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Does Your Company Need Capital?

Guest post by: Ken Hollowell

Article Overview: Raising capital can be a nightmare if you don't understand how it's done.

Does Your Company Need Capital?

If you are considering raising capital for your project, concept, startup business or existing business, I want to share one of the best kept secrets in funding. Anyone who is considering starting a new business must analyze the cost and expenses associated with the startup operations. For the business owner who wants to expand an existing business that requires additional capitalization also needs to weigh the various costs and liabilities associated with funding. Being undercapitalized is one of the most common mistakes business owners make. Attempting to work on a financial shoe string is not only stressful but can impede the growth of the business for years. The very first step that most companies take when seeking private capital is the creation of an executive summary and/or a business plan. While executive summaries and business plans are an important facet of raising capital they are not designed to be investment documents.

Executive summaries and business plans typically just provide general information about the company, its business model, goals, etc. While this information is important to investors, it does not provide a basis or structure for accepting capital investment.

A business plan does not allow a company to accommodate multiple individual investors. Most business plans state an aggregate amount of funding needed, "$500,000" for example, but provide no structure to allow for fractional investment. This means the company must find one single investor with $500,000 to invest - and the patience to develop the transaction structure and documents to process that investment. This limitation is probably the single biggest reason why so many companies fail at raising investor capital. Raising capital effectively and properly from investors requires very specific documentation that far surpasses what a business plan provides.

Public companies don't raise capital from investors by putting a business plan in front of them. If you wanted to invest into Dell Computer - do you think Dell would send you a business plan to process your investment? Of course not - you would invest into Dell Computer through a securities offering. The same holds true for private companies seeking capital from investors. Don't expect an investor to invest unless you have presented them with a securities offering. Business plans serve a purpose (especially for start-up companies) - but they should not be relied upon as investment documents.

Here is the "Best Kept Secret in Funding." The Regulation D series of funding can allow you to legally in compliance with Security & Exchange Commissions laws raise the funds necessary for your business with a short period of time. Whether it's a few hundred thousands of dollars or millions, there is a Reg D to answer your requirements.

If you intend to offer equity in a privately held company such as a corporation or limited liability company, then you must have the proper exemption from the Securities & Exchange Commission or you'll be in violation of offering securities. The Reg D series of private placement offerings are the exemptions. For individuals needing $1 million or less, the Reg D 504 Private Placement Offering is ideal. It's very cost effective and easy to comply with only a few restrictions. For those needing over $1 million, the Reg D 506 is commonly used.

Procedures in Preparing to Fund Your Project or Business

From the early 1980's when I first began assisting business owners in the preparation of their private placement offerings, I've tried to make the process simple for all of my clients, even though it is very complex and can be confusing. These are the areas for discussions:

Understanding the Basic Concept of the SEC Regulations

A privately held company is prohibited from using its corporate stock or LLC membership units to raise money unless it has the appropriate exemption. The SEC Reg D series of private placement offerings are the exemptions.

Do You Have the Proper Business Entity?

Depending on what your intentions are in the future will often determine the type of business entity to form. This is one of the most important discussions in the beginning. The wrong business formation could be frustrating later. Do I form a Corporation or use a Limited Liability Company?

If a LLC is being used, then you must have the current operating agreement available.

Do You Need a Business Plan?

Whether or not a business plan is required will depend on which Reg D offering is being prepared. In some instances a thorough executive summary may suffice.

Preparation of the Private Placement Memorandum

Usually a questionnaire is sent that you will need to answer the various questions. Your input is necessary in the development of the memorandum. For Reg D 504 offerings, preparation time is usually 2 weeks, for all others 3 weeks.

Preparation of the Promotional and Marketing Tools

Standard promotional and marketing materials consist of a power point presentation that explains a private placement offering and materials that can be e-mailed out such as an HTML Campaign banner.

Consultation on Methods, Techniques and Procedures for Marketing the PPM

There are at least 7 different methods used in reaching out to potential investors beyond your contact with friends, relatives & family members.

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Article Tags: funding, memorandum, ppm, private placement offering, raising capital, raising funds



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