Mendocino County’s Economic Development & Financing Corporation is taking early steps to embark on a direct public offering, with plans to fund a new loan program aimed at startups and other ventures that would struggle to obtain financing from a traditional lender, according to the organization’s executive director.With a draft prospectus expected for internal review in April and a public offering possible later this year, the effort would provide a highly regional vehicle for investors and boost the EDFC’s other loan programs for small business, said John Kuhry, executive director.The "DPO" approach would allow the Ukiah-based nonprofit to market and sell shares directly to the public in California, without the necessity and cost of a national filing with the U.S. Securities and Exchange Commission.“Companies typically use it as an equity instrument. We’re using it to support debt capital,” said Mr. Kuhry.Formed in 1995, the EDFC (707-467-5953, edfc.org) has offered rural small business loans backed by the United States Department of Agriculture since 2001. The organization has funded over $2.8 million to more than 40 businesses through the USDA, and received the U.S. Department of the Treasury’s Community Development Financial Institution designation in 2013.Those loans are tied directly to potential job creation, offered at four or six-year terms at an interest rate of 7.5 percent. Most of those USDA loans are toward the minimum end of the spectrum -- $10,000 -- but are available for up to $150,000, Mr. Kuhry said.Not all proposals have fit within the framework of the USDA loan program, however. Combining that program with lending from the proposed “Social Impact Investment Fund” could allow greater flexibility in maximum loan size and terms, he said.“We look at people who have been turned down by banks, or not given enough capital,” said Mr. Kuhry. “We want to graduate people away from this money and onto our local banks.”The EDFC would essentially borrow at a rate of around 2 percent for the new fund, with loans offered at rates as low as 4-to-5 percent, Mr. Kuhry said.Mr. Kuhry cited a proposed wool fiber processing plant in Ukiah and a revitalized Sea Shell Inn in Point Arena as the kind of larger proposals that could benefit from the new fund.Yet he cautioned that the increased loan capacity would not mean a focus on larger loans. The self-described “lender of last resort” would focus on loan requests typically considered unattractive for a traditional lender, often smaller-balance loans involving significant underwriting and little profit.A number of North Bay organizations have recently made efforts to offer or facilitate so-called “microloans,” including Santa Rosa’s Redwood Credit Union, the Sonoma County Economic Development Board and San Rafael’s Renaissance Entrepreneurship Center. While difficult to precisely define, those “microbusinesses” are generally considered to be very small, early stage companies.Supporting those businesses remains a key part of the EDFC’s mission, Mr. Kuhry said.“We’re really going to sell this as a community development investment fund,” he said. "It allows people to move their money local."While available for several decades under the SEC, the direct public offering mechanism remains one of the lesser-known investment vehicles. Among the most famous examples are packaged food maker Annie’s Homegrown, which included shareholder advertisements in product boxes, and Ben & Jerry’s ice cream, which used a DPO to fund a production expansion in Vermont.
Though similar in attempting to lower barriers for investors, the DPO approach differs from the SEC’s proposed “Title III” equity crowdfunding provisions under the Jumpstart Our Business Startups or “JOBS” act. A Title III crowdfunded offering can have a national reach and procure up to $1 million through a huge number of tiny investments, while too many shareholders can trigger full-blown SEC filing in the case of a DPO.
The EDFC is working with Oakland-based Cutting Edge Capital to develop the offering, he said.