The following methods are used to raise anywhere from $100,000 – $10 million dollars or more through private stock offerings:
While Business Plans are an important facet of corporate fund raising, they are, by themselves, not designed to effectively raise investor capital. What is needed is a “mechanism” that provides the framework and structure necessary for a company to effectively solicit and receive capital investment from individual investors.
Most people are aware of public stocks traded openly on the Pacific Stock Exchange, the New York Stock Exchange, The Toronto Stock Exchange and over the counter (OTC). Few are aware of the power of private stock offerings in raising capital for business ventures. In the opinion of many investment bankers, the best way to raise capital in today’s market, is issuing stock in your private company. This mechanism is provided by filing either Direct Public Offerings (DPOs in the form of a Reg A, U-7m, or Small Corporate Offering Registration (SCOR), Limited Liability Partnership Offerings (LLPOs), or Private Placement Memorandums (PPMs). In most cases the company only issue, 15%-35% of its company stock (depending on the amount of capital sought) so that you retain most the shares and the control of your company. This can be done easily if you have the knowledge. We can refer you to our affiliates who are licensed broker dealers or to securities attorneys to handle your securities needs. These are competent professionals who can structure these private offerings and assist you in raising the money needed.
The best two things about stock offerings (which there are many) are no loan payments and no risk of your personal assets, such as your home, car etc. By selling and issuing stock in your corporation – each stock certificate sold represents money to your business.
DPO vs. IPO
What is the difference between a Direct Public Offering (DPO) and an Initial Public Offering (IPO)? Usually an Initial Public Offering is an underwritten public offering. This means than an underwriter, usually an Investment Banker develops a public market for the stock and often purchases shares to support the offering. Generally, only large offerings, which have gained tremendous publicity in the public eye, qualify for an IPO. Registrations such as SCORs, REG As, SB-1, and SB2 are normally too small to attract the attention of national underwriters, yet still represent significant sources of capital.
The Private Placements
Simply stated, it is against the law to sell stock unless you are licensed to do so or can qualify for an exemption from the SEC rules. Section 5 of the 1933 Act clearly 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.” The 1933 Act does, however, contain some exemptions, but they fall short of really helping small businesses.
It was this concern that prompted Regulation D, better known as Reg D, which became effective April 15, 1982. Reg D is not just another exemption but one of the key exemptions for small businesses that wish to raise money by selling stock (equity). Reg D contains the kind of exemptions that many entrepreneurs have been looking for. These exemptions can easily be used in private or limited offerings. Thus, the Reg D private placement document, better known as the Private Placement Memorandum, has been one of the most workable exemptions for small offerings.
Regulation D Offerings
A company seeking growth capital 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 provide: a concise mechanism and process for receiving fractional and other 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 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, development projects, golf courses, and rehab); capitalization for early to pre-IPO stage Internet and technology companies; expansion funding for retail companies; and, product development and distribution funding.
In addition to being able to effectively raise capital from individual investors, a Regulation D Offering enables our clients to utilize our vast and effective network of sophisticated and regulated funding resources unavailable to companies that just have a business plan. These resources include brokerage firms, fund managers, and individual stockbrokers, and represent the most efficient and effective resources for raising equity capital. IRA will first assist in the preparation, formatting, and finally profiling your offering memorandum for your selective distribution among our extensive database of brokerage houses specializing in Regulation D offerings.
Regulation D programs are typically called “Direct Public Offerings” because the stock being sold, while privately held, is being offered “directly” to the public by the subject company. The DPO programs were designed for small businesses and are therefore less complex than a fully registered Initial Public Offering but retain similar benefits to an IPO. Most companies that use the DPO programs typically issue (or sell) between 15-35% of the company’s capital share – depending on whether it is a first-round funding or later stage funding and/or the amount of venture capital being raised through the offering. The company principals retain control over most the issued shares and, thus, retain control over the company. Investors receive a return based on the performance of the company and the number of shares they own.
SCOR (Small Corporate Offering Registration)
SCOR is intended to help small and startup companies raise venture capital through a simplified and relatively inexpensive public stock offering. Stock sold under a SCOR can be freely traded in the secondary market, making the investment more liquid and thereby appealing to investors. SCOR securities can be resold into established secondary markets and permit the sale of securities to an unlimited number of investors, accredited or non-accredited. It is often referred to as a Registration by Exemption, because it is basically a hybrid between a Public Offering and a Private Placement. However, SCOR is not for every small company and should not be used without consulting with experienced investment professionals.
Companies filing a SCOR (also known as a U-7 Registration) are subject to some requirements and an application process:
• The U-7 registration form has 50 questions. In most cases, the answers to these questions provide potential venture capital investors with adequate information about: the company ownership, business practices, intentions, risks, competition, stock allocations, and proposed distribution.
• Before any stock can be sold, the completed U-7, together with supplemental exhibits including financial statements, needs to be approved by the state securities administrator in each state in which the stock is to be offered. On approval, the U-7 becomes the prospectus or offering circular and may then be photocopied and given to potential investors. An expensive printed prospectus is not required.
• A U-7 can be drafted by company officers, assisted by their attorney and CPA, and submitted for approval to the state corporate commissioner. However, a professional consulting group approach enhances the prospects for a successful offering. The IRA Network can assist you with your document formatting and provide a securities attorney and CPA to guide the application through the state examination procedure and structure the company’s stock offering.
What else do these documents provide?
A financial document such as a Private Placement Memorandum or a SCOR (Small Corporate Offering Registration) is much more than a tool to obtain financing. It also contains your business plan which clarifies your company’s direction and outlines your corporate philosophy. A professionally written Private Placement, in combination with a well-written Business Plan provides a blueprint for your company. Each communicates how you expect your business to grow and what it takes to get there. These documents are extremely comprehensive – describing your company, its products, state suitability standards, financial information, business model, management team, markets, competition and business risks. This document is meaningful to investors and must pass the scrutiny of any regulatory agency.