough so that the legal folks don’t worry about them losing their shirt, because they have a closet full of them. They are called “Accredited Investors.” They have legal access to investments of all kinds, and so entrepreneurs usually focus on them to invest in their business. They have more money than most people.

The second class of investors is people who aren’t wealthy or worth over a million. They are the rest of us. Cutting Edge Capital shares a pie chart online that asks entrepreneurs: Why compete for 4% of investment dollars, when you can spread your ask out to the other 96% of us? There are citizens in every neighborhood and town who want to get out of the stock market and into improving our own local economies. What about us? A DPO allows the connection to be legal!

A Direct Public Offering must be approved by the state/s in which it will be offered, avoiding more expensive federal applications. And, it can be offered to non-accredited investors. In other words, a neighborhood bakery, a software company, a commercial building, or a window business can ask me if I would like to buy a share in their success, or, a share in their failure. If they are the kind of business I want in my community, I’m more likely to invest, AND, to help make it successful. I don’t have to have a pile of cash. In fact, I may only have $100 to use as an investment (they’re risky!). It depends on the cost of the share, but often the numbers allow for smaller investments. 

So, how does an enterprise “do” a DPO? You fill out a SCOR form. It’s about 44 pages, and even has a manual (Issuer’s Manual for Form U-7) which is full of appropriate questions and examples manual. It stands for Small Company Offering Registration Form (U-7) and you can find out more here  from the North American Securities Administrators Association (NASAA). It can take from one to three months to receive approval, often in two phases (where you have to fix what wasn’t right the first time in Phase 2).  

What brings me to hate/love this document is that it is an excellent business development tool. I have become very familiar with this document, and I am convinced it is an extremely useful tool for early stage and growing companies. If every enterprise used this document as their business plan framework, we would have much smarter plans, and enterprises ready for community investors! Remember, that’s 96% of us, not the usual 4%.

So, what’s next? We have enterprises with strong cases for success, we have the legal tool for community investing, now all we need are community investors! Here is where we run into another challenge. We don’t know who we are.

Put another way, we don’t know that we are investors! But, think about it. You have money in a bank, in a savings account, or maybe in some stock market fund that someone else manages. You ARE an investor, you just don’t think of yourself as one.

That has to change. 

So, meet the Local Investing Opportunities Network (the LION of my title). Started in Port Townsend, WA, it’s a group of people who live in town, who provide investments, mostly in the form of loans, to local businesses. They talk to each other, make connections, help educate people, inviting them to the table, and then conduct their deals privately and directly. They provide a framework for investors to work in their own community, providing triple benefits – their own, the enterprise’s, and the community’s economy.

From their Web site, “Keeping funds local facilitates greater economic self-sufficiency, job growth, economic development, and a dollar-multiplier effect whereby a dollar kept within the community can be spent many times over for a far greater benefit than a dollar invested away from our community.”

We now have the three critical pieces to the local economic puzzle: Investable enterprises, legal tools for local investing, and local investors. Imagine what we could do with this kind of community fuel!

There’s clearly more to it than this overview. How do community investors conduct due diligence? Find deals? What resources are there for me if I’m an entrepreneur? Springboard Innovation and Cutting Edge Capital, along with a number of partners, are working together to bolster these three areas in 2012, bringing resources, expertise, educational opportunities, and strategies to Portland and Seattle. It’s an incredibly exciting possibility for all of us, building bridges with reasoned and thoughtful finance between citizens and their enterprise neighbors.

What do you think? Ready to invest some time to find out more?

 

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Waking Up to Social Innovation pt 2

by admin, Posted Nov-29-2011 in Community Finance, Return on Investment, Startup, Who are Social Innovators?

And the New York Times writes about PRIs.

To Advance Their Cause, Foundations Buy Stocks

By 

Earlier this year, the Bill & Melinda Gates Foundation invested $10 million to acquire a stake in Liquidia Technologies, a biotechnology company working on new ways to deliver vaccines.

The foundation bought its shares using a program-related investment, or an investment that can be counted toward federal requirements that it pay out 5 percent of its assets each year.

A growing number of foundations are using such investments, known as P.R.I.’s, to connect with profit-making ventures that advance their missions. But as they become more popular, some officials in the nonprofit field worry that this and other newer mechanisms are blurring the lines between profit-making businesses and charitable work.

