Archive for March, 2010

Any privately held corporation or limited liability company in the United States that intends to offer any equity in the form of selling stocks or membership units to a friend, relative, employee, associate, private investor, angel investor or venture capitalists is prohibited from doing such without the appropriate Security and Exchange Commission (SEC) Exemption.  The Exemptions are known as Reg D Series Offerings and depending on the amount to be raised will determine which series will be designated. Most commonly the offerings are Reg D 504, 505 or 506.

The SEC defines this act as a securities offering and the Offeree must be in compliance with the proper Regulation D Series memorandum that is required to be provided to a prospective investor and additionally follow the particular restrictions of that offering.

Any SEC violation could be punishable by fines and/or prosecution for criminal acts. The officers, directors or managing members could be personally liable and responsible for the violations of the company.

• Estimates are that over $1 trillion will be raised through private placement offering in 2010.
• Private investors do not expect unreasonable returns.
• Any business entity in nearly every industry can utilize a private placement offering to raise capital.
• No individual credit checks or requirements necessary.
• A properly prepared private placement offering and memorandum can captures the attention and impress a private investor.
• A standard private placement offering is cost effective and economical.
• In most instances, the company has immediate access to funds raised.
• Professional broker/dealers are available to assist in the promotions, sales and placement of private placement offerings.
• Usually a company is marketing its offering within a matter of weeks after contracting for the preparation services.
• No stressful monthly installment payments as in a loan from a bank or individual.
• So long as the company is in full SEC compliance, there are no personal liabilities or risks to officers, directors or other individuals associated with the offering.
• A great way to finance a company if the needs are from $1 million to $10 millions.
• Private investors & institutions are more secured owning stocks and membership units.

How do I qualify for a Private Placement Offering?

It is suggested that anyone entering into a private placement offering consult with someone that has experiences in the field whether that be a SEC consultant, SEC broker or SEC attorney. Have some degree of fundamental understand of the regulations, guidelines and laws associated with an offering. Be familiar with the basic procedural steps that must be taken before the capital is raised.

• A Complete and Comprehensive Business Plan or Executive Summary
• Private Placement Memorandum (PPM)
• Formation of Limited Liability Company (LLC) or Articles of Incorporation
• Employee Identification Number (EIN)
• Limited Liability Regulations and Operating Agreement
• Security Exchange Commission (SEC) Form D
• Subscription Agreement
• Marketing Tools

Where does the money come from?

There are many sources of capital available to those who know how to find it and properly represent the offering in a professional and compliance manner. Some of those ways are:

• Small Company Offering Registration (SCOR) – under SEC Reg D
• Direct Public Offering (DPO)
• Investment Bankers
• Informal Angel Capital Investors (AC)
• Formal Venture Capital Funds (VC)
• Small Business Investment Companies (SBIC)
• Investment Clubs
• Foreign Investors
• Broker/Dealer Investor Client Base

When it comes to a private placement offering and the regulations concerning solicitation laws, you really must know what you are doing so that you don’t cross the line.

If you think for one moment a place you DON’T want to visit for several years, I think most reasonable people would agree it’s JAIL.  Waking up next to convicted felons named Big Al and eating a cold breakfast doesn’t sound appealing to me.

You might say it sounds rather extreme, but one mistake during a conversation about private placement offering can lead to the infamous “knock on the door”.  As with any other investment market, there are laws for brokering private placement, AND consequences for breaking the regulations and laws.

To better understand the laws that concerns solicitation, let’s define the word “solicitation” and how the term applies to private placement investments. Solicitation means approaching any individual with the intent to discuss and sale an idea, service, or opportunity. When it comes to a private placement offering, it is considered solicitation to promote or even talk about your business in regards to your memorandum, projections or earning claims before you have delivered your full compliance package. That means no advertising on Craigslist, Linkedin, Facebook or any of the many social business networking sites.

Before you send out a memorandum to a potential investor, you MUST have that individual request the offering. The moment the individual states, “I’d like to see your offering”, it is no longer solicitation. In speaking with a potential investor, NEVER guarantee any returns on the investment. Don’t sugarcoat the information you are providing to the potential investor. Always use disclaimer in communicating either verbally or by e-mail. A good disclaimer in an e-mail might be:

“You are NOT an investment advisor, and that NO information you provide should be considered a solicitation.”

Always avoid any misrepresentations of yourself to the potential investor. Other words, NEVER LIE. Be truthful and honest in all statement avoid any form of deception.

Though it may be easier to paint a rosy picture for investors, the truth is always uncovered as the transaction unfolds.  No one appreciates the “bait and switch” technique, and as you know, ANYONE can file criminal complaints or sue you.  Remember, having a private placement offering investor submit an application is great, but NOT if they are expecting something you can’t provide.  Having applications that don’t close does nothing but degrade your reputation, and in such a fraud polluted business, that is all you really have.

