| Company Description | PPM $ Amount |
|---|---|
| *Major Entertainment Resort Chain | $80M Equity |
| Alternative Energy Producer | $20M Equity |
| Raw Timber and Timberland-2 deals | $20M Equity-$4M Debt |
| Green Convenience Stores | $16.5M Equity |
| *Invests in/Operates Hotels in China | $12.5M Debt/Equity |
| Synthesis of Atifical RNA | $15M Equity |
| *Mexico Luxury Time-Shares | $10M Equity |
| Gold/Diamond Investments | $5M Equity |
| Medical Emergency Facility | $4M Equity |
| *Fractional Housing - West Africa | $4M Equity-$1.9m Debt |
| Commercial Medical Real Estate | $3M Equity |
| Expedition Vehicles | $3M Equity |
| Gaming Casino | $3M Equity |
| Coffee Shop Franchise | $2M Equity |
| Online Gaming System | $2M Equity |
| Drink Supplements | $1.5M Equity |
| Citrus Farm | $1.3M Equity |
| Mountain Resort/Restaurant | $1M Equity/Debt |
| Developed Integrated Online Engine | $975k Equity |
| Company Description | PPM $ Amount |
|---|---|
| Internet Customer Referral System | $950k Equity |
| Coal bed Methane Detection Device | $950k Equity |
| Real Estate Development - Smart Homes | $950k Equity |
| Produces and Distributes Cooking Videos | $900k Equity |
| B2B Fuel Procurement System | $900k Equity |
| Urban Online Retailer | $900k Equity |
| Online Order System-2 deals | $1m & $875k Equity |
| Invented and Distributes Security Device | $850k Equity |
| Restaurant - Mexican | $800k Equity |
| Fire Alarm System | $800k Equity |
| Automation Systems for Manufacturing | $750k Equity |
| Health/Vitality Supplements-Pets | $700k Equity |
| Bed and Breakfast- Dog Centric | $500k Equity |
| Restaurant Food Delivery | $500k Equity |
| *Bulgarian Newspaper | $500k Equity |
| Bioelectrochemistry Fertility Device | $455k Equity |
| Apparel Selection/order Processing System | $390k Equity |
| Environmental Biotechnology Systems | $350k Equity |
| Television Monitor Mounting Device | $225k Equity |
The Preferred Investment Vehicles
Regardless of the source of your financing--family and friends, angels, or venture capital--you will need some vehicle, forms, or set of papers to make it all nice and legal. On the surface, it would seem that if you're going to sell stock, you could take the investors' check and give them a stock certificate. Or if it was to be a loan, just take the check and sign a note. Unfortunately, it's not quite that simple. And in fact, you don't want it to be.
Today's "sue the buzzards" mentality causes some real problems for entrepreneurs when it comes to raising money. The main problem is the entrepreneurs themselves. Considering their natural propensity and rightful enthusiasm for their project, they tend to oversell. This is okay if everything works out the way it is planned. But we all know that "Murphy" will enter the program and that not always what is well, ends well. In the worst cases, your company may not survive.
The problem then becomes that the friendly original investor is not the least bit happy about the fact that you did not perform up to expectations or lost all their money. Their fee-happy lawyer is more than pleased to take on the case of suing you because you said there wasn't any significant competition, that your engineer was a genius and couldn't miss on inventing the black box, that you had umpteen customers lined up, and the endless list goes on. What it comes down to is your word against theirs, and most likely they have more money (which is why you went to them in the first place) and they can afford the upfront legal fees that will be repaid when they sell your house.
There is a solution to this dilemma, various documents that have been blessed by our governmental bodies, which act like a sort of insurance policy for entrepreneurs to protect them against disgruntled investors, be they friend, family, angel, or venture capitalist. They are the subject of the next section.
The Selling of SecuritiesSimply stated, it's against the law to sell stock unless you are licensed to do so or can qualify for an exemption from the Securities and Exchange Commission (SEC) and the various states securities commissions' rules. The very worst that can happen is that you will have to pay penalties or you can be put in jail. The least that can happen is that you would be required to refund any monies you raised. This can be very difficult if you've already spent a sizable portion before the legal problem arises.
For most entrepreneurs, the best vehicle to accomplish initial equity financing under an exemption is through the use of a Private Placement Memorandum under Regulation D, which is a limited offer and sale of their company's stock, or securities, without registration under the Federal Securities Act of 1933.
Some risks continue under Reg D, but compliance is significantly easier than before Reg D. A major, major point is that by complying with Reg D, it provides the company, its officers, and its directors with an insurance policy of sorts regarding disclosure.
There Are Six Basic RulesRegegulation D consists of six basic rules. The first three are concerned with definitions, conditions, and notification. Rule 501 covers the definitions of the various terms used in the rules. Rule 502 sets forth the conditions, limitations, and information requirements for the exemptions in Rules 504, 505, and 506. Rule 503 contains the SEC notification requirements.
The last three rules (504, 505, and 506) deal with the specifics of raising money under Reg D. Rule 504 generally pertains to securities sales up to $1 million. Rule 505 applies to offerings from $1 million to $5 million. Rule 506 is for securities offerings exceeding $5 million. (A complete review of all aspects of Reg D is contained in our book Going Public" - Everything You Need to Know to Take Your Company Public.)
