Businesses of
all size regularly require infusions of capital in order to break
into the next plateau, penetrate new markets or to sustain overall
growth. While there is a multitude of financing sources available
to these business owners, each source has its own inherent limitations,
requirements and benefits.
Dealing with
commercial banks in a traditional lending scenario can be ideal for
established companies with a proven track record of profitability.
However, growing businesses do not have this same option do to the
fact that they may not meet the strict requirements of most contemporary
lending institutions. Although less seasoned than their established
contemporaries, these up-and-coming companies still possess merit
and creditability and fortunately, have practical options for financing.
Private Placements are an attractive alternative for growing companies
for a variety of reasons.
A Private Placement
is private investment capital invested in a company, usually from
individual investors in the form of stock and sometimes bonds. In
the United States, Private Placements do not need to be registered
with the Securities Exchange Commission. Regulation D and Rule 4(2)
of the Securities Act of 1933 are the most popular forms of non-public
private placements. The process can also be referred to as a Private
Stock Offering as well.
More than $400
billion in capital was raised in the Private Placement market during
2002. The majority of that equity came from pension funds, investment
pools, banks and insurance companies. In total, there were just over
2,000 completed offerings. However, Private Placements do not simply
favor small businesses. Larger corporations can reap the benefits
as well because Private Placements are far less expensive and time
consuming than public offerings. Because there are so many options
for undertaking corporate financing it is essential that corporate
officers carefully review their entire financial picture before embarking
on a capital raise or a stock offering of any kind. In a brief overview
though, Private Placements offer a viable form of business financing
without the constraints of taking a company public and conceding control.
Private Placements
have a high degree of flexibility in regard to the amount of money
that can be raised. Private Placements can range in size from less
than $50,000 to upwards of $50 million. Private Placements come in
a variety of forms and may consist of debt, equity or a combination
of debt and equity financing.
The investors
that fund the Private Placement are usually more "business friendly"
than lending institutions or venture capitalists due to the fact that
they are "hand-picked" by the company raising money for
itself. The company can establish their own terms for return on investment.
As long as these terms are fully disclosed and agreed to by all parties
involved, a highly beneficial capital raise can be completed in a
relatively short period of time. Of course, the more reputable the
company and the more promising their outlook, the easier it is to
complete the private placement. Like any other investment vehicle,
participants still want to know that their money is invested wisely.
In addition to
the more favorable return on investment, the Private Placement itself
can be substantially faster and less expensive than seeking the assistance
of a venture capitalist or selling the stock to the public in the
form of an Initial Public Offering or IPO.
A prime Private
Placement candidate is a small business in its third stage of financing
seeking enhancement of their existing capitalization for growth or
expansion. Private Placements are also perfect for start-up companies
that are in the process of product development but have already conducted
market-feasibility studies and have established solid business planning.
Although infinite
types of businesses can benefit from Private Placement financing,
some specific examples include:
Restaurant
chains seeking to open additional locations
Bio-tech companies
seeking to transform its research into product sales
Real estate
developers seeking financing for a particular project
Franchise
operators seeking to add additional locations
Inventors
seeking to turn an invention into product sales
Professional
service providers such as nursing staffing or executive placement
agency seeking to expand into additional markets
Retail chains
seeking to expand product lines or locations
Auto dealerships
seeking to add inventory or additional locations
Public companies
seeking a cash infusion without the necessity of completing a secondary
offering
Medical providers
seeking to franchise their services
Raw material
excavators such as minerals
Any company
seeking to laterally expand by conducting its own manufacturing,
packaging or distribution
Pharmaceutical
or research companies seeking to further research and development
Private companies
seeking financing to allow them to proceed with future financing
such as bridge loans
Clothing designers
seeking to expand their product line; manufacture and market products
Any company
that has reached a growth plateau and desires to expand into additional
markets
Real estate
investment groups
Recording
studios or producers seeking funding for a particular artist
Movie studios
or entertainment producers seeking funding for film production
Communications
providers intending to add cellular towers, satellite feeds or cable
wiring
Product licensing
firms seeking to add additional licenses to its stable
Internet or
tech companies desiring to grow and develop
Hard product
distributors such as vitamins and supplement companies
Private Placements
also add an inexpensive capital raise alternative to existing public
companies looking for a cash infusion. Private Placements into a public
company are known as PIPE transactions. Usually PIPE transactions
involve a singe or very small group of investors. In the normal PIPE
transaction, the company agrees to register the privately purchased
stock for public resale providing the investor with an upfront exist
strategy. In the event that the Company does not register the stock,
the PIPE investor can re-sell the stock after a one year holding period
under certain circumstances, and after a two year holding period in
all circumstances in which the investor is not an affiliate of the
public company.
