How a Nonprofit Raised Growth Capital From Public Markets

A group shot of the TechSoup team. (Photo courtesy of TechSoup)

Nonprofits have often found it difficult to raise the operating support they need for long-term growth. Since most foundation funding goes towards project grants—that tend not to sufficiently cover operating costs—nonprofits that earn significant earned revenue sometimes explore more creative approaches to raising growth capital, including loan financing and debt securities. Yet, compared to the plethora of options available to for-profit companies, nonprofit organizations seeking to raise growth capital have more limited options: for-profit companies can sell shares of stock to investors to raise growth capital, for example, but nonprofits don’t have shares to sell. And few nonprofits can offer investors the market-rate returns or hard assets as security that would attract more traditional investors.

This was the challenge we faced at TechSoup in 2017 when we hoped to raise $11.5 million to fund our own strategic transformation. TechSoup and the TechSoup Global Network (TSGN) have enabled over 1.3 million of the smallest civil society organizations to receive more than the retail value of $16 billion of technology tools, resources, and funding, but many civil society organizations still struggle to access the technology and services they need. We estimated that there were over 12.3 million nonprofits in the 236 countries and territories where we worked, but to scale our services to reach them—in a hyper-local and fragmented sector—we realized we needed to transform our own systems, digital tools, and programs. More than that, TechSoup has been managing paradigm shifts in the technology sector itself: with corporate partners like Microsoft, Adobe, and VMware rapidly transitioning to cloud-based tools and XaaS (everything as a service) technology, we’ve needed to invest in our own next-generation technology platform, as well as new business models, processes, and systems. Extensive financial modeling indicated that we would need $11.5 million through a growth capital campaign over three years to execute our strategic plan.

TechSoup has been fortunate to receive grant support from several private foundations and corporate partners, but by supplementing grants with debt financing, we realized we could raise the growth capital we needed more quickly. Fortunately, over the last decade, changes in regulation and the growth of the impact investing movement have begun to open the door to creative financing for small businesses and nonprofit organizations alike. For example, the JOBS Act of 2012 legalized investment crowdfunding, and there are now many options at a federal and state level for small businesses and nonprofits to raise capital from people in their communities who care about them.

As a nonprofit social enterprise generating 88 percent of total revenue from earned income, we determined that an integrated capital raising strategy—which included both donations and investments in debt securities—could be the right approach for our organization. By growing programs that generated additional earned income and cost savings from economies of scale, TechSoup had the potential to repay a debt financing over a period of several years, while also scaling our social impact.

How to Raise Inclusive Capital

However, the opportunity was more than just to raise the capital we needed: it was a way to engage our community as impact investors, to allow our corporate partners, the foundations that support us, the nonprofits we serve, and TechSoup’s employees and board members to invest alongside us in our collective futures. Market research indicated that many of the employees of nonprofits in our community couldn’t easily invest amounts larger than $50 or $100, so we challenged ourselves to enable our stakeholders to participate with a minimum investment size of $50. Our first thought was a global campaign, but doing so would be extraordinarily complicated due to the different securities regulation regimes in each country. We decided to focus on raising capital in the United States first.

TechSoup sought the guidance of outside legal and financial experts to determine the right approach for our capital raising strategy. The team at Cutting Edge Counsel—who specialize in helping social enterprises to do direct public offerings to raise capital—helped us look at the different options. While the Securities and Exchange Commission (SEC) makes it easier for wealthy individuals and institutions to participate in securities offerings as “accredited investors,” regulations that protect less wealthy “non-accredited investors” make it more complex to design an investment structure we could offer to all members of our community. Cutting Edge Counsel guided us through the various regulatory frameworks for crowdfunded investment campaigns, including intrastate and nonprofit direct public offering structures at a state level, JOBS Act Title III Exempt Crowdfunding (also known as Regulation Crowdfunding or Reg CF), and Regulation A+ Tiers 1 and 2. There was a lot of complexity in considering all the costs and benefits of the different options. In the end, we determined that a direct public offering (DPO) relying on the SEC's Regulation A+ Tier 2 exemption was the right fit for our campaign: though costlier to manage, it was the only option that enabled us to raise the full amount of capital we needed, market to potential investors from all states, reduce the state-by-state filing burden, and offer investments to non-accredited investors.

We worked with the Cutting Edge Counsel team to design our direct public offering as a community investment campaign, embodying our belief that TechSoup should be financed by people and entities of all economic backgrounds who want to support our mission. Our DPO was structured as a debt securities offering in three tiers, with five-year term notes, the first and second tiers available to non-accredited investors and the third tier available to accredited investors and institutions only. The first tier, which accepted investments as small as $50, offered an annual interest payment of 2 percent. The second tier accepted investments of $2,500 and higher, with annual interest of 3.5 percent. The third tier for accredited investors required a minimum investment of $50,000, with annual interest of 5 percent. When the SEC qualified our DPO in 2018, we believe it was the first time it had qualified a nonprofit to raise funds through a Reg A+ Tier 2 offering.

After launching the three-year DPO campaign in November 2018, we successfully concluded on time in the fall of 2021, raising just over $11.5 million. Nearly $4.9 million was raised through the DPO structure from over 200 individuals, technology companies, foundations, and IRA custodians on behalf of their clients, and we raised more than $6.6 million in capital outside the DPO structure through a combination of sources, including a direct loan from Nonprofit Finance Fund (an equity-focused nonprofit community development financial institution, or CDFI), recoverable grants managed by donor-advised funds on behalf of their clients, and individual donations. TechSoup found that adapting to the preferences of various investors and donors—offering different options to participate based on their needs—allowed us to engage more supporters throughout the fundraising period.

