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Raising Capital

Starting or growing a business takes hard work, planning, a good team, and, quite often, the right kind(s) of financing in the right amounts.  In addition to traditional sources of financing such as banks or the SBA, it is often necessary to attract funding from outside sources such as private investors (angels) or venture capital funds.  The process of obtaining funding embraces an intricate maze of issues and decisions, and most importantly, federal and state securities laws if the sources of funding involve a securities offering.

 

PSC has gathered together on this web page certain basic information and links to other web sites that may be relevant in financing your business.  This material is being provided for educational purposes only.

 

PSC helps clients identify strategies, develop infrastructure and prepare internal documents to seek funding, whether from banks or more non-traditional sources. PSC does not offer funding, act as an intermediary or agent on behalf of any other business in the funding process, or participate in any manner in the offer or sale of securities or the solicitation of offers to invest.

 

NOTICE: PSC helps clients identify strategies, develop infrastructure and prepare internal documents to seek funding. PSC does not offer funding, act as an intermediary or agent on behalf of any other business in the funding process, or participate in any manner in the offer or sale of securities or the solicitation of offers to invest.

 

PSC does not endorse any of the web sites that are linked below, their respective sponsors, or any of the policies, activities, products or services offered on the respective sites or by any advertiser on a particular site.

 

SECURITIES LAW PRIMER

Q:         What is a Security?

A:         Securities include stocks, bonds, notes, limited partnership interests, certain types of LLC member interests, and investment contracts.  Basically, if you've given your money to others so that they can put it to work for you, you may have purchased a security. Courts have said a security is an interest in a common enterprise, where the investor expects profits derived mainly from the significant managerial efforts of others.  

Q:         What is involved in offering and selling a security?

A:         Generally, under federal and state law all securities offerings must be registered unless they qualify for an exemption from registration.  In a registered offering, issuers of securities to are required to officially register their offerings with the federal SEC and follow mandatory formats for the offering documents, called prospectuses.  In general, companies are required to file detailed information about, among other things, the securities being sold and the backgrounds of the key people in the company issuing the securities, along with a certified financial statement prepared by independent accountants. 

There can be serious legal consequences if issuers violate any of the anti-fraud provisions of the securities laws, which includes misrepresenting or omitting important information from the prospectuses, or using “manipulative or deceptive devices” in offering and selling the securities.

Q:         Are there legal ways to offer and sell securities without registration?

A:         Yes. The federal Securities Act of 1933 exempts from registration, but not from the anti-fraud provisions, securities “not involving a public offering.” There are several different types of exemptions, each with its own requirements.  The most well-known is Reg. D, initially implemented by the SEC in the early 1980s and revised many times since then, and the state counterpart.

 Q:         What does it take to qualify for a “non-public offering?”

 A:         There are several very important requirements to qualify as a private offering:

·        The issuer must disclose all material information to potential purchasers, usually in a written document known as a private placement memorandum or PPM;

·        The security typically may not, among other things, be offered through any form of general solicitation. General solicitation can happen many ways - such as through ads in newspapers or magazines, at seminars open to the general public, over the Internet or in press releases;

·        There are also numerical limits on the number of offers and the number of actual purchasers there can be, depending upon, among other things, whether or not the offer is made only to accredited investors and their sophistication level; An issuer of privately offered securities may sell in an offering to no more than 35 "non-accredited" investors;

·       The issuer must also comply with all other requirements in the applicable exemption that is being relied on;

·        THE MOST IMPORTANT REQUIREMENT REMAINS THE SAME.  ALL SECURITIES TRANSACTIONS, EVEN EXEMPT TRANSACTIONS, ARE SUBJECT TO THE ANTIFRAUD PROVISIONS OF THE FEDERAL AND STATE SECURITIES LAWS. THIS MEANS THAT THE ISSUER AND ITS REPRESENTATIVES INVOLVED IN MAKING THE OFFERS WILL BE RESPONSIBLE FOR FALSE OR MISLEADING STATEMENTS, WHETHER ORAL OR WRITTEN. THE FEDERAL GOVERNMENT ENFORCES THE FEDERAL SECURITIES LAWS THROUGH CRIMINAL, CIVIL AND ADMINISTRATIVE PROCEEDINGS.  STATE GOVERNMENT SECURITIES AGENCIES ARE THE SAME.  SOME ENFORCEMENT PROCEEDINGS ARE BROUGHT THROUGH PRIVATE LAW SUITS. ALSO, IF ALL CONDITIONS OF THE EXEMPTIONS ARE NOT MET, PURCHASERS MAY BE ABLE TO OBTAIN REFUNDS OF THEIR PURCHASE PRICE. IN ADDITION, OFFERINGS THAT ARE EXEMPT FROM PROVISIONS OF THE FEDERAL SECURITIES LAWS MAY STILL BE SUBJECT TO THE NOTICE AND FILING OBLIGATIONS OF VARIOUS STATE LAWS.

 Q:         What is an accredited investor?

