Copyright © 1998-2003 First Line Capital, LLC
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What
is a Private Placement Offering (PPO)? A Private Placement Offering (PPO) refers to any type of
offering of securities to any number of private accredited investors.
Securities offered through a private placement are exempt from
registration with the Securities and Exchange Commission (SEC), provided
that the appropriate offering documentation is prepared in compliance
with Federal and State regulations
To determine whether a private placement is a sensible strategy for your entity, you must: (a) have a fundamental understanding of federal and state securities laws affecting private placements; (b) be familiar with the basic procedural steps that must be taken before this capital formation alternative is pursued; and (c) have a team of qualified professionals to assist in structuring the appropriate offering type, offering terms and offering documentation. Who must prepare a Private Placement Offering (PPO)? Any entity seeking to raise equity or debt capital (regardless of amount), from multiple private investors in the US is required by the SEC to prepare a compliant offering. Whether you are raising $50,000 or $50,000,000, you will definitely benefit from the structure of a PPO. What is a Private Placement Memorandum (PPM)? A Private Placement Memorandum (PPM) is the document that discloses everything the investor needs to know to make an informed investment decision. This includes: the offering structure, the share structure of the company, SEC required disclosures about the securities being purchased, company information, information on company operations, risks involved with the investment, terms of securities being sold, management information, use of proceeds, information on certain transactions that could affect the investor, and investor suitability data. The PPM also includes the subscription agreement which is the actual "sales contract" for purchasing the securities. This is the document that the investor will sign and send in with their investment funds. PPMs are designed as a stand-alone document - there need not be other information presented to the investor for them to make an accurate investment decision. Many companies will attach their business plans to the PPM as supporting documentation. This is an acceptable practice so long as the information in the business plan properly corresponds with the information in the PPM and that the investor is made aware that the business plan alone does not constitute an offer to sell securities - only the PPM can make that offer.
It is imperative that you assemble a qualified team to assist you in the
preparation of the documents and exhibits that will constitute the
Private Placement Memorandum. What should we
be presenting to our investors? The typical investor package should
include the following items: Summary Presentation: The summary presentation should resemble a power point version of your executive summary. As this will serve as the first impression of your entity to the investor it is important that this be done in a professional manner. Company overview, products, market, competition, summary projections and return on investment are all topics that should be addressed. Financials: The financials should include all historical data as well as detailed three year projections. Income statements, balance sheets and cash flow statements are normally provided. When possible, monthly pro forma information should be included for the first year. Exhibits: Letters of
intent, pending contracts, partnership agreements, news clippings and
a copy of the business plan are all examples of valuable exhibits. Subscription Agreement:
This is the actual sales contract for the purchase of the stock or
membership units. When an investment is made, you will receive a
signed subscription agreement along with a check from the investor. Investor Suitability Questionnaire: This is a basic questionnaire that queries the investor about certain financial data to qualify them as an accredited or non-accredited investor. How will a PPO help our fund-raising initiative? A PPO will allow you to swiftly penetrate capital markets in a sophisticated and legally compliant fashion while allowing your agreement with investors to be creative and confidential. Additionally, a private placement facilitates a rapid “Solicitation - Negotiation - Close” cycle. Are PPOs appropriate for any industry? A private placement offering can be tailored to meet the needs and requirements of most any capital raise. It is imperative to assemble a qualified team of professionals to assist you in structuring the offering type that will best suit your particular industry. What is the success rate of private offerings? PPOs are government programs that are available to nearly any entity that has the practical or legal need to use them. The success of your PPO will entirely reflect the merits of the opportunity you are presenting. A private offering will not change a bad opportunity into a good one, but it will drastically enhance the capability of good opportunities to raise capital. Will my company be a public company at the end of this process? Absolutely not - you will still be a private company. What are the related costs and fees to selling an offering? The average commission offered to registered brokers for selling securities is 10% (commissions are deducted from offering proceeds). However, you do not have to have a broker sell your securities – as a principal of the entity you can sell your securities directly to investors and bypass paying commissions to brokers. Do I need to guarantee the invested capital? No, individuals who invest in private placement offerings do so because they feel the long