Local Investing: Another Facet of Community Lending
Many CDFIs focus on scaling their microlending, Community Advantage and SBA 504 loans. Another branch of community lending is represented by a project in Mendocino County – social impact lending using a Direct Public Offering (DPO) in which an investment opportunity is offered and sold directly to the public.
Mathew and Sarah Gilbert, owners of Mendocino Wool and Fiber, are long-time sheep shearers who have seen mountains of wool go to waste for lack of local capacity to turn this valuable resource into yarn. Determined to stop the waste by creating a local wool processing mill, they bought a piece of property, received a permit from the City of Ukiah and then worked with the Economic Development and Financing Corporation (EDFC) to raise funds for equipment and working capital.
John Kuhry, Executive Director of Economic Development Finance Corporation, issued a DPO used to fund Mendocino Wool and Fiber, raising $350,000 from 88 investors who invested, on average, $3,954 each. EDFC structured the deal to Mendocino Wool with a combination of DPO, USDA Intermediary Relending Program (IRP) and Rural Microentrepreneur Assistance Program (RMAP) funds, leaving some of the DPO funds for a loan loss reserve. The company pays 5% interest and the investors receive a 2% return on their money over six years.
“There is significant social impact from this project through job creation and the production of yarn with a significantly lower carbon footprint than imports,” said Kuhry.
In addition to structuring and issuing the DPO, EDFC led the fundraising effort, by reaching out to the community to find those 88 investors. While many investors put up funds because they are excited by the project and feel a personal connection to the owners, many also see this direct relationship-driven investing as a way to direct their money away from Wall Street and into Main Street, and all of them are supporters with a stake in the success of the business.
Cutting Edge Capital, who worked with EDFC on their DPO, helps social ventures and their partners navigate the securities laws to raise capital from non-wealthy investors through development of offering memorandums, an online lending platform and other services.
While businesses can offer their own DPOs, there are good reasons for CDFIs to sponsor this on behalf of a business owner. The CDFI can vet the project increasing investor confidence; mitigate risk through accessing grants for loan loss reserve and enrolling the project in Cal CAP (a state loan insurance program); shoulder much of the marketing campaign; and support the servicing and repayment to investors.
EDFC spent $23,000 on the DPO and $15,000 on marketing. Those costs are high for a loan, but for some projects with high social and economic development value — in jobs and additional tax revenues — the investment pays off. Other DPO examples include:
- Three Direct Public Offerings You Can Invest in Today
- Boston Residents Create Well-Paid Sustainable Jobs
The much anticipated federal regulations for JOBs Act intended to make crowd-funded capital more accessible, but have yet to deliver. In the meantime the exemption allowing for DPO’s in the 1933 Securities Act are still a viable crowd funding mechanism. Kuhry hopes California will pass legislation to allow Community Public Offerings that would significantly reduce the costs and allow investors to interact directly with the business. Citing Cutting Edge Capital, “The Oregon CPO, which was championed by Amy Pearl and Hatch Innovation, was designed to be a community capital raising tool, and companies are encouraged, not discouraged, from raising those funds directly from their communities via meet-ups that allow people to look the CEOs in the eye.”