In both the Private
Placement and the PIPE scenarios, the ideal investor is rather specific
in nature and is sometimes referred to as an "Angel Investor"
due to the fact that they are indeed saviors in the Private Placement
arena.
With the latest
occurrences of accounting fraud in the stock market, the private investment
market is an attractive alternative for investors and small businesses.
It also allows investors to get involved in a company on the "ground
floor" in many cases. A Private Placement investor has the opportunity
to keep a closer eye on their investment, than a public market investor,
and has the opportunity to reap large financial benefits by getting
in on the ground floor of what could be a hugely successful company.
In rare instances
a single Angel Investor or small group may fund an entire private
offering. In this particular scenario though, the Angels may dictate
various terms of the offering and require that the company make modifications
to its initial compensation plan. Like all good business transactions
though, as long as all parties benefit, everyone comes away satisfied.
The aforementioned
Angel Investors are just a small part of the equation. The money to
fund Private Placements invariably comes from accredited investors
as defined by the SEC Rule 501 under Regulation D as:
An individual
earning 200k per year.
A household
with income of $300K per year or having a net worth over $1M.
Various venture
capital or hedge funds, small banks and other financial institutions
such as insurance companies, pension funds and hedge funds.
Regulation D
promulgated under the Securities Act of 1933 sets forth rules governing
three (3) types of Private Placement offerings commonly known as a
504, 505 and 506 offering. Growth companies must be able to offer
and accommodate fractional investments from individual investors.
Nothing can accomplish this more effectively than the structure and
framework of a Regulation D Offering. These offerings are the most
concise mechanism currently available for receiving fractional capital
investments; the appropriate documentation for receipt of those investments;
and, a tool for leveraging securities brokers as a resource for capital
funding. Regulation D Offerings are highly versatile and have proven
successful for a wide variety of transaction and industry types: corporate
seed capital; corporate expansion capital; film production capital;
real estate equity funding; acquisitions; capitalization for early
to pre-IPO stage Internet and technology companies; expansion funding
for retail companies; and, product development and distribution funding.
A Private
Placement memorandum (PPM) that fully discloses all the pertinent
facts of the investment and business
Potential
investors or a placement agent to locate potential investors;
Most
importantly, a law firm or lawyer experienced in Private Placements
and the creation of Private Placement Memorandums.
Section 5 of
the 1933 Act states that "it is unlawful for any person, directly
or indirectly to sell a security unless a registration statement has
been filed, or to sell a security or deliver a security after the
sale unless a registration statement is in effect." Sections
3 and 4 of the Act contain exemptions to this all encompassing rule,
which exemptions include the private placement.
There are many
rules and regulations in conducting a Private Placement which require
the advice and guidance of experienced securities counsel. A Private
Placement offering is not exempt from the fraud provisions of the
Act and requires careful compliance with the relied upon exemption.
The rules prohibit general solicitation or advertising; limit the
number of non-accredited investors; they require that that specific
disclosures be made to the participating investors; and they place
responsibility on the company and its placement agents to verify that
the investors solicited and accepted are qualified to participate.
Moreover, the
registration provisions of the Securities Exchange Act of 1934 provide
that it is illegal for a Company to pay commissions to an individual
or entity unless the individual or entity is a licensed securities
broker or bona fide employee of the issuing Company. In addition,
state securities laws ("blue sky laws") must be examined
to ensure compliance.
If an issuing
company fails to qualify for the Private Placement exemptions relied
upon, it can face severe penalties and possible criminal repercussions.
In other words, securing competent counsel is the single most important
step in conducting a Private Placement offering.
The key requirement
to conduct a Private Placement offering is the Private Placement Memorandum
or PPM; the legal document that includes all the disclosures required
by law so investors can make an informed decision as to the risk-reward
scenario before taking part in a private offering. The Private Placement
Memorandum protects the company as well as the investor by making
perfectly clear that such transactions are speculative in nature and
should only be undertaken by individuals capable of sustaining a loss
of investment capital.
The Private Placement
Memorandum and accompanying Subscription Agreement guards the company
from inadvertent non-compliance and also provides evidence of due
diligence in the event of a dispute.
By getting to
know your company thoroughly, Legal & Compliance, LLC can quickly
prepare Private Placement Memorandums and all the essential documents
required for a variety of private equity transactions. Over the years
the firm has also developed an extensive network of key professionals
in the securities industry. These accomplished investment bankers
and consultants can provide access to investors as well as perform
feasibility studies to discern how well an offering may be received
by the investment public. In other cases our consultants will offer
advice pertaining to the creation of business plans as well as compensation
packages in order to maximize the effectiveness of the offering without
"giving away the house" in the process.
