Archive | Private Placement (PPM)

Using Social Media to Raise Capital?  Bad idea (even it is to buy beer).

Using Social Media to Raise Capital? Bad idea (even it is to buy beer).

If you are raising capital for your startup business through some sort of securities offering (i.e.  selling stock, LLC units, notes, bonds…etc…to investors), hopefully you have sought the advice of a good lawyer.  And hopefully the first thing that lawyer did was grab your ear and explain to you the concept of “general solicitation.”  And hopefully then that lawyer explained to you that if you generally solicit potential investors, you run the risk of getting smacked silly by the SEC and state securities regulators – especially if those solicitations turn into actual sales of securities.

In general, the rule against general solicitation means that you cannot advertise, engage in a mass mailing, or issue a press release that discusses the existence of your offering / potential offering of securities. A conservative interpretation of the SEC’s view is that all potential investors should be people with whom a company, its directors, officers, or full-time employees have a pre-existing business relationship.  If you want to generally solicit, you need to register your securities with the SEC, which means big bucks in legal and underwriting fees (e.g. and IPO).

Now you can officially add social media to the list of no-no’s (which should have been quite obvious anyways).

Yesterday the SEC announced a settlement with two advertising executives who launched a Twitter and Facebook campaign to buy the Pabst Brewing Company, makers of the questionably classic beer Pabst Blue Ribbon.  They also created a website that is no longer around – BuyaBeerCompany.com (yes!).  Their stated goal was to raise $300 million to buy Pabst.  So they started taking pledges, and apparently received around $15 million in pledges within a few weeks – and the full $200 million from 5 million pledgers within 5 months (wow!).  Of course this attracted media attention, which alerted the SEC to the campaign, and of course the SEC got all hot and bothered.  This was clearly a general solicitation, and the SEC was having none of it.   In the end, the two never received the $300 million in pledges, and never collected any money.  The SEC issued an order finding that these two knuckleheads violated federal securities law. As a result, they must cease and desist from committing or causing any violations and from committing or causing any future violations federal securities law – which the knuckleheads consented to without admitting any wrongdoing.

This was more about setting an example than actually dishing out punishment (they got slapped on the wrist). The clear message is that if you start tweeting to the masses that you are raising money, be prepared to get an SEC boot planted in your rear.  Luckily for these guys they never actually collected any money, and more importantly, never lost any money they may have collected – because then this would have been about punishment – and the penalties can be quite severe.

I am not always a huge fan of our securities regulatory scheme – sometimes it makes it very difficult and expensive for a startup with little capital to raise the capital it needs to get off the ground or expand.  And this is coming from someone who makes a decent living advising business owners who are raising capital.  Still, there is a reason these laws and regulations are in place (scam artists lurking EVERYWHERE).  So if you are raising capital, be careful, and get some good advice.  And stay off the twitter. And the facebook.  And don’t launch a website called “PleaseInvestInMyCompany.com” (I already own that domain name anyways).

 

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Private Placements – A Brief Overview of Raising Capital with a PPM

Private Placements – A Brief Overview of Raising Capital with a PPM

If you are looking to raise capital for your business, a private offering of securities might be one way for you to consider. Selling securities, whether it be to friends and family or angel investors, is an excellent means of raising capital if you are prepared and do it the navigate the maze of state and federal laws and regulations involved.  The following is intended to provide a basic understanding of raising capital via the private placement process. You should retain the services of a private placement attorney to advise you through the entire private placement process.

The SEC created Regulation D, which creates certain rules for private offerings. By following these rules, an issuer (i.e. a company selling stock, LLC units, partnership interest, notes, or other forms of a security to raise capital) generally may raise capital without a public offering.

Generally, a private offering may have no more than 35 investors. On the federal level, though, certain high-net-worth investors defined as “accredited investors” may be excluded when calculating the number of investors. There must also be NO general solicitation of investors by the issuer – no advertising. Just this weekend I came across someone soliciting the “private” sale of securities on Twitter – definitely not a good idea if you are trying to comply with the registration exemptions under Regulation D.

The federal securities laws for both public and private offerings are based on the premise that investors in securities are best protected by the disclosure of all relevant information regarding the securities and the issuer. The underlying guideline in this respect is Rule 10b-5, which requires the issuer to disclose to investors anything material that a reasonable investor would want to know prior to making a decision to invest. This is why PPMs are stocked to the brim full of material facts, disclaimers, and lots and lots of risk factors. Failure to properly include these and other items may subject the issuer to serious liability, including being forced to buy back the securities from the investor, as well as damages. If you want to avoid liability, overdisclose, do not hide anything, and do not mislead (among other things of course).

