Private Placement Financing
The one constant in the life of your small business will be the need for a cash infusion to jump start sales, expand into new markets, or continue to sustain growth. While there are many financing sources of funding available to small business owners, each source has its limitations and requirements.
For instance, commercial bank loans are often intended for businesses that have been around and have shown a steady stream of profitability. Private placements are an attractive alternative for growing companies.
What is Private Placement?
Private placement or private investment capital is money invested in your company usually from private investors in the form of stocks and sometimes bonds. In the United States, private placement often does not need to be registered with the Securities Exchange Commission. Regulation D is the most popular form of non-public private placement.
According to Thompson Financial, over 416 billion was issued in the private placement market for 2002. As good as it sounds, the majority of those dollars came from pension funds, investment pools, banks and insurance companies amounting to just over 2,000 deals. However, private placement does exist for the small business owner and is often less expensive and easier than taking your company public.
Benefits of Private Placement
High degree of flexibility in amount of financing ranging from 100 thousand to 10-20 million with combinations of debt, equity, or debt and equity capital.
Investors are more patient than venture capitalists, often seeking 10 to 20% return on investments over a longer term of 5 to 10 years.
Much lower costs than approaching venture capitalists or selling the stock to the public as an IPO (Initial Public Offering). Quicker form of raising money than usual venture capital markets.
Who Is A Candidate For Private Stock Offerings?
Ideally the candidate is a small business company in the third stage of finance and on the lookout for growth or expansion funding. Though it may seem to small business owners that private placement applies to start-ups once the company is past completion of product development, study on market feasibility and business planning, start up funds also comes from angel investors.
When is This Not Advised?
• When neither you nor anyone else in the company is comfortable or effective in the sales role.
• When your business' growth will be too flat to distribute profits to a lot of investors fairly soon (before they become impatient and start phoning all the time)
• When you can't spare yourself (or anyone else) from operations to chat with the number of potential investors you'll have to woo.
Where to Find Private Placements?
The money from private placements will come from Accredited investors defined by the SEC Rule 501 under Regulation D as individuals worth 200k per year, household income of $300k per year or net worth of over $1M, or venture funds, banks and institutions form the source of money from private placements. Bankers, attorneys and accountants network your small business with a private investor.accredited investors defined by the SEC Rule 501 under Regulation D.
What is Required for Private Placements?
A sound business plan
A private placement memorandum (PPM) disclosing the full facts of the investment and business
A law firm or lawyer experienced in private placements.
Tips for Getting The Money
Network! Turn your nose up at no one, for his contacts and money may prove invaluable in the future. This is where contacts within your own industry or neighborhood may pay off big -- trawl the trade associations, local business groups, and clubs.
Get a lawyer seasoned in private placements. Private placements are overseen only loosely by the Securities and Exchange Commission, but state securities and exchange officials will want to review your documents just to see what you're doing. To satisfy them, have your attorney prepare the paperwork. Tread lightly as you promote the private offering so as not to attract the attention of the regulators early on for innocent hyperbole.
Ingredients You'll Need on Hand
· A Business Plan
· A good attorney, familiar with Private Placements
· Basic Financial Package (*see below)
· Legal Documents to meet SEC and state regulations
*Basic Company Financial Documents
· Balance sheet. Financial report that shows the status of a company's assets, liabilities and owners' equity; this gives a complete picture of the worth of a company.
· Income Statement, also called Profit-and-Loss Statement. Summary of a company's revenues, costs and expenses during one accounting period. This shows how profitable a company is. If a company is new, these can be projected income statements.
· Cash flow projections. Estimates of the schedule on which money will actually move into and out of your company. Cash flow can be very different than income statements, especially for companies that operate on an accrual basis accounting.
Additional Financial Information
Certain financial activities will require greater information.
Such information may include:
· Audited financial statements. Financial documents like those listed above, but prepared by an accounting firm that audits the documents to make certain they are correct.
· Last two-three years' business tax returns.
· Last two-three years' partners' and owners' personal tax returns.
· List of current accounts.
· Current business plan.
· Appraisals of assets that secure loans. Appraisals are estimates of the value of property, made by an expert.
· List of other personal assets and liabilities of the partners/owners.
With a sound business plan, private placement discloses the full details of the investment and business, and requires an experienced lawyer. Due to the limited capital infusion into the stock market, the private investor market appeals to investors and small businesses. It offers a viable alternative form of business financing minus the impediments of a company going public and conceding control. Companies requiring capital of $50,000 to $10,000,000 from individual investors will benefit from the structure of a Regulation D offering. For simple deals like seed capital for a coffee shop to million dollar raises for high growth companies, the programs offer the legal, practical solution to raising capital from investors.