term possibilities of the company are good and/or a profitable exit strategy will develop - ie: the company will be acquired by a competitor at a substantial increase in stock value; the company will complete an IPO, or the company will be successful and produce a profitable return for the investor each year. Private investors are much less concerned about the traditional bank criteria for lending. How much of my entity do I need to sell to investors and what type of return do they look for? This depends on many factors, however most companies sell between 10-35% of their stock for a first round funding - less, if it is a second or third round situation. We will work you through a "projected income model" to establish your valuation which in turn helps to determine how much of the company to sell in an equity offering. Returns vary depending on risk. Can we use the programs to raise capital for a real estate transaction? Yes. Many real estate professionals and developers use the programs to raise equity capital and then utilize the enhanced balance sheet of the company post-offering to qualify for real estate loans. That is one of the critical advantages of raising equity - the investment is shown as an asset of the company (cash) rather than a liability as in debt arrangements. The programs are excellent for raising needed equity for re-hab projects, commercial real estate purchases, and real estate development. What is the preferred corporate structure for an offering? This depends on the type of transaction. S Corporations do not make good choices for offerings simply because most States limit S Corporations on the maximum number of shareholders that can be in the company (usually 35-75). Limited Liability Company "LLC" formats are popular with companies that have one-off type deals (film deals, real estate development, etc.) where there is a definitive end of the transaction, and with companies that are going to remain private and only need one or two rounds of funding. In an LLC the company sells a membership unit in lieu of stock - it is basically an ownership stake in the company, the same as stock ownership but with some "pass through" tax advantages at the corporate level. C Corporations are the most used entity type because the C corporation structure provides for more flexibility in future rounds of funding and allows for the company to go public without the massive entity restructuring that would be needed in an LLC. How do you market a Private Placement Offering? PPOs are not necessarily marketed differently than any other type of investment opportunity. Companies that have Private Placements in place are much better equipped to interact with investors and accommodate their capital investment. There are some key marketing advantages to a PPO: Internet Resources: The dawn of the Internet has created some excellent venues by which entrepreneurs can market their opportunities to investors. There are numerous online exchanges that cater to marketing deals to private investors. The companies that have the most success with Internet based marketing resources are the companies that have private placement offerings in place. Most of the Internet resources specialize in attracting investors with between $10,000 - $50,000 to invest. Thus - it becomes critical for the entity to approach these investors in a sophisticated manner and to be able to practically and legally accommodate their fractional investment. Brokerage Resources: Brokerage firms do sell Private Placement Offerings. The offering is sold through the brokerages stockbrokers to investors just like an IPO is sold by a lead underwriter (like Lehman Brothers). Sphere of Influence Resources: Most entrepreneurs and growth companies have a wealth of potential investors all around them. The problem is that when these companies just use a business plan to seek capital they get into a "one big investor" mentality that blinds them to the potential resources in their midst. Since a business plan cannot provide the practical, efficient, or legal capability to raise capital from numerous investors these companies typically miss out on excellent resources for capitalization. With a PPO everyone becomes a potential investor: customers, accountants, lawyers, employees, trade groups, local stockbrokers, members of the chamber of commerce, etc. The
key thing to remember is that The
PPO process seems overwhelming. Will
First Line Capital guide us through each step?
First
Line Capital will provide
assistance to your entity by evaluating the benefits and potential
pitfalls of the various offering types available to your corporate
structure. Additionally, we will work closely with management to
create offering terms that satisfy the expectations of potential
investors and your entity. Once completed, First Line Capital will
prepare and file all necessary documentation so you can begin to raise
the capital you require. What
determines the maximum amount of dollars we are able to raise? In order to ascertain the amount
you’re capable of raising, a current valuation must be established
for your entity. First Line
Capital will provide an understanding and substantiation of your
entities current value and help to identify immediate
opportunities to increase that value. How
long does it take until the offering is ready to be marketed to
investors? Working collaboratively with you,
First Line Capital can complete most offerings within a thirty day period. Will
First
Line Capital handle all of our compliance requirements?
First
Line Capital will complete all
applicable state and federal filings and assist you in other related
compliance issues. What
are the related costs and fees to preparing an offering? Offering related expenses can be broken down into two categories: |