Monday, December 6, 2010

Tap Your Customers via Direct Public Offerings (DPOs)

Do you need to raise capital to grow your company but have not been able to access bank financing...or have not been able to access sufficient bank financing? Have you tried tapping into your existing customer base? No, this time I'm not talking about customer pre-pays (I'll come back to that topic again in a few months). I'm speaking of offering customers an ownership stake in your business through direct public offerings or DPOs. DPOs are governed by SEC Regulation D Section 504, which allows companies to raise up to $1 Million every 12 months. Using this financing technique, called a SCOR or small corporate offering registration, the SEC allows state security administrations (usually through the state's secretary of state) to register these DPOs and allow share prices to be as low as $1. Currently, 47 of the 50 states in the US allow businesses to use SCOR to raise capital.

Advantages:
  • You give up a smaller portion of equity for the same amount of capital that angel investors would inject. You typically even give up less than you would using a more traditional private placement.
  • If you are growing rapidly, you are most likely funneling much of your operational cash flow into expansion. This is equity so you don't have to worry about repayment or hiccups with your expansion plan resulting in difficulty with loan repayments or covenant violations.
  • Since you are marketing to your target or current customers already, you get to align your marketing efforts with your money-raising efforts. Typically, raising money pulls the owner's or CEO's (and CFO's) focus from the day-to-day business to funding the company which can cause problems.
  • Your current customers know you and your target customers are getting to know you. Part of raising money is getting people to believe in the ongoing health of your company and your product or service. Customers (or potential customers) are already there.
  • You get experience that you can leverage when doing a larger private placement or actual IPO later on in your company's growth plan.
Disadvantages:
  • Typically, since you register a SCOR with the state and not the federal government, your customer or other potential share buyer must come from the state in which you register. If you have national or regional customers, and therefore want to include more states, the expense will increase accordingly.
  • How will your customers (and others) get their investment and return on investment back? You may need a well-communicated exit plan or stock re-purchase plan if you encounter a lot of resistance to waiting indefinitely for a payout.
If you have an established customer base and/or are adept at marketing and PR, a direct public offering may be just the method you need to raise capital to expand your business. More companies are now taking advantage of this option due to the significant drop in bank lending to small and medium businesses.


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