“Equity investments, and sometimes debt instruments, are ways to tap into the private sector when we think it will add to the work we are doing and leverage private flows of capital to advance our work in global health, global development and U.S. education,” said Jeff Raikes, chief executive of the Gates Foundation.

The Liquidia investment was made from a $400 million program-related pool the foundation created in 2009. Now, the foundation is increasing that pool to $1 billion, a quarter of which will be used to make equity investments or to finance debt instruments in profit-making ventures.

Its investment in Liquidia piggybacks on capital supplied to the company by traditional investors and is meant to ensure that the technologies the company develops for better delivery of vaccines not only benefit what Mr. Raikes calls “the rich world” but also serve the poor, who are the foundation’s target.

I’m not going to say we couldn’t do this through a nonprofit, but it would certainly be more difficult,” Mr. Raikes said.

Investments like the Gates Foundation’s stake in Liquidia compose but a tiny portion of all program-related investments. About 5 percent, or $37.2 million, of all P.R.I.’s made in 2006 and 2007 was used to buy shares, according to research by the Foundation Center.

The rest of the Gates Foundation’s $1 billion pool, for instance, will go toward more traditional types of program-related investments, like the one it made to guarantee a bond offering by KIPP, a nonprofit manager of charter schools.

But interest is growing rapidly in using P.R.I.’s to buy stakes in businesses that can help foundations achieve their missions, experts say, and the Gates Foundation alone will change the dynamics.

The foundation also put money into two funds that invest in Africa — $7 million in one targeting health-related businesses and $10 million in another aimed at small businesses — and used a $2 million P.R.I. to buy a stake in Inigral. That represents almost the total of all such investments made in the period covered by theFoundation Center report.

Added to about $20 million that the Omidyar Network, the philanthropic investment fund set up by the eBay founder Pierre Omidyar, has put into equity funds and other investments, the amount already exceeds that for program-related investments in the Foundation Center’s last report.

“We made our first equity P.R.I. a little more than four years ago, and after that I got maybe one call a month asking how we did it,” said Will Fitzpatrick, general counsel of the Omidyar Network. “For about the last year and a half, though, those calls are coming in at a rate of one or so a week from a combination of large and smaller foundations thinking about making similar investments.”

Diana Aviv, chief executive of the Independent Sector, the nation’s largest nonprofit trade association, said such investments reflected a broader trend.

“Foundations are increasingly agnostic about how they achieve their goals,” Ms. Aviv said. “If their purpose is, say, to eliminate food deserts, they may see supporting a grocery store chain as the best way of doing that rather than funding a nonprofit program.”

That trend concerns her at a time when government financing for nonprofits is declining and the charitable deduction is under fire. “It’s part of this slow erosion of nonprofit funding streams that threatens to undermine organizations that have been built over decades to meet high standards of public trust,” Ms. Aviv said.

For example, Gerard Cafesjian, who made more than a billion dollars through the sale of a publishing empire, formed a family foundation that has invested and made loans to a variety of companies in Armenia, from a financial services business to extensive media holdings and real estate. Its Web site says it has a total of $128 million invested in that country.

The foundation’s 2009 tax form, the latest available, showed that it used P.R.I.’s to make some $53 million in investments that year, about $42 million of which were equity investments. In contrast, it made just $178,000 in grants.

GLC Enterprises, which manages the foundation, did not respond to a list of questions about its investments.

In most cases, program-related investments pale in comparison to grants. Some foundations, like the David & Lucile Packard Foundation, do not even count them toward the payout requirement.

It first used a program-related investment in 2009, when it put $1 million into Ecotrust Forest Management, a fund set up by Ecotrust, an Oregon-based nonprofit conservation organization.

The fund, whose limited partners include Packard and a handful of family offices and individual investors, acquires forest land in the western United States and Canada and earns revenue using ecologically sound management of those properties.

Mary Anne Rodgers, Packard’s general counsel, said the foundation was working on a second deal and planned to cautiously increase its investments in businesses.

“The principal purpose of these types of investments isn’t the appreciation of capital, though we hope to get a return,” Ms. Rodgers said. “Our main reason for investing in Ecotrust Forest in this way is to demonstrate that sustainable forest practices can generate a profit so that mainstream investors will become more interested in it.”