Lessons Learned

1. Long Lead Time and Unanticipated Costs

When TechSoup chose to pursue a Regulation A+ Tier 2 DPO, we did not anticipate how long the process would take. Navigating the complexities of SEC regulations required extensive dedicated time from internal staff members and outside experts, and our team spent close to two years researching, planning, and adjusting the campaign before finally launching. For example, we had to change how we do audits to be compliant with SEC requirements, and although this entirely new set of audit requirements which has improved how we manage our financial reporting, the time and expense to prepare our financial statements was unanticipated. Another unexpected expense was the increased cost of liability insurance, driven by insurance carriers’ perception that doing an SEC-regulated securities offering would increase our risk. While outside legal counsel costs also exceeded our original budget, those costs were well worth the investment as TechSoup navigated these and other unanticipated complexities.

Many of the unanticipated costs we faced were related to complexities of the SEC-regulated Reg A+ structure that we chose. We faced a significant learning curve in pursuing a securities structure that was new to nonprofit social enterprises like TechSoup. Most nonprofits choosing among the different direct public offering structures would likely choose one of the options with less onerous reporting and audit requirements. Moreover, crowdfunded investing regulations continue to evolve since TechSoup launched its campaign. Regulation Crowdfunding (Reg CF) has increased its fundraising limits recently, making that regulatory exemption a viable option to consider for many more nonprofit issuers. In addition, for those that aren’t raising funds with a national stakeholder community, there are many state-specific options. It’s worthwhile for nonprofits to do some research with their state regulators and to talk to a trusted advisor about their unique circumstances.

2. The Value of Values-Aligned Partners

Our team recognized right away that we needed expert professional advisors to help us with our strategy and legal and securities compliance, as well as on managing the entire investment process. Cutting Edge Counsel guided us through the many complexities of securities law and capital raising strategies for social enterprises and were central to the planning, launch, and management of the campaign. We also partnered with SVX US, and relied on their online impact investing marketplace to help us automate the investment process and keep transaction costs down. In both cases, working with values-aligned partners meant that we approached each challenge with a shared vision and creative thinking about how to accomplish goals that went beyond a purely transactional relationship.

In addition, while many of the investors were deeply engaged and supportive, we had unique engagement from one of our funders, Peter Brach, of the Funders 2025 Fund. While Peter had provided support for TechSoup in the past, he engaged deeply in the vision behind scaling TechSoup’s services globally and the growth capital campaign. In addition to personally investing, Peter also provided a catalytic grant to cover our fundraising costs to complete the campaign. This catalytic support played an important role in helping us successfully close the campaign on time.

3. Investor Education Is Paramount

Because investing in a nonprofit’s debt securities offering is relatively unknown for both non-accredited and many accredited investors, we needed to invest a lot more time on investor education than we originally anticipated. For most of our investors, this was the first time they had made an investment in a nonprofit. We were one of the first nonprofits doing this type of securities offering, and there was a steep learning curve both for us and for the stakeholders who invested.

Many of the non-accredited investors—who were used to quick and simple online donation transactions—didn’t initially understand the higher level of scrutiny required for an investment transaction, or the level of Know Your Client (KYC) requirements we were obligated to perform. Others didn’t fully understand what it meant to invest in a nonprofit and earn a return on their investment. Corporate partners also required a great deal of engagement to think through how they might participate in the DPO, and in some cases, we provided corporate partner contacts with the support they needed to make a case internally.

Moreover, while TechSoup initially expected to be a good candidate for program-related investments (PRIs) by more large private foundations, and many staff members of larger foundations were interested in the funding model, it turned out that smaller family foundations had fewer barriers to decision-making and were more apt to invest in a timely manner. Ultimately, more examples and field building are needed for all of these stakeholder groups to build more comfort with these kinds of alternative investments.

4. Fundraising Strategies

Fundraising strategies we found to be most effective included a mix of stakeholder engagement and educational events. Early in the three-year campaign, we began to focus on stakeholder relationships that were strategic and mission aligned. These included the lending relationship with Nonprofit Finance Fund as well as some of TechSoup's key corporate relationships, including Microsoft, VMware, and Okta. In addition, our board of directors actively participated in the campaign, their investments going towards a matching campaign that helped build fundraising momentum in year one. With the onset of the COVID-19 pandemic early in year two, we needed to think differently about our campaign and how we might authentically engage with investor prospects in on online-only format.

TechSoup worked closely with organizations like Impact Finance Center and co-created investor clubs that allowed us and other like-minded organizations the chance to highlight our work and share our fundraising campaigns while still staying compliant with SEC rules. One fundraising strategy we should have pursued earlier was building relationships with values-aligned registered investment advisors (RIAs) and other impact-oriented wealth advisors. Given the fragmentation of the investing community, connecting to those networks was beneficial for discovering like-minded investor prospects. Had we cultivated those relationships sooner, it’s likely that we would have hit our fundraising goal ahead of schedule.

Looking Forward: Field Building

Ultimately, TechSoup was delighted to have paved a new way to raise growth capital in the nonprofit sector that allowed us to accomplish our capital raising goals. While the path we took can also be a successful approach for others, much more field building is needed to help organizations understand options since there are several different regulatory approaches. Which one they choose depends on how much capital they want to raise, whether they want to do a local or national campaign, their approach to marketing, and whether they want to reach out to stakeholders of all economic backgrounds, not just wealthy accredited investors. Relying upon trusted and values-aligned expertise and fundraising strategies that align with the stakeholder community are critical. We look forward to seeing others experiment with fundraising models that go beyond conventional approaches that help them scale their services and provide even more impact.

Read more stories by Dara Westling & Ken Tsunoda.