Direct Public Offerings Let Businesses Turn Customers Into Investors

Oliver Dameron pitches a roomful of investors in San Francisco. He jokes with his guests. "Investing needs booze," he says. "It takes confidence."

He isn’t trying to get his crowd to invest in a new app or even a mutual fund. He’s asking them to put money into a restaurant called Maker’s Common.

Dameron and his team’s goal is to build on the popularity of their first eatery, Mission Cheese. That’s where this meeting, with about 20 potential investors, is happening. Most people here are locals and fans of the current spot in San Francisco’s Mission District.

Chloe Banks is an event production coordinator attending tonight's event. "I love cheese and wine," she says. "I'm really excited to see where this goes and to be able to say I'm a part of it."

Dameron and his partners hope Banks will be one of the people who helps them raise $600,000 through something called a direct public offering (DPO).

Seren Pendleton-Knoll wrote her master's thesis at UC Berkeley on direct public offerings. She says, "Essentially a direct public offering is a way for a business to get investment from their community."

Pendleton-Knoll says DPOs are sort of like IPOs, or initial public offerings, where people can buy shares of a company. But unlike an IPO, nothing here is traded on the stock market. Another difference is that with a DPO, investors don’t need to have a certain amount of wealth to put money into the soliciting organization.

She says businesses like DPOs because they provide a way to raise capital "without necessarily needing a broker or needing significant legal advice or needing to file a lot of paperwork."

In the case of Maker’s Common, doing a DPO would cost less than borrowing from a bank.

Pendleton-Knoll says DPOs, like any investment, are risky. Many DPO prospectuses bluntly tell interested funders they shouldn’t invest money unless they can afford to lose it all.

But she says the kind of funders DPOs generally attract aren’t focused on money. They’re focused on community.

Kim Arnone is a vice president of the consulting group Cutting Edge Capital. The Oakland-based team represents organizations using this fundraising tool, including Maker’s Common. The group has even done its own DPO.

"Eating locally, shopping locally, it’s a very small step to investing locally," says Arnone.

She says direct public offerings are becoming increasingly popular. Three years ago, her firm was handling one DPO. Today it’s working on over 30.

Arnone says many factors contribute to this growth. For one, the popularity of crowdfunding tools like Kickstarter has made the idea of direct investments familiar. And DPOs can offer easier access to capital, especially in low-income communities.

Brahm Ahmadi is the CEO of People's Community Market. "We had a really tough time trying to raise capital from private investment sources and even private institutional sources," he says.

In 2013, Ahmadi ran a successful DPO to open a grocery store in West Oakland, an area with few healthy food options. Community members, paying a minimum of $1,000, put in their money. Ultimately, People’s Community Market raised over $1 million.

"Our shareholders are really diverse. For many of them making this $1,000 minimum investment was a huge step," Ahmadi says. "In some cases a couple churches in the community pooled money from their congregations."

Other communities around the state are also using DPOs to spark economic growth. Mendocino County's economic development agency is raising money for a wool mill in Ukiah. Its hope is to create jobs. In the Central Valley, a water producer is trying to raise money for a solar-powered desalinization plant.

Back at Mission Cheese, Dameron and his colleagues ring the bell to signal they’ve signed on an investor. Just another $394,000 to go.