Saturday, December 5, 2009

Private Offerings

One of the most common ways of raising capital is through a PPM or Private Placement Memorandum governed by regulation D securities law. Why is a Regulation D securities offering critical to effectively raising capital from investors? Many companies seeking private capital make the mistake of using only their business plan as a funding vehicle. While business plans are an important facet of raising capital, they are not designed to properly raise capital from individual investors.

Who should use a Regulation D Offering? Any company or entrepreneur that is seeking to raise equity or debt capital from investors.

There are 2 basic types of Regulation D Offerings that can be structured:

An "equity" offering is where the company sells partial ownership in the company (via the sale of stock or a membership unit) to raise capital. Equity offerings are preferred by early stage companies because there is no set repayment schedule or debt service payments - the investors profit when the company profits.

A "debt" offering is where the company raises debt financing by selling a note instrument to investors with a set annual rate of return and a maturity date that dictates when the funds will be paid back to investors in full. A debt offering functions much like a business loan except instead of a bank providing the financing it is a group of investors lending funds to the company.

Preparing a Regulation D Offering is very straightforward. It involves three primary steps:

1. Pre-Offering Structuring: Most entrepreneurs are not experts in raising capital - and thus typically have poorly structured transactions. An improper or non-existent transaction structure will portray a very unprofessional image of you to potential investors. Thus, the very first step in an offering is properly setting the transaction structure and, in equity transactions, company share structure.

Pre-offering structuring typically includes such items as setting share price or note amount, determining how much of the company to sell (in equity situations), which Reg D program to use, setting the maturity date and annual rate of return for corporate notes (in debt situations), share allocations to principals so they maintain a set amount of control in the company, minimum and maximum offering amounts which set the effective range of the offering, minimum amount of investment per investor, etc.

2. Document Creation: Step two of preparing an offering involves the creation of the related Regulation D offering documents. These documents include:

  • Private Placement Memorandum: The Private Placement Memorandum, or "PPM", is the document that discloses all pertinent information to the investors about the company, proposed company operations, the transaction structure (whether you are selling equity ownership or raising debt financing from the investors), the terms of the investment (share price, note amounts, maturity dates, etc.), risks the investors may face, etc. Do not confuse the detailed disclosures and transaction structure in a PPM with the general information a business plan provides - they are not the same.

  • Subscription Agreement: The Subscription Agreement sets forth the terms and conditions of the investment. It is the "sales contract" for purchasing the securities. It is practically impossible to raise capital without this document - investors are not going to invest into your company or opportunity based on a handshake. Would you invest into a company without having the terms and conditions of the investment set in writing and agreed to by both parties?
    Promissory Note: In debt offerings you need to have a Promissory Note outlining the terms of the loan arrangement with the investors. The note is the actual "loan document" between the company and the investor.

  • Form D SEC Filing: The Form D is the notification filing that is sent to the SEC in Washington, DC. It notifies the SEC that you are using the Regulation D program and provides them basic information on the company and the offering. It is not an approval document or registration - it is merely a filing that notifies the SEC that you have a Regulation D Offering in place.

3. Marketing: The offering is now ready for marketing to investors. We provide our clients the capability to implement a diversified marketing campaign that involves NASD brokerages, Internet Marketing, and Direct Investor Marketing tactics.
A Regulation D Offering will solve all of the technical issues you will face when dealing with investors (investment structure, investment documentation, etc.) - these are issues that should be addressed before you interact with investors. Not addressing them ahead of time presents a very unprofessional image of you to the investor.
The Regulation D Programs can be used by domestic as well as foreign corporations. While the programs can be used by any corporation type - the preferred structure is a stock "C" Corporation or Limited Liability Corporation "LLC".

More detailed information on the Regulation D programs can be found at the Regulation D Resources website. This company also will help you create an offering for a fee. However, I use them just for information. Another very good source of information and a firm you can hire to create the offering for you is The Trowbridge Curriculum.

To your wealth!

Russell Roesner

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