DPOs: How to Invest Directly in Your Favorite Local Business

Tea Display at the Farmers' Market stands for small businesses who could benefit from a DPO.
Both you and your favorite entrepreneur can stay this side of the law with a DPO! Sonora Ortiz ©2018

As an ethical investor, are you feeling like a maverick as you take back your right to align your investments with your values?

Do you find yourself reacting to the stern advice given by your professional advisors about investments, return, risk, reward, and market volatility?

While fun to glory in these outsider activities as an investor, if you’re an entrepreneur, this outlandish behavior can take on a different tone.

As an entrepreneur, you might find you’re an outright outlaw!

Many entrepreneurs working with community investors are breaking the law!

To be clear, the Securities Exchange Commission (SEC) doesn’t spend much time making certain that small local businesses working with friends and family investors have dotted every ‘I’and crossed every ‘T.’

Friends & Family Exclusion

However,  many entrepreneurs connecting to their communities and taking investments from their neighbors operate under a loosely held friends and family exclusion. 

A look at the law, friends and family rounds of unregistered nonaccredited investors without giving notice  is outside the law.

Seems, trust and relationship aren’t enough to satisfy the SEC or many state legislators!  

New Laws 

It’s good to know about recent laws that make compliance easier:

Today, thirty-one states allow local investment without registration through specially written local investing exemption laws. Eight other states have exemptions in process: California, Hawaii, Missouri,New Hampshire, Nevada, New York, Ohio, and Oklahoma.

To date, Utah is the only state with a formal law on the book to reject local exemptions.

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The Jumpstart Our Business Startups Act, or as it’s more commonly known, the JOBS Act, came into existence on April 5, 2012. The JOBS Act went into effect in stages over several years. Title III, also known as the Crowdfund Act allows for equity crowdfunding. Title III went into effect on May 16, 2016.

These laws make it easier for entrepreneurs and investors to connect, and entrepreneurs to obtain funding while staying within the bounds of the law. 

Ben & Jerry  Early Adopters for DPOs

All that said, there is a law on the books for every state that’s been around for more than 40 years. It’s called a Direct Public Offering (DPO). It’s a financial tool  that some entrepreneurs are using to bridge the gap.

While it still requires a state filing and registration, DPOs are less expensive for entrepreneurs than their federal counterpart, an Intial Public Offering or IPO.

DPOs are SEC sanctioned funding vehicles available to investors in throughout the U.S.

DPOs are sometimes called an IPO-lite because of their simpler filing requirements.

Many of you have probably heard the story of Ben Cohen and Jerry Greenfield going out to community members in the state of Vermont to find investors. The investment vehicle they used was a Direct Public Offering (DPO). Ben & Jerry’s offered their shares to residents of the state of Vermont. The shares price was $10.50. With a minimum requirement of 12 shares per person, they raised $750K.


DPOs have a long history but have come into their own only recently. Cutting Edge Capital started to use them as a strategy to encourage entrepreneurs to reach out to their nonaccredited investor community.  

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I loved hearing Cutting Edge Capital’s John Katovich at a recent conference where he noted looking for legal loopholes. He likes to do this instead of campaigning to change the laws.

Change is good and good change happens.

But, sometimes when we instigate change at the highest levels we lose control of the change we want to see.

John Katovich seems to understand this.

For John, it’s more efficient to make the current laws work in the positive ways we want them to work than to create new ones.

An SEC sanctioned, Direct Public Offering fits the bill!

Where’s the Exit!

When you consider community investments, you need to consider how will you get your investment returned to you! 

In other words, where’s the ‘exit’?

IPOs are large public offerings with many shares and liquidity on a major stock exchange.

DPOs are smaller offerings without the benefit of a major stock exchange.

For that reason, much community investment in a social enterprise designs the exit into the security:

  1. Offering a debt instrument or what we know as a loan.
  2. Structuring the security as a revenue sharing instrument like a Royalty Note or a Demand Dividend (check out the glossary for more information on revenue sharing instruments).


In more sophisticated exit offerings, the DPO might offer preferred stock with a redemption feature outlined in the offering paperwork. Redemptions are just a fancy word for the way the business is willing to redeem the security for a set of stockholders. There are many ways to structure a redemption structure, including:

  1. Designating who may initiate the redemption –Is it only started from the business side, or can an investor ask for the redemption? Is there an event that triggers the redemption?
  2. How is the pricing for redeemed stock determined?  Unlike a stock listed on the S&P or the NASDAQ, a DPO doesn’t offer a list price. How do the business owner and investor determine the price?
  3. How is the money paid out? – Is the money due all at once in a single lump sum? Can the business owner pay the amount due in installments?
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Answers to these questions are found in the DPO offering paperwork.

Exits and Future Events

Using a security to define an exit is the simplest, but there are other ways.

These might include an exit that depends on future events. Future event exits hinge on events like an IPO or a Merger & Acquisition, but there are others as well.

There are also ways to exit that are solely under the investor’s initiative. These are subject to securities law. There are practical approaches that are contingent on both legal compliance and rely on secondary market mechanisms. To find out more about exits, read Cutting Edge Capital’s detailed explanations for DPO exits.

California DPOs

Embracing DPOs is an effective way to bring in community money with existing law. Money from the raise supports business strategy in a variety of ways (just as business models vary for IPOs).

DPOs are available in all states, but California leads the way. Some recent DPOs in California are:

  1. FarmLink
  2. People’s Market
  3. Mendocino Wool Mil

People’s Market out of Oakland, California, for example, used their money to build their building and buy land for the grocery store. Mendocino Wool Mill had a mill and a permit, but needed upgrades to begin processing in earnest.

Nonprofit organizations like nonprofit, California FarmLink are using their DPO to bring funds to re-lend to farmers in California.

You can find information on DPOs in California and throughout the rest of the United States on Cutting Edge Capital, Cutting EdgeX.

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