Author: Susan Kraemer, Solarplaza
A new crowdfunding route has opened for US developers following news of the first solar project to raise funds through a Direct Public Offering (DPO).
California-based WaterFX announced in September 2015 that it will finance USD$10 million of a $30 million solar desalination project using a California DPO shares to both accredited and non-accredited investors, as well as corporations.
A state-regulated form of crowdfunding, the DPO allows non-accredited investors to participate in fundraising for non-listed companies.
The concept overcomes a challenge for the early movers in US crowdfunded solar, such as JoinMosaic, which have been limited by Securities and Exchange Commission rules limiting equity participation to accredited investors.
These had to have a net worth of at least $1 million, or earnings of $200,000 a year.
As with traditional crowdfunding, in a DPO funds are raised for a specific project, the company remains private and shares are not traded on the stock market, unlike an initial public offering (IPO), where a company goes public and shares are traded.
With a DPO, though, the company handles the offering directly, not through a crowdfunding platform. Mandell, for example, chose to publicise his DPO on the WaterFX website, rather than promote it on a crowdfunding site.
It took several months to prepare the offering materials for the project and another five months to receive a permit from the state to issue the offering.
WaterFX will use solar thermal rather than PV technology, but the choice of technology is unlikely to affect the viability of the DPO as a funding route for other developers.
WaterFX’s DPO will pay 6% in interest for ‘preferred’ shares, meaning they are first to receive dividends from a plant's profits.
"DPOs have been around a long time, but to my knowledge never utilised for a project like this," said WaterFX founder Aaron Mandell.
"We have always planned to finance the plant using this approach; we feel it fits squarely with our 'open source' philosophy."
In addition to $10 million in equity through the DPO, WaterFX will be taking on $20 million in debt. A big advantage to investors is there is no risk that they might send funds off to a project that never happens.
As in federally regulated crowdfunding, in a DPO funds are held in escrow until the financial goal is reached, so the money is returned to the investors if a project is not able to meet the funding goal needed to get it off the ground.
Hence if WaterFX can't raise the minimum amount needed (in this case $7.5 million) from investors, the funds will be returned. The money is held in a third-party impound account until the project is ready for construction.
"We don’t draw the DPO funds until the front-end engineering is complete, which gives us certainty around the construction costs and therefore certainty that it will provide enough equity to bring the plant online," Mandell explained.
"The water will be under a 20-year contract with the local water district, so 100% of the output is pre-committed. This is how we are able to guarantee the preferred dividend."