 A:         Under federal rules, one is an accredited investor if he or she has a net worth of $1 million, excluding home, furnishings and vehicles, or either individual income of more than $200,000 a year or joint income with a spouse of more than $300,000 a year, for the two years before the investment, as well as income expected at one of those levels during the investment year.

 Q:         What sort of sales practices can get an issuer, or its agent, in trouble?

 A:         Both state and federal laws say that a person selling securities may not make "any untrue statement of a material fact," or omit a material fact that is necessary to keep the sales pitch from being misleading.  This applies to the sale of registered, publicly offered securities and unregistered, privately offered securities alike.

 Q:         What is a "material fact"?

 A:         The U.S. Supreme Court has said that what is "material" -- or, important to the investment decision -- must be considered from the standpoint of the "reasonable investor." An omitted fact, the court has said, is material if there is a "substantial likelihood" that a reasonable investor would consider it significant.  "Put another way," the court has said, "there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available."

THE BOTTOM LINE:  OFFERING AND SELLING SECURITIES IS A COMPLEX PROCESS WITH VERY SERIOUS CONSEQUENCES IF IT IS NOT DONE CORRECTLY.  INVEST IN PROFESSIONAL ADVICE BEFORE YOU START. 

FEDERAL RESOURCES

- Securities and Exchange Commission (SEC)  |Link|

- Information for Small Business webpage  |Link|

- Small Business and the SEC Q&A Webpage  |Link|

  

 

STATE RESOURCES

- North American Securities Administrators Association (NASAA)  |Link|

- State of Missouri: Missouri Securities Division  |Link|

 

OTHER RESOURCES

- Angel Investors - Inc Magazine Report  |Link|
When you're in search of financing, the idea of an angel - an individual investor with money to invest in early-stage or start-up companies -- can seem nothing short of enchanting. But where do you find an angel? In the November,2000 issue of Inc. magazine, you can read how the owners of Wetzel's Pretzels tapped an existing customer as an angel. Typically though, courting an angel is less serendipitous. If an angel doesn't fall in your lap, try these resources for finding and working with angel investors.  There are a number of links to other related articles.

- ABCs of Venture Capital and Angel Investors  |Link|
What differentiates angel investors from professional venture capitalists? In addition to a good side-by-side comparison of the two types of risk-capital suppliers--how they operate, how they manage risk, and how much money they invest--the article also provides the names of networking organizations that focus on equity financing.

- Venture Capital Analysis  |Link|
This article is a 'must' for any entrepreneur considering seeking a venture capital investment. Although no article is a match for talking with other entrepreneurs who've been through the process, this piece effectively covers some of the issues and challenges of raising venture capital financing, including finding venture capital, industries that attract venture capital, qualifications for venture capital, the due diligence process, how a venture capitalist will value your company, and how an investment might be structured.

- Streetwise Tips on Getting Money  |Link|
The brainchild of an entrepreneurial publisher, Bussinesstown.com focuses exclusively on the needs and interests of small and emerging businesses. The finance page, just one aspect of this extensive Web site, divides material into Getting Money, Money Problems, and SBA Loans. Under Getting Money, you may click to definitions and descriptions of such concerns as lease financing and factoring. Extensive links to other Web pages make this a fruitful place to start your search for funding opportunities.

- America's Business Funding Directory  |Link|
This oft-linked Web site is designed to help entrepreneurs locate business funding. You may answer the questions in the Business Capital Search Wizard and, based on your company's industry, size, and stage, BusinessFinance.com will lead you--free of charge--to valuable resources, experts, and contacts. But before you try to reach potential sources of funding, it might be wise to download from the Expert Center the free workbook guide on how to prepare a successful funding request. Expert advice and a library of links to leading small business resources round out the impressive usefulness of this site.

- The Growth Company Guide to Investors, Deal Structures and Legal Strategies  |Link|
Here, free, is the complete text of a 302-page reference guide, with chapters that explain just about every term and concept that should be know to you, the entrepreneur. The site has over 200 key-word entries, alphabetically listed, from Adventure Capitalists (entrepreneurs who invest in others' ventures) to Windows (the time you have to take advantage of a product launch or equity offering.) Skip the last entry, Zeal: if you don't have it already, you're in the wrong place

- Questions To Ask About Angel Financing  |Link|
Way before you structure a deal with an angel investor, step back and make sure you make the right moves. This article describes the variety of stock types entrepreneurs can offer angels, how long angels should serve on boards of directors, and negative covenants.

- Private Offerings  |Link|
Are you thinking about raising capital from private investors or going directly to the public without registering an IPO? You'd better make sure you're playing by the rules and regulations of the SEC and comparable state agencies. This article explains the rules that govern Regulation D, Regulation A, and Small Company Offering Registration (SCOR) approaches.
 

NOTICE: PSC helps clients identify strategies, develop infrastructure and prepare internal documents to seek funding. PSC does not offer funding, act as an intermediary or agent on behalf of any other business in the funding process, or participate in any manner in the offer or sale of securities or the solicitation of offers to invest.

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