Helping Clients Raise Community Capital Using a Direct Public Offering

• Publication year: 2018
• Author: By Cameron Rhudy

Helping Clients Raise Community Capital Using A Direct Public Offering

By Cameron Rhudy

Cameron Rhudy is the Grassroots Finance Attorney at Sustainable Economies Law Center, which provides research, education, advice, and advocacy for just and resilient economies. Cameron is currently working on a project with the Grassroots Finance team that is focused on increasing access to capital for farmland conservation. Cameron also supports the Resilient Communities Legal Cafe, the Law Center's national Fellowship program, and its Transformative Policymakers project.

Access to capital is one of the largest barriers to new and emerging businesses. The capital needs of new and emerging businesses are often higher than what is feasible to raise from friends and family, but also lower than the minimum amount most large banks are willing to lend. New businesses have little to no track record of steady income and few assets or collateral for banks to lend against, often making them ineligible for a loan even if they are asking for amounts that would otherwise be worthwhile for the bank. According to a 2016 study funded in part by the Kauffman Foundation, only about 18% of businesses ever access a bank loan.¹

Rural businesses, women-owned businesses, and businesses owned by people of color are disproportionately affected by these barriers to capital. Conventional financial strategies rely on institutions that have a history of exploitive and discriminatory practices, including predatory lending and redlining. Despite California being one of the few states that receives a concentrated amount of venture capital (VC) funding compared to most U.S. states, the actual number of businesses that receive VC funding is very small, with rural businesses, women-owned businesses, and businesses owned by people of color grossly underrepresented.²

For these reasons, many types of enterprises need to consider alternative capital raising options. Raising capital directly from one's community is one such option.

WHAT IS COMMUNITY CAPITAL?

Community capital is simply money held by community members. What community capital looks like can differ depending on the type of enterprise seeking to raise money, the geographical location of the business and customer base of the business, and various other factors. Potential community capital investors include anyone who has money to invest. This doesn't mean, however, that someone has to have a lot of money to be a community investor; many community capital raises have a minimum investment amount of around $1,000, and some are even lower. In the context of securities regulation, community investors include both accredited investors (investors that meet certain wealth and asset thresholds)³ and non-accredited investors (everyone else). Individually, the amount of money a community investor has may not seem like much, but harnessing the wealth of the collective can have a significant impact.

For purposes of this article, I will focus on raising community capital through investment crowdfunding (by way of a direct public offering), which usually involves the solicitation of loans, equity investments, or other similarly structured investments in exchange for some sort of financial return. Similar to donation or rewards-based crowdfunding, investment crowdfunding involves raising smaller amounts of money from a large number of individuals and/or institutions. By conducting a direct public offering (DPO), clients can advertise their investment opportunity to the general public and make it available to both accredited and non-accredited investors.

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WHY DOES COMMUNITY CAPITAL MATTER?

Community capital is about more than meeting the capital needs of a local business. Community capital raising increases transparency and gives community members an opportunity to decide which goods and services are most valuable to the community. Even when community-based banks or credit unions are doing their best to meet the needs of their community, they operate under a strict regulatory environment that can prevent them from lending to borrowers that are viewed as high-risk. By raising capital directly from the community, both financial and nonfinancial factors can be considered, such as the business's reputation in the community and the strength of the relationships the owners have cultivated over time.

As with any capital raising strategy, however, raising community capital is not without its own set of risks and challenges. For example, raising money from a large number of...