The Omidyar Network used that strategy to demonstrate the commercial viability of microfinance. It used a program-related investment to become a limited partner in the Unitus Equity Fund, a private equity business affiliated with the nonprofit Unitus. After Omidyar made its investment, the fund attracted a group of limited partners that reads like a who’s who of the venture capital world.

“They were having a hard time raising commercial capital until we did that,” Mr. Fitzpatrick said.

Revolution Foods also needed nonprofit financing to attract commercial capital. Its first financing in 2005 came from what is now known as DBL Investors, a private equity firm, the first fund of which included program-related investments from several foundations.

Revolution Foods has grown to 750 employees making nutritious meals served in more than 600 schools in 20 cities across the country.

“That capital got us off the ground,” said Kristin Groos Richmond, one of its founders. “It helped us hire our first employees and buy our first truck and kitchen equipment.”

Not all program-related equity investments turn into gold, however. From 1999 to 2002, the John D. and Catherine T. MacArthur Foundation used P.R.I.’s to make six investments totaling $6 million to help small businesses in places like Appalachia and the Mississippi Delta.

“To be honest, we’ve seen a mixed set of financial results,” said Debra Schwartz, director of MacArthur’s program-related investments. “So far, a couple have been total wipeouts, there are a couple where we’ll at least get our principal back and maybe two of them will produce a positive return — though I’m not expecting anything gigantic.”

Still, she said, “what we were trying to do was help create jobs, and from a rough accounting, more than 11,000 jobs have been created and maintained. That’s impact.”

Original article here.

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Raising Community Capital -Presentations Now Online

by admin, Posted Oct-4-2011 in Community Finance, Convention and Law, Happenings, Startup

The presentations from our forum speakers are now up on the October Forum Page. Our event last Tues, Oct. 25, was held at the PNCA Collaborative Design Studio on growing community capital–both kinds–literally. Raising money is a clear need for social enterprise, especially when targeted at a deep systemic level. We believe, as Muhammad Yunus always says, “There is plenty of money” we just need to figure out how to free it up for making a difference.

LOCAL INVESTING: A Grassroots Stimulus Program
Join us for an evening of experts, information, and investment strategy combined with edibles, beverages, and connecting with peers as we explore how to take charge of growing our local economy in ways that strengthen our pocketbook and our neighborhoods. Springboard’s October Social Innovation Forum builds on recent presentations at SoCap2011 and ReVV2011 about how to transform our communities through innovative enterprise and finance.

Jenny Kassan of Cutting Edge Capital is a national leader in helping community organizations raise money in non-traditional ways. It’s not charity, and it’s not Venture Capital (in the traditional sense). Direct Public Offerings are legal tools to work at the state level and raise money from neighbors and the public–the non-accredited investors–like you and me. (Certainly me!)

John Katovich is a long-time (“recovering”, he says) veteran of Wall Street. He will help explain why the stock market and our mental model of investing is flawed in important ways. He expresses financial information in a way we can understand, and act on.

Leslie Christian,  CFA. Chief Investment Officer, Chief Executive Officer of Portfolio 21 is a leader in finance innovation. Her ideas on portfolio theory and strategic investing are exactly what we need to hear and understand. She will set the stage for us on why new ways of raising capital and making money are timely, and possible.

SHARING OWNERSHIP—The DIRECT PUBLIC OFFERING
The Direct Public Offering is a rarely used legal strategy for empowering community investors—people like you and me—to invest in local enterprises that are both local and beneficial.  You’ll learn whether your enterprise should consider doing a DPO, or how you might invest in one. We’ll explain how it works, its legal structure, how much money it can raise, and from whom, and how long it might take.

This is a session designed for two groups of people. If you are someone who wants to raise capital for an organization, join us. If you are someone who wants to put some of your investment dollars into growing the local community, come learn how.

You will leave with ideas for how money can be used to grow community benefit. This includes creating employment, enterprise, and innovation.

Where: PNCA Collaborative Design Studio, 1330 NW Kearney

When: Oct 25th 5:30 to 9:00pm

How much: Register with Lin at lin[at]hatchthefuture[dot]org for $10 at the door, or drop in for $15.

For more information and the agenda, see Springboard’s Forum Page.

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