Tap Your Customers to Raise Equity via Direct Public Offerings (DPOs)
Do you need to raise capital to grow your small business into a medium-sized one but have not been able to obtain any bank loans or access sufficient bank financing? Have you tried tapping into your existing customer base for equity financing? I’m not talking about customer pre-pays. I’m speaking of offering customers an ownership stake in your business through direct public offerings (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 small businesses to use SCOR to raise capital.
Advantages:
- Your company gives up a smaller portion of equity for the same amount of capital that angel investors would inject. Your business typically even gives up less equity than it would using a more traditional private placement.
- If your small business is growing rapidly, you are most likely funneling much of your operational cash flow into expansion. A DPO 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 and 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 business 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 in 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 (initial public offering) 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 your small business has national or regional customers, and you 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 your small business has an established customer base and/or is adept at marketing and public relations, 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 DPO option due to the significant drop in bank lending to small and medium businesses.
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Tiffany Wright is the author of the ebook, “Help! I Need Money for My Business Now!” available at http://www.smallbusinessfinancingresource.com . She is the president of Toca Family Business Services, an interim management firm, based in Atlanta. As a former CFO and business advisor, she’s helped companies obtain over $31 Million in financing. She has an MBA in Finance and Entrepreneurial Management from the Wharton School of Business at the Univ. of Pennsylvania and her B.S. in Engineering. You can also view her blog at http://blog.smallbusinessgrowthcapital.com .
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