Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
business builder money
by Don Keysser
Raising necessary capital is always a consuming task and an unavoidable requirement. When reviewing the options for raising capital, however, companies are often frustrated at the complexity. Like ship-wrecked sailors in a lifeboat, they may be surrounded by water but none of it is theirs to drink.
Bank debt is difficult to get for any but the most credit-worthy firm. Venture capital money usually goes to early-stage firms in “hot” industries, not start-ups or firms in less exciting businesses, and comes with the potential for a considerable loss of control. And raising capital through the traditional public offering structure, including an initial public offering (IPO), can be expensive.
(Reg D for short) refers to a series of exemptions under the Securities Act of 1933, instituted by the SEC in 1982, which provide what is termed a “safe harbor” for firms to issue their debt or equity securities in a simpler and less complex method.
While these exemptions themselves carry some requirements and limitations, these are much less onerous, time-consuming and expensive than for traditional securities offerings. For issuing equity, a Reg D approach functions as a very simplified non-IPO issuance of shares. For debt, a Reg D approach functions like a private non-bank (and often non-asset-based) loan.
There are three primary exemptions under the Reg D program, and they differ mostly in the amount of capital that a company can issue. Each of the exemptions requires the company to file a Form D with the SEC. This is not an approval or registration document, simply a notification, and requires no action or waiting period.
Under Rule 504, a company can issue up to $1 million of securities in any 12-month period. While the original rule stated that the securities could not be sold through public solicitation or advertising and would be restricted (not transferable), subsequent amendments created the Small Corporate Offering Registration (SCOR) program, a variation of the Rule 504, which significantly expanded this program’s flexibility.
Under SCOR, which is available now in most states, including Minnesota, the company must file a Form U-7, which asks 118 questions and serves as a form of disclosure document. The securities can be sold to an unlimited number of investors, including non-accredited investors, and they can be offered through public solicitation and advertising, including over the Internet. The securities are transferable.
Under Rule 505, a company can issue up to $5 million of securities in any 12-month period. Although this is considered a public offering, the company is not permitted to engage in any public solicitation or advertising (including over the Internet). The securities can be issued to an unlimited number of accredited investors, and up to 35 non-accredited investors; moreover, these non-accredited investors do not have to meet any “sophisticated investor” requirements. The securities would be restricted (non-transferable) for at least one year.
Under Rule 506, there is no limitation on the amount a company can raise. However, this is a private offering only, with no public advertising or solicitation; the company must already have a relationship with the investors. The securities can be sold to an unlimited number of accredited investors, and up to 35 non-accredited investors (who have to be established as “sophisticated” investors). The securities would be restricted for at least one year.
A fourth program, less often used, is the Intra-State Offering Exemption. This is a very narrowly targeted exemption, and allows an unlimited dollar amount of securities and no limit on the numbers of investors. However, the company has to be incorporated in the state in which it is offering the securities, it has to do its primary business in that state, and all of the securities must be sold to investors residing in that state. Even in re-sale on the secondary market, the securities can be sold only to residents of that state. Relatively few firms can meet these strict limitations, but those that can have a very inexpensive and quick method of raising unlimited capital without registration.
In each of the exemptions discussed above, there is no specific requirement of any particular level of disclosure. However, any information requested of the company must be provided to that investor, and if it is provided to one investor, it must be provided to all, especially non-accredited investors.
In reality, however, companies going through any of the Reg D exemptions are very strongly encouraged to write a complete private placement memorandum (PPM). A PPM is a disclosure document, and should not be confused with a business plan. While business plans are marketing documents and vary considerably in their quality and depth, the components of a PPM are much more clearly defined, and the PPM has a specific legal function and legitimacy.
It should be as comprehensive a discussion of the company as possible, including: business plan, marketing plan, technology, patents and copyrights, bios of senior management, risk factors, competition, pricing strategy, and cash flow pro formas, and it should include a section on tax consequences. It should meet all standards of complete, accurate and material information, and not fail to disclose any material information.
Since a PPM will provide a considerable amount of sensitive company information, it is normal to add a “confidential” stamp, and to hand out numbered copies only to investors willing to sign a non-disclosure agreement.
Remember that while Reg D exempts certain securities from registration, it does not exempt the company from the anti-fraud provisions of various federal and state regulations. A well-written PPM is a company’s best defense in an investor lawsuit.
The other documents used in a Reg D offering, aside from the PPM, include a subscription agreement (which for an equity transaction acts as the purchase contract between the investor and the company, and sets out the terms and conditions of the transaction), or a promissory note (which in a debt transaction is the actual security being sold).
The idea of a Reg D offering is that a company can sell its own securities, and thus avoid the expense of retaining an investment banking firm. However, it is still advisable to retain a securities attorney and a financial adviser to assist in structuring the financing and writing the PPM. Furthermore, while some firms then sell their securities through their own channels (including the Internet, where permitted), other firms prefer to hire a broker/dealer and gain access to that firm’s network of retail investors.