Keep in mind that there are also state “blue sky” laws to comply with – and they will need to be complied with in every state that a security is offered and/or sold.

There are lots and lots of land-mines to avoid when raising money in a private offering – so make sure to consult a private placement attorney / securities law attorney before you raise capital for your business. Also, I may be a lawyer, but the above is not legal advice!

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Is equity financing right for your small business?

Is equity financing right for your small business?

Bank of America has a website called Small Business Online Community, the mission of which is to “create a thriving online community that empowers people in building a successful business.”  A few weeks ago, a gentlemen called me, after reading some of my posts on IndianaStartup.com and interviewed me regarding the raising capital and potentially giving up control in the process.  The article, which you can find in its entirety here, is pretty good, and give some interesting perspectives (other than just mine).

Here are some excerpts quoting yours truly:

Still, Indiana business attorney Brian Powers, who also runs the blog http://Indianastartup.com, points out that such a power-sharing arrangement can work-it just depends upon the individual circumstances of the parties involved. “Investor control is not necessarily a bad thing, especially if you have a young business that will be gaining partners that have greater industry expertise and business connections than you do,” he explains. But if a business owner can’t take an emotionally detached look at his company’s real long-term needs, he or she might be better served by bringing in a third party to help facilitate offers and find the best match. “That’s what I often do,” Powers explains. “I end up helping companies through the process of figuring out that what they’re usually being offered is a pretty good tradeoff for the money.”

What helps Powers assess what is or isn’t a pretty good tradeoff is the fact that he’s been on the other side of the table. “In 1998, I was part of a dot-com startup company that raised $1 million in capital through an equity round,” he explains. “Back then, though, we got ridiculous valuations and didn’t have to give up control to get it. Those days are long gone now.” For a short primer on these valuations and their role in determining equity investment, check out Powers’ blog: http://indianastartup.com/business-funding/raising-venture-capital/raising-venture-capital-how-much-should-you-give-up/.)

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Private Placement – A Brief Overview of Rule 506

Private Placement – A Brief Overview of Rule 506

One of the exemptions from the federal securities laws regarding the registration of offerings of securities comes in Rule 506.   Rule 506 contains no limit on the amount of capital that can be raised in an offering. Similar to other exemptions, an issuer using Rule 506 cannot use general advertising or general solicitation to market its offering.  Rule 506 is available to an unlimited number of accredited investors and up to 35 non-accredited investors.  Unlike Rule 505, all nonaccredited investors, either alone or via a purchaser representative, must be sophisticated, that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.  Just as with Rule 505, nonaccredited investors must receive a substantive disclosure document that includes financial statements, although even if only accredited investors are involved, care must be taken such that the anti-fraud requirements are met and that there are no false statements, no misleading statements, and no omissions that might make what you have disclosed misleading.  Purchasers must receive restricted securities, meaning that the securities may not be sold without either registration or an exemption.

As always, make sure you get the advice of a securities attorney with private placement experience. There are lots of complicated regulatory requirements to comply with, both on the state and federal level.   A private placement attorney can help you navigate the regulations and to draft your private placement memorandum.

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Private Placements – A Brief Overview of Rule 505

Private Placements – A Brief Overview of Rule 505

One of the exemptions from the federal securities laws regarding the registration of offerings of securities comes in Rule 505.  Rule 505 allows a company to raise an aggregate amount of $5,000,000 over a twelve-month period.  Similar to Rule 504, Rule 505 does not permit an issuer to use general advertising or general solicitation to market its offering.  A Rule 505 offering is available to an unlimited number of accredited investors and up to 35 non-accredited investors.  Unlike a Rule 504 offering, nonaccredited investors must receive a substantive disclosure document that includes financial statements, although even if only accredited investors are involved, care must be taken such that the anti-fraud requirements are met and that there are no false statements, no misleading statements, and no omissions that might make what you have disclosed misleading.   Purchasers must receive restricted securities, meaning that the securities may not be sold without either registration or an exemption.

As always, make sure you get the advice of a securities attorney with private placement experience.   There are lots of complicated regulatory requirements to comply with, both on the state and federal level.   A private placement attorney can help you navigate the regulations and to draft your private placement memorandum.

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What is an Accredited Investor?

What is an Accredited Investor?

