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Capital Ideas for Private Business

Access to Capital - Is There a Private Placement In Your Future?

By Craig Allsopp, Managing Director
Portland Office
Corporate Finance Associates

When sports camera maker GoPro went public over the summer the company sold 8.9 million shares to raise more than $255 million at a price of $28.65 per share.

The company’s stock has nearly tripled in price since, turning early investors and executives into millionaires and providing even more capital to fund growth and expansion.

If only accessing investor money was that easy for most companies.

Ask the CEO who lives down the street and you will probably get a frustrated sigh. The bank will only lend so much, and most other capital sources are simply too hard to find.

But thanks to recent legislation and new business models, the landscape is changing. The JOBS Act passed two years ago removed some of the regulatory burdens while new online marketplaces seek to make the $1 trillion private capital market more efficient.

The new marketplaces, including startups ACE Portal and FNEX, aim to help companies across market sectors issue securities in private placements and more easily reach accredited investors (those with a net worth of $1 million or more) interested in alternative investments.

Typically companies issuing private securities need to raise at least $1 million, with most seeking $5 million to $25 million of new investment to accelerate R&D, enter new markets or to make acquisitions. Some companies set low price thresholds to attract multiple investors while others require investments of $50,000 or more to limit the investor pool.

Breaking it down, any company seeking debt or equity may qualify for a private placement. Start up and fast growing companies often will sell equity (shares of stock) to preserve cash, while more established companies might choose to issue debt and cover interest payments from cash flow.

Though relaxed by the JOBS Act, federal and state securities regulations still apply to private placements and companies issuing these securities must follow rules covering, (1) the offering size, (2) the number of investors allowed and (3) whether advertising to the general public is permitted.

Once an owner determines a private placement is the right approach, there are three core documents needed for an offering. All are best prepared and reviewed by qualified professionals including a transaction attorney and licensed investment banker. These include:

Private Placement Memorandum: Also known as a PPM, the private placement memo provides information investors need to know to evaluate an offering. This includes details about the company and its products as well as its financial performance, planned use of proceeds and potential risk factors.

Subscription Agreement: This is the "sales contract" for purchasing the securities being offered by the issuer. It is important for the subscription agreement to clearly spell out the terms of the transaction, including percentages, dollar amounts and any interest payments that apply.

Form D SEC Filing: The Form D Filing notifies the SEC that you are selling securities under the Regulation D exemption and provides regulators with basic information about the company and the private placement offering.

Besides individual investors, private placements are also of interest to institutional investors who manage funds to make debt and equity investments.

Phil Curatilo, a principal at Cyprium Partners in Cleveland, reviews as many as 300 potentials deals a year from companies seeking funding.

Curatilo recommends owners develop a detailed plan well before they need capital because it can take six months to a year to complete a successful raise.

“Sit down with your investment banker and understand what’s going on in the company and the market,” he says. “Then consider a range of options and be flexible.”

It seems no one size fits all when it comes to raising debt or equity.

“Most deals are structured on the fly,” he says. “There is lots of tweaking going on.”

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