Author Topic: What should I be concerned about with Direct Public Offerings?  (Read 2276 times)

jac941

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I'm wondering if any of you have experience with "Direct Public Offering" investments? My nonprofit preschool in California (securities registration required state) is using a DPO as a funding source for recently completed capital improvements. Conceptually I thought this was really novel -- particularly compared to just relying on donations and bank loans which many other schools do -- so I really want to support it.

We're planning to invest an amount that makes a big difference for our school but that has a small impact (<1%) on our pretty substantial (not FIRE size, but getting there) investment portfolio.

Our 2 options are:
*12 year note: Interest only payments for the first 6 years & interest and principal amortized over the following 6 years. Annual interest on unpaid principal will be at 4.2% per year
*7 year note: Interest only payments for the first 4 years & interest and principal amortized over the following 3 years. Annual interest on unpaid principal will be at 3.7%

Does anyone have any thoughts on this? Risks, tax implications, etc.? Which option is a better choice? In general we're Vanguard index funds investors & we don't seek these types of things out, but to me the terms look no worse than a CD or a "safe" bond fund for balancing out stock risk. I just want to make sure that we're not doing something that's going to cause us all kinds of grief because I don't know much about these type of investments. As far as I can tell this is like a "safer" version of crowdfunding?

NoStacheOhio

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Re: What should I be concerned about with Direct Public Offerings?
« Reply #1 on: April 05, 2016, 11:33:20 AM »
At the risk of asking a dumb question, do you want the money back, or do you just want to support the school? Making a vanilla donation gives you a tax write-off and sidesteps all of the investment questions.

MustacheAndaHalf

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Re: What should I be concerned about with Direct Public Offerings?
« Reply #2 on: April 05, 2016, 11:38:31 AM »
In the realm of private equity, a small investor would have millions of dollars.  One of the reasons for that is the expertise required to tease the deal apart and make a decision.

What I find odd is the lack of a municipal bond offering for this.  Interest rates are low, and schools are one category of municipal bond offering.  So why did they avoid that route?  If you don't know the answer, you're not really sure what's lurking behind this offer.

What does this deal do for you that a donation or education municipal bond does not?

onlykelsey

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Re: What should I be concerned about with Direct Public Offerings?
« Reply #3 on: April 05, 2016, 11:42:38 AM »
Securities registration doesn't mean much.  It's a disclosure regime, it doesn't mean the government has passed on the securities or read any of the registration materials.

Do you need to meet sophistication standards to buy the debt?  There are various exemptions to federal registration, and they must have found one.  You should find out which one, read up on it, and also see if you're actually eligible to participate.

jim555

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Re: What should I be concerned about with Direct Public Offerings?
« Reply #4 on: April 05, 2016, 12:11:16 PM »
I would be concerned about the ability to sell the security prior to maturity if no market develops for that issue.

Munis do not have Federal registration requirements:
https://www.sec.gov/answers/nrmsir.htm
"Most municipal securities offerings are exempt from the registration provisions of the federal securities laws.  That means municipal issuers do not have to file a registration statement with the SEC.  But you can still obtain information about municipal securities from the Municipal Securities Rulemaking Board (MSRB), through its Electronic Municipal Market Access (EMMA) website at www.emma.msrb.org."

jac941

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Re: What should I be concerned about with Direct Public Offerings?
« Reply #5 on: April 05, 2016, 12:55:15 PM »
Thank you so much for the far-more-educated-than-me responses! Here are my responses to your comments:

At the risk of asking a dumb question, do you want the money back, or do you just want to support the school? Making a vanilla donation gives you a tax write-off and sidesteps all of the investment questions.

We donate directly to the school as well. The amount we would invest exceeds what we would be willing to donate. We are also allowed to invest our deposit (~$1700) which otherwise would be sitting around losing money to inflation for the years that our kids attend the school.

What I find odd is the lack of a municipal bond offering for this.  Interest rates are low, and schools are one category of municipal bond offering.  So why did they avoid that route?  If you don't know the answer, you're not really sure what's lurking behind this offer.

