About the Report

Profran Capital Group is a specialist in funding methods and techniques that specializes in working with entrepreneurs and small business owners in multiple industries.

Since 1980, Ken Hollowell, President & CEO of Profran Capital Group has assisted clients in raising more than $2 billion in capital. The following information is provided to help you understand many of the myths that exist surround raising capital and information about private placement offerings.

If you are seeking assistance with a private placement offering, please do not hesitate to contact us at 407-363-3545, and/or write us at info@profrancapitalgroup.com.

The following are some of those MYTHS and MISTAKES:

Mistake #10: Believing That You Don't Need a PPM to Raise Capital

If you are raising capital from an individual, as opposed to an institutional (a bank, or venture capital or a private equity fund), then to comply with SEC and state securities laws, a PPM may be required. But even if not, you need one for legal protection. A business plan is a component of a PPM, but in and of itself does not provide sufficient risk disclosures.

Mistake #9: Assuming That a PPM is ALL You Need to Raise Capital

The old joke on Wall Street is that a prospectus (another name for a PPM), is actually Latin for "that which is not read." A PPM, because of its somewhat ominous structure and exhaustive risk disclaimers, is in many ways a document that highlights everything that can go wrong. As such, it needs to be supplemented by more promotional-focused materials, such as an executive summary, a PowerPoint, and/or multimedia including a website and/or a video presentation of the investment opportunity.

Mistake #8: Providing Insufficient Disclosures

Poorly prepared PPM’s often have only "template" risk factors such as disclosures regarding liquidity, dilution, management dependence, the need to raise more capital, etc. While these somewhat formulaic risk factors are included in all PPM’s, they must be supplemented with more directly relevant and material risk factors for the specific business raising capital. These can include disclosure of matters such as the outstanding debts of the enterprise, the specific competitive threats to business success and investment return, and the to-be-met technological/implementation roadblocks the firm faces.

Note: Often over-looked by filers are the required disclosure and investigation requirements of the Patriot Acts and Anti-Terrorism Acts of 2001. While most issuers consider these tangential concerns, it is an area that regulatory agencies have paid far closer attention in the last few years, and have fined issuers significant sums for insufficient disclosures/safeguards.

Mistake #7: Not Filing Notice of the PPM with the Appropriate Regulatory Agencies

All Regulation D private placement offerings need to be filed with the Securities and Exchange Commission and in any state where the offering is made. It is important to both properly fill out the various regulatory disclosure documents as well as to meet the time filing requirements for the various states.

Mistake #6: Publicly Advertising a Private Offering to Potential Investors

Your success in raising a private placement round - in terms of fundraising as well as legal liability - is not only affected by how you create the PPM, but also by how you market your opportunity.

Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. The most common vehicle is Regulation D, which is a limited offer and sale of a company's stock or securities without registration under the 1933 Act.

Regulation D contains three rules providing exemptions from the registration requirements: 504, 505, and 506. Two of these rules - Rules 505 and 506 - of Regulation D specifically prohibit general solicitation or advertising to sell the securities. If you advertise your opportunity, you may turn your private offering into a public one, which then defeats the exemption and may require registration and/or return of investors' money.

This means that you cannot advertise your offering in the newspaper, TV, or radio. Instead of generally advertising an investment opportunity, issuers are required to limit the marketing of their opportunity to people with whom they have a pre-existing business relationship.

If an issuer does not have a per-existing network of prospective investors, the company can demonstrate such a relationship through a "finder" that is acting on behalf of the issuer.

Mistake #5: Using Unregistered "Finders" to Market Your Offering

In order to broaden their network of potential investors, issuers will often use "finders" or intermediaries to help promote their offering.

Whether or not these finders are compensated, they are technically acting broker-dealers, and problems arise when such intermediaries are unregistered with the Financial Industry Regulatory Authority (FINRA). It is unlawful for an individual and/or firm to conduct business as a broker-dealer without holding a license and this activity can result in criminal and civil penalties.

More importantly, the company who hires an unlicensed broker puts its private placement in jeopardy. The company faces a significant risk of rescission of the transaction by the purchaser, whereby the purchaser may "cancel" the sale and have its funds returned by the seller.

In order to avoid the risk of rescission and the accompanying litigation, the safest course is to work exclusively with registered broker-dealers.

Mistake #4: Selling Securities to Unaccredited Investors

The various rules under SEC Regulation D proscribe very specifically regarding the investor accreditation requirements for various types of offerings. Depending on if it is a 504, 505, or 506 offering, either the offering has to be made to only accredited investors, or to no more than a specifically prescribed number of unaccredited investors.

What is an "accredited" investor?

When marketing to individual private equity investors (e.g. "angel" investors), the following two definitions of accredited investor apply:

1. A person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase; or,

2. A person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or

By restricting your private offering to accredited investors, you help ensure that you retain your exemption status.

Limiting your offering to accredited investors is beneficial both from a fundraising and legal liability perspective. Accredited investors are capable of investing larger sums, they tend to be more familiar with the risk and liquidity associated with private equity investments, and they are a better financial position to withstand a potential loss of investment.


– Ken M. Hollowell, founder of both Prfran Consultants, Inc. and Profran Capital Group, Inc. and is a leader in the field of franchise development and non traditional methods of raising capital since 1980. Ken Hollowell has lectured before many business organizations, Universities and Colleges on the subject of franchising and hosted a radio talk show of radio for years.

Ken Hollowell conducts numerous seminars annually on franchise development and investing in a franchise bus...

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