Regulation D Rule 504Actually, Congress's original intent in 1982 for Rule 504 was to "set aside a clear and workable exemption for small issuers to be regulated by state blue sky requirements, but by the same token, to be subjected to federal anti-fraud provisions and civil liability provisions." Rule 504 exemption is provided for almost any type of organization, including corporations, LLCs, partnerships, trusts, or other entities. However, it is not applicable to companies already reporting to the SEC (subject to the '34 Act) or investment companies.
You Cannot Exceed $1 Million. The total offering amount under Regulation D Rule 504 can be up to $1 million in a 12-month period, less the aggregate offering of all securities sold within 12 months before the start of a 504 offering. So, if a company has raised $100,000 in private money in the previous 12 months, it can still raise up to $900,000 without being accused of breaking the rules, or "integration."
Generally speaking, there are no specific disclosure requirements under Rule 504 (disclosing what the company is about, what it intends to do, or who is connected with it). This means that, theoretically, an issuer can have a purchaser sign a subscription agreement and purchase stock without any information about the company being disclosed. However, the rule is dependent on the blue-sky laws of each state in which the securities are offered. This means that if a state's blue-sky rules require disclosure, it must be provided regardless of Rule 504.
A word of caution to the entrepreneur--regardless of the amount of disclosure the issuer is willing to provide, Rule 504 does not dismiss the issuer from the federal requirements, nor is there an exemption from the fraud provisions, including the areas of material omissions or misstatements. The penalties for noncompliance are severe, including monetary fines and mandatory jail sentences.
Number of Investors. With its limited disclosure requirements, Rule 504 also allows an issuer to sell securities to an unlimited number of investors. Theoretically, a company could raise $1 million by selling its stock at a penny a share to 100 million different investors. Obviously, the administrative economics are not too attractive, but there's no rule that stops an issuer from selling $500 blocks of stock to 2000 investors. Rule 504 is the only rule under Reg D that permits an unlimited number of investors.
A final note on Rule 504 is that the exemption provides for sales of securities of either debt or equity. This opens the door for combinations of both via convertible debentures. By way of explanation, convertible debentures are a debt issue (debenture) that is convertible to a preferred or, most commonly, common stock at some future date.
Rule 505: Offerings of $5 million or lessAlternate Exemptions
There are several other rules and exemptions besides the Reg D exemptions discussed above. They are worth looking into and are discussed below under the headings of Regulation A and the Small Corporate Offering Registration (SCOR).
As pointed out in the last section, the principal advantage of an exemption from registration is that the buy-and-sell transactions can take place as soon as the parties decide to proceed. It eliminates the necessity of preparing and filing a prospectus with the SEC, and it saves legal costs, plus accounting and registration fees.
Exemptions under the Securities Act of 1933 ('33 Act) are listed as exempted securities and exempted transactions. They can save both time and money. The only drawback is they can take a legal genius to interpret them. They're full of loopholes, and the courts have shown no qualms about ruling against the entrepreneur in their interpretations. Regardless, the end results should make them worth pursuing. But since the whole area of exemptions is so complex, the entrepreneur should not proceed without first seeking the advice of qualified counsel to determine the best form of exemption.
Regulation A has a long history as an exemption for raising capital. It has been revised quite often, and it allows a company to publicly offer its securities without registration under the 1933 Act. Instead, an offering statement (Form 1-A) is filed and "qualified" with the SEC. A principal attraction of Reg A is that only two years of financial statements are required and they may be unaudited if audited information is not readily available. Additionally, the completion of a Reg A offering does not automatically subject the issuer to 1934 reporting.
The dollar limit of a Reg A offering is $5 million in any 12 month period (of which $1.5 million can be sales by selling security holders). Also, Form 1-A allows the optional use of a "user-friendly" question and answer form (See SCOR below).
The new rules allow an issuer to "test the waters" before filing the offering statement. This means you can solicit indications of interest through the distribution or publications of preliminary materials. The materials are limited to factual information and must include a brief description of the company's business, the experience of the chief executive officer, and a statement that no money is being solicited or accepted. These solicitations of interest must be filed with the SEC on the date first used. Oral indications can be solicited but the solicitation materials must be discontinued when an offering statement is filed. Also, 20 days must expire between the use of the solicitation statement and the first sale of any securities.
The Form U-7, which is the basic registration/information form used in the SCOR (in some states, this is called Uniform Limited Offering Registration or ULOR) was adopted by the Securities and Exchange Commission in 1992. It allows a company to raise up to $1 million by selling securities. The disclosure statement (Form U-7) is considerably less complicated than standard disclosure forms and it is constructed in a question and answer format. Some states even offer it as a download.
The SCOR/ULOR process is touted as the simplest paper-work process used to complete an exempted offering. Still, it's an area that requires you to engage legal and accounting advice, although not to the extent of the other offering processes. Consequently, you can save some money in expensive professional fees, although we suggest that you should feel highly qualified in writing legalese. SCOR/ULOR offerings commomly receive a lot of scrutiny from state security commission offices.