In summary, if you have honest conversations outlining realistic expectations and worst case scenarios, you will ALWAYS be more productive in the end.  Keep it truthful, legal, short, and sweet, and you will surround yourself with people of similar ethics in return.

Anyone who is considering starting a new business must analyze the cost and expenses associated with the start up operations. For the business owner who wants to expand an existing business that requires additional capitalization also needs to weigh the various costs and liabilities.

Being under capitalized is one of the most common mistakes business owners make. Attempting to work on a financial shoe string is not only stressful but can impede the growth of the business for years.

The very first step that most companies take when seeking private capital is the creation of an executive summary and/or a business plan. While executive summaries and business plans are an important facet of raising capital they are not designed to be investment documents.

Executive Summaries and Business plans typically just provide general information about the company, its business model, goals, etc. While this information is important to investors, it does not provide a basis or structure for accepting capital investment.

A business plan does not allow a company to accommodate multiple individual investors. Most business plans state an aggregate amount of funding needed, “$500,000″ for example, but provide no structure to allow for fractional investment. This means the company must find one single investor with $500,000 to invest – and the patience to develop the transaction structure and documents to process that investment. This limitation is probably the single biggest reason why so many companies fail at raising investor capital. Raising capital effectively and properly from investors requires very specific documentation that far surpasses what a business plan provides.

Public companies don’t raise capital from investors by putting a business plan in front of them. If you wanted to invest into Dell Computer – do you think Dell would send you a business plan to process your investment? Of course not – you would invest into Dell Computer through a securities offering. The same holds true for private companies seeking capital from investors. Don’t expect an investor to invest unless you have presented them with a securities offering. Business plans serve a purpose (especially for start-up companies) – but they should not be relied upon as investment documents.

Here is the “Best Kept Secret in Funding.”  The Regulation D series of funding can allow you to legally in compliance with Security & Exchange Commissions laws raise the funds necessary for your business with a short period of time. Whether it’s a few hundred thousands of dollars or millions, there is a Reg D  to answer your requirements.

If you intend to offer equity in a privately held company such as a corporation or limited liability company, then you must have the proper exemption from the Securities & Exchange Commission or you’ll be in violation of offering a securities. The Reg D series of private placement offerings are the exemptions. For individuals needing $1 million or less, the Reg D 504 Private Placement Offering is ideal. It’s very cost effective and easy to comply with only a few restrictions. For those needing over $1 million, the Reg D 506 is commonly used.

You owe it to yourself to learn about this method of raising funds for literally any type of business.

The buzz words today are “private investing in business offerings”. Since the majority of private investors still lack confidence in the stock and housing markets they are researching and turning to investment opportunities in business projects, start ups, various business concepts, existing businesses and most of all franchisor companies.

For decades entrepreneurs have successfully used private placement offerings to fund their businesses with capital and for years, accredited private investors have experienced the benefits of these offerings whereby the company offers a minority equity position through the sale of stocks or membership units. Private placement offerings are risky but when an investment becomes a “home run”, the rewards are tremendous with returns sometimes hundreds of times the initial investment. Some investors seek out companies that intend to be acquired or will consider an IPO within a short period of time. The company uses the private placement offering for seed capital while others are for business expansion.

Predictions for 2010 are that over $1 trillion dollars will be raised through private placement offerings. In 2007, $600 billion was achieved therefore you can see the growth of these types of offerings.

All private placement offerings are regulated by the Security & Exchange Commission and require the company making the offering to have the proper exemption in the form of a Reg D memorandum. Depending on the amount being raised will determine the Reg D exemption. For a company raising less than $1 million, a Reg D 504 most likely will be used. For those companies seeking more than $1 million, a Reg D 506 would most likely be used. In addition to the federal SEC guidelines and regulations nearly every State has laws to protect the investor. This is why many private investors like investing. There are penalties, fines and even criminal prosecution for individuals who misrepresent and/or commit fraud in the offering.

Profran Consultants, Inc. works with approximately one hundred individuals each year who offers private placement offerings to investors. Since 1982, Ken Hollowell, CEO/President of Profran Consultants has experiences in this arena. Mr. Hollowell guides his clients through the regulations, guidelines and requirements preparing the proper memorandum to be offered along with preparation of the promotional and marketing materials. In addition, Mr. Hollowell coaches and teaches the client in ways to find and approach private investors. His client’s success rates are among the highest in the industry. The range of industries are from retail, manufacturing, technology, environment friendly, real estate, mortgage, automotive, health care, entertainment, and franchise companies to name a view.

For more information on existing investment opportunities or funding your company, e-mail info@regdconsultant.com or call Mr. Hollowell at (407) 363-3545.