Yesterday evening we held an event at Brown University to launch Capital Good Fund’s $4.25 million Direct Public Offering in front of about 50 potential investors. You can click here to learn more about the DPO, but here’s a very quick overview:
- Social investors, who can be accredited or non-accredited, can invest as little as $1,000 and earn up to 6%
- Investors can choose terms of seven, eight, nine, or ten-years with annual interest-only payments and a lump sum at maturity
- We are using the proceeds of the Offering to hire 60 people and make 17,000 loans in the next five years; this will allow us to generate enough revenue from our loan portfolio to cover all of our operating expenses and pay back investors
What was fantastic about the event on Tuesday was that we had the President of Brown University, Dr. Chris Paxson, and Rhode Island General Treasurer Seth Magaziner, speak in glowing terms about the importance of our work. In no small part thanks to their support, $60,000 was committed on the spot and 20 attendees expressed interest in learning more. For years now I’ve talked–and dreamt–about scaling to the point where we are operationally self-sufficient. And once we figured out our business model–which, to be fair, took us about five years–the remaining obstacle had always been money. Specifically, the money needed to hire staff, market our services, and improve our systems so as to deploy enough loans to at least break even.
What It Takes
Having played the nonprofit game for seven years and done the math to figure out what it will take to scale, I know full well that there simply is not enough philanthropy out there to enable us to make the investments we need to hit our growth goals. The good news is that because of the strength of our loan portfolio (90% repayment rate on $1.1 million lent out) we’ve never struggled to raise loan capital, and we have a very strong record of financial soundness and social impact. And when, about 18 months ago, I learned about the DPO model, I immediately recognized how we could get around the limitations of grants and donations.
It turns out that written into the 1933 Securities Act is a provision that allows nonprofits to issue debt without having to register it as a security with the Securities and Exchange Commission. This alone saves us hundreds of thousands of dollars in compliance costs, but there are more benefits: for instance, we can publicly market the Offering, make it available to the average investor, and structure it how we want. (Incidentally, I believe the original impetus for the exemption was that if, say, a Church wanted to borrow money from its congregants to buy a new property, it didn’t make sense to require them to do an SEC filing).
Hypotheses & Realities
From day one my hypothesis has been that by tapping into the capital markets we would have the potential to access a pool of money that is many, many orders of magnitude greater than the pool of philanthropy, which in the U.S. has been stuck at about 3% of GDP for five decades. Moreover, I believed that while there has been a lot of interest in social investing, there has at the same time been a dearth of places in which to invest, especially for the average person with a couple thousand dollars.
Well, the fact that after just a few months about 40 people have invested anywhere from $1,000 to $100,000 tells me that I was right. What’s more, in the coming weeks I have meetings with folks who would ordinarily never meet with me were I asking for a donation; they are probably sick of constantly being asked for grants, but this is a totally different ask. And once I’m in the door, in about 70% of cases I get a commitment.
Not only does the DPO mean that we will be able to change 17,000 lives over the next five years, it also creates a new model for how effective nonprofits can fulfill their missions. There are so many social change organizations with proven social impact models that, for lack of resources, are unable to realize the promise of their approach to poverty, homelessness, environmental degradation, or whatever issue they focus on. That isn’t just a shame; it’s a travesty–one that have life-and-death consequences.
A Social Stock Market
In a way, we are looking to create a social stock market. After all, the biggest hurdle with the Offering has been the transaction cost of getting in front of investors, as opposed to convincing them to invest. Were we to create a centralized mechanism by which social investors could connect with nonprofits looking for capital, we could dramatically accelerate the pace of social and environmental change.
As the political climate looks more and more stuck in partisan rancor and even bigotry and racism, nonprofits are being asked to pick up the slack. Unfortunately, there has not been an increase in grant funding to keep up with the increased expectations, putting us in an untenable position. I strongly believe that only by using tools like the DPO can we get around this fundamental catch-22 faced by all nonprofits and, in so doing, ensure a better future for us all.
If you are interested in learning more about investing, please shoot me an email.