I thought only public schools could do municipal bond offerings? This is a preschool, not a public school.

Do you need to meet sophistication standards to buy the debt?  There are various exemptions to federal registration, and they must have found one.  You should find out which one, read up on it, and also see if you're actually eligible to participate.

We have to live in CA to invest & meet net worth standards to buy the debt & our investment cannot exceed 10% of our net worth. We meet the standards by a long shot & only plan to invest <1% of our net worth. I believe they are exempt from federal registration because they are a nonprofit. CA does not allow an exemption for nonprofits.

OkieStache

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Re: What should I be concerned about with Direct Public Offerings?
« Reply #6 on: April 05, 2016, 02:51:04 PM »
The school is doing a DPO because they have wealthy parents that patronize the school they solicit for the raise and no bank would offer them terms anywhere near those terms and "crowdfunding" is hip right now.  Interest only for half the term?  Hopefully that means they added capacity during the last round of capital improvements and they (and you as an investor) are confident they can fill those seats (carpet circles).  Are you sure it's a DPO?  They are offering stock? If so, sounds like they are using the intrastate nature of the offering to exempt from federal registration. 
If it is only a loan and not a stock offering, it is a loan to a known entity so you are in the best position to be able to evaluate risk.  There is no "general" risk that is any higher or lower than any other loan.  If you read the offering, I am sure it will say something like "You could lose all your money."  They should have audited financials for you to review. 
There is likely to be no market for the security so you should assume that you will have to ride it out to maturity. 
Since this is a tiny amount of your overall net worth, sounds like a good diversification that will do some good.

jim555

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Re: What should I be concerned about with Direct Public Offerings?
« Reply #7 on: April 05, 2016, 03:30:01 PM »
If they are a non muni school then I think they need to file with the SEC for these notes under Securities Act of 1933.  "Accredited investors" might be able to bypass this requirement.

jac941

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Re: What should I be concerned about with Direct Public Offerings?
« Reply #8 on: April 05, 2016, 06:00:07 PM »
Thank you so much OkieStache! What you're saying makes sense with the terms of the agreement and what I'm observing / learning.

The school is doing a DPO because they have wealthy parents that patronize the school they solicit for the raise and no bank would offer them terms anywhere near those terms and "crowdfunding" is hip right now.

Yes. They basically have said they're doing the DPO to get better terms than the current bank loan that they already have for the expansion. So this makes sense.

Interest only for half the term?  Hopefully that means they added capacity during the last round of capital improvements and they (and you as an investor) are confident they can fill those seats (carpet circles).

They doubled capacity and have already filled the spaces with a wait list. The interest only for the first few years was a concern of mine so I'll look at that a bit more closely.

Are you sure it's a DPO?  They are offering stock? If so, sounds like they are using the intrastate nature of the offering to exempt from federal registration. 
If it is only a loan and not a stock offering, it is a loan to a known entity so you are in the best position to be able to evaluate risk.  There is no "general" risk that is any higher or lower than any other loan.  If you read the offering, I am sure it will say something like "You could lose all your money."  They should have audited financials for you to review. 
There is likely to be no market for the security so you should assume that you will have to ride it out to maturity. 

They're calling it a DPO, but from the terms, it sounds like an unsecured loan NOT stock to me -- the contract refers to the "sale of Notes" and states that these are "restricted securities". I understand that we are assuming risk of default just like if we made anyone else a loan. And I know we won't be able to sell it easily -- we were planning to just ride it out to the end collecting interest & the repayment. Good call on reviewing the financials -- I will definitely do that. It's a good practice just to see what they're doing with our tuition anyway :-)

Since this is a tiny amount of your overall net worth, sounds like a good diversification that will do some good.

That was my initial impression, but I just wasn't sure. Now that I understand more from all of the lovely people here, I will take a closer look at the paperwork & financials with all of the above issues in mind.

Thank you all so very much!