Accessing The Private Market For Capital

Banks are like a pendulum – they swing from one extreme to another without spending much time in the middle. After several years of aggressive lending, banks are pulling in their horns and battening down the hatches. The consequences are felt by businesses of all shapes and sizes, but smaller businesses are hurt more. Access to capital means being able to finance working capital, buying equipment, or financing an acquisition. When the banks get more risk adverse, capital becomes dearer.

One of the ways to address banks’ decreased risk tolerance is to bolster the company’s balance sheet with more capital. This certainly is the case for acquisitions. Banks will require more equity to support a transaction.

But what do you do if you do not have the money to firm up the capital structure to convince the bank to