Companies seeking to raise capital from a small group of investors can benefit from a private placement offering. Private placements, or nonpublic offerings, are governed by Securities and Exchange Commission (SEC) Regulation D. This regulation spells out the rules for issuing securities without having to register those securities with the SEC. Regulation D rules allow for faster funding while significantly reducing transactional costs typical of public offerings.
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SEC Regulation D
The Securities Act of 1933 states that companies using a Regulation D exemption do not have to register the securities with the SEC. Instead, they must file a document known as "Form D" after they first sell their securities. Form D is a short declaration of exemption that includes the names and addresses of the company's executive officers and stock sellers and little else except the "exemptions and exclusions" claimed. Form D lists 20 possible exemptions and exclusions, one of which must apply to the issuing company to qualify for the Form D exemption. These exemptions and exclusions are not written in plain English for a layperson to understand. An attorney trained in securities law is needed to decipher their meaning.
Private Placement Memorandum
The market for private placements is comprised of institutional, venture capital and other sophisticated investors. Sophisticated investors expect ample documentation to make an informed investment decision. The private placement memorandum (PPM) serves this purpose. The PPM is essentially a free-standing document that constitutes an offer to sell securities. It is complex document, which is best left to a securities expert such as a securities attorney or a PPM specialist for preparing. As a legal document, it protects the business person if the investment turns bad. It also provides the investor with the conceptual framework for how the deal is structured, the risks and the actual mechanism for concluding the investment transaction.
The Business Plan
It is a common practice for companies to attach the company business plan to the PPM as supporting documentation. The business plan however is not the PPM. It is separate and distinct from the PPM. Unfortunately, entrepreneurs and small businesses tend to rely on the business plan as their sole documentation when raising capital, frequently with disappointing results. The business plan is vital as an internal company working document that serves as a road map of the company's plans, strategies and tactics for future growth. It is also quite useful to prospective investors in facilitating a comprehensive understanding of what the company is about when attached to the PPM.
Business Plan Limitations
The entrepreneur is severely handicapped in approaching sophisticated funding sources when equipped with only a business plan. The business plan does not contain the investment details sophisticated investors need to make an informed decision. Consequently, investment bankers, institutional investors and most venture capitalists will be reluctant to consider an investment proposal in the absence of a PPM. The business plan works in synergy with the PPM to provide a composite picture of the company and should only be used in conjunction with the PPM.
Raising capital is time-consuming, frustrating and frequently disappointing. For example, most venture capital companies receive thousands of business plans each year and may invest in only a few. Many business propositions are clearly not worthy of consideration. There are also many business propositions that do not get the proper attention they deserve because they lack proper documentation. Entrepreneurs and small business owners on the hunt for investment capital should definitely consider an SEC Regulation D Offering with the knowledge that proper documentation is essential. This includes the Private Placement Memorandum.
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