May 30, 2019; Next City
As nonprofits seek new ways to mobilize investment in capital projects, more organizations are exploring options outside traditional fundraising mechanisms like donor-driven capital campaigns. Some nonprofits are taking advantage of impact investing tools, such as direct public offerings, or DPOs. This investment strategy allows nonprofits to utilize a public offering of securities to raise capital for projects, permitting both accredited and community (non-accredited or non-wealthy) investors to contribute to the offering. This direct offering eliminates financial intermediaries and uses self-underwriting, a distinct investment feature, for its securities.
Recently, Community Foods Market completed a DPO, raising over $2 million toward the construction of a local neighborhood grocery store in West Oakland. While the grocery store relied ultimately on a mix of revenue sources to complete the project, the unique role that the DPO played is something that nonprofits undertaking community development and large capital projects should consider as a funding option.
Although DPOs have been around for some time, they have gained attention through stories of companies like Ben and Jerry’s and Spotify utilizing DPOs as a strategy for raising funding. In West Oakland, a DPO was part of the answer to the dire need for healthy food options. As in many communities, a lack of access to healthy foods plagued the neighborhood, and community groups and nonprofits mobilized to build healthy food access programs over the years. The need remained for a permanent grocery store offering healthy options and access, which is where Community Foods Market comes in. The Market engaged relationships throughout the community to meet this need by offering a DPO where community members themselves could invest and make it a reality.
Throughout the DPO campaign, Community Foods Market raised over $2 million from more than 650 shareholders. This funding allowed the organization to leverage additional funding from private investors, the New Markets Tax Credit program, foundations, and public sources. In addition, the grocery store secured a bridge loan from Self-Help Federal Credit Union and North California Community Loan Fund (now known as Community Vision) to begin demolition and construction.
This type of mixed funding is often needed to finalize large capital projects, especially grocery stores, and the role that the DPO played in West Oakland is another potential tool to help nonprofits achieve success in complex capital projects. As NPQ has previously reported, Mission Waco offered stock to the community starting at $25 per share to help fund the Jubilee Food Market. This is in addition to other nonprofit grocery ventures that NPQ has reported on including Good Food Markets in Washington DC, and the Salvation Army’s DMG Foods in Baltimore.
Although DPOs show features of traditional fundraising strategies, they’re also seen as an emergent form to raise capital from nontraditional sources, namely investors at all levels who want to support beneficial community projects and also earn a return. For nonprofits, one benefit is that they are exempt from securities registration and only need to consider state regulations based on where they want to raise capital. Furthermore, there is no limit on the amount that can be raised by a nonprofit, whereas other organizational entities have caps.
One example of a nonprofit using a DPO strategy is TechSoup, the nation’s premier provider of technology and related services to nonprofit organizations. Recently, TechSoup embarked on a DPO of $11.5 million dollars, with the goal of increasing its contributions of technology to civil society organizations. Investments in TechSoup’s DPO start at $50 and returns range from 2 to 5 percent. In addition to small investments, TechSoup’s DPO has already attracted a $1 million lead investment from Microsoft Philanthropies. As part of the DPO, TechSoup is pitching five strategic initiatives to potential investors, which include scaling its core nonprofit technology marketplace business; expanding its Apps for Good offerings; and testing, building, and refining new processes and systems.
Though TechSoup may be one of the most prominent examples, other domestic and international nonprofit organizations are increasingly turning to impact investing strategies like DPOs to raise funding. According to a December 2018 report called “Amplify: The Next Mile of Impact Investing for INGOs,” published by the INGO Impact Investing Network, currently, international non-governmental organizations (INGOs) manage nearly $1 billion of impact investments. Given the unique niche that many nonprofits have, as well as the evolution of nonprofit business models, impact investing mechanisms like DPOs offer unique and promising ways to raise capital to meet nonprofit missions.
Though public offerings have traditionally reserved for businesses and social enterprises, DPOs, when accomplished with due diligence, provide avenues for innovations in nonprofit service delivery. More broadly, nonprofits can look to nontraditional revenue and investment vehicles to achieve impact, and cultivate a fresh relationship with their donors as true investors.—Derrick Rhayn