One of the more common questions I get from clients interested in raising capital is “what is an accredited investor?” The answer is spelled out in fairly plain english in Rule 501 of Regulation D:

  • a bank, insurance company, registered investment company, business development company, or small business investment company;
  • an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
  • a charitable organization, corporation, or partnership with assets exceeding $5 million;
  • a director, executive officer, or general partner of the company selling the securities;
  • a business in which all the equity owners are accredited investors;
  • a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase [08/05/2010 – See this link for a recent change to this portion of the definition];
  • a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
  • a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

In addition to understanding what it means to be an accredited investor, it is also important to understand how accredited investor status relates to the most common exemptions from the registration requirements of federal securities law. In a nutshell:

Rule 504 permits allows a business to sell up to $1 Million in securities during a 12 month period to an unlimited number of non-accredited investors. Additionally, Rule 504 does not require the issuer to provide any specific disclosure to the offerees, regardless of whether they are accredited.
Rule 505 allows a business to sell up to $5 million in securities during a 12 month period to an unlimited number of accredited investors, and up to 35 non-accredited investors.  The big problem with selling to non-accredited investors is that the disclosure requirements are significantly more diffucult to meet – very similar to the disclosures required in a public offereing.
Rule 506 allows a business to raise an unlimited amount of capital via the sale of securities to an unlimited number of accredited investors, and up to 35 non-accredited investors.  In addtion to the substantial disclosure requirements discussed above for Rul5 505. any non-accredited investors must also meet a “sophistication” standard, either themselves or via a qualified purchaser’s representative.  The status of an investor as “sophisticated” is a fairly high standard; investors who are merely
knowledgeable about the particular industry are not necessarily sophisticated.
As you can see, raising capital from non-accredited investors puts a start-up in a much more tenuous position in terms of disclosure – which means substantially more legal and accounting fees.  Non-accredited investors also tend to be more difficult to deal with in the long term.  Consider carefully the decision to raise capital using non-accredited investors – and of course consult with a securities attorney.
One other thing to keep in mind is that the burden of establishing whether an investor is an accredited investor falls on the issuing company. At a minimum, the issuing company must reasonably believe that the investor falls into one of the 8 categories in the definition of “accredited investor.”  This is typically accomplished using a carefully drafted investor questionnaire – make sure you use on and that you consult a secruities attorney.d investors) is also tainted.
  • Rule 504 permits allows a business to sell up to $1 Million in securities during a 12 month period to an unlimited number of non-accredited investors. Additionally, Rule 504 does not require the issuer to provide any specific disclosure to the offerees, regardless of whether they are accredited (but keep in mind the anti-fraud requirements).
  • Rule 505 allows a business to sell up to $5 million in securities during a 12 month period to an unlimited number of accredited investors, and up to 35 non-accredited investors.  The big problem with selling to non-accredited investors is that the disclosure requirements are significantly more difficult to meet – very similar to the disclosures required in a public offering.
  • Rule 506 allows a business to raise an unlimited amount of capital via the sale of securities to an unlimited number of accredited investors, and up to 35 non-accredited investors.  In addition to the substantial disclosure requirements discussed above for Rule 505, any non-accredited investors must also meet a “sophistication” standard, either themselves or via a qualified purchaser’s representative.  The status of an investor as “sophisticated” is a fairly high standard; investors who are merely knowledgeable about the particular industry are not necessarily sophisticated.

As you can see, raising capital from non-accredited investors puts a start-up in a much more tenuous position in terms of disclosure – which means substantially more legal and accounting fees.  Non-accredited investors also tend to be more difficult to deal with in the long term.  Consider carefully the decision to raise capital using non-accredited investors – and of course consult with a securities attorney.

One other thing to keep in mind is that the burden of establishing whether an investor is an accredited investor falls on the issuing company.  At a minimum, the issuing company must reasonably believe that the investor falls into one of the 8 categories in the definition of “accredited investor.”  This is typically accomplished using a carefully drafted investor questionnaire – make sure you use one and that you consult a securities attorney.

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Private Placements – A Brief Overview of Rule 504

Private Placements – A Brief Overview of Rule 504

One of the exemptions from the federal securities laws regarding the registration of offerings of securities comes in Rule 504. Rule 504 provides an exemption for the offer and sale of up to $1MM of securities in a single twelve month period. In general, an issuer of securities may not advertise, market or otherwise publicly solicit the sale the securities. Purchasers must receive restricted securities, meaning that the securities may not be sold without either registration or an exemption. Unlike some other exemptions, Rule 504 allows for a private sale without any specific disclosure requirements, although care should be taken to provide sufficient information to investors to avoid violating the anti-fraud provisions of the federal securities laws – as I mentioned in an earlier post – disclose, disclose disclose. Make sure there are no false statements, no misleading statements either, and no omissions that might make what you have disclosed misleading.

As always, make sure you get the advice of a securities attorney with private placement experience.  There are lots of complicated regulatory requirements to comply with, both on the state and federal level.  A private placement attorney can help you navigate the regulations and to draft your private placement memorandum.

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