Small businesses that need to raise capital typically do it with the help of angel investors and venture capital firms, or via donations raised on a crowdfunding platform such as Kickstarter or Indiegogo. A recently launched online platform called CuttingEdgeX (CEX) showcases a little-known third option: Direct public offerings (DPO), a legal method of raising capital by selling stock (or other investments) directly to anyone, not just accredited investors.
DPOs are similar to IPOs, except they're less complicated, less expensive, don't necessitate the involvement of an investment bank, and don't result in the company becoming "public," a classification that would make it subject to onerous reporting requirements and other regulations. The issuing company markets shares to anyone--wealthy and accredited investors as well as regular folks including customers, friends, family, and social media followers--without having to file quarterly reports or hassle with the cumbersome IPO registration process.
CEX doesn't directly handle investment funds but provides businesses and organizations listed on its site a customizable software module the issuers plug into their own websites. It's a template that helps the business properly inform investors about the investment opportunity as well as an online mechanism the company can use to actually gather cash from investors.
Businesses can offer investors a wide variety of securities.
"We have one where the offering was for a revenue share," says CuttingEdgeX co-founder Jenny Kassan. "So it was neither equity nor debt, it was just an agreement to pay a percentage of revenue every year for five years... Sometimes they'll sell preferred stock but the preferred stock can never appreciate in value, and it pays a fixed dividend so it looks a lot like a loan but it's actually equity. You can get really creative,"
For example, she says Farm Fresh to You, a Capay Valley, California-based subscription Community Supported Agriculture provider, offered to pay interest on a loan with credit toward their products.
"Oftentimes they'll throw in extra perks along with the security they offer," Kassan says. "For example, People's Community Market is selling preferred stock but along with the preferred stock you also get a store discount."
Kassan says the legal fees associated with executing a DPO run around $25,000 and of the five companies and non-profits listed on CEX so far, four hired its consulting arm, Cutting Edge Capital, to set up the offering although doing so isn't required for a listing. Before listing a company CEX only has to do its due diligence to make sure the business in question has complied with state and federal securities regulations.
Since CEX just launched it's not yet charging companies to be listed on its site, but that will be changing.
"We will be coming out with a fee schedule for both being able to be listed on the site and for being able to use the module that... [makes] it much easier for them to be able to bring in investors," CEX co-founder John Katovich says.
While Katovich and Kassan--both attorneys--haven't decided exactly how much they'll charge companies for listing on CEX as well as the software module, they think the online investment tool will land somewhere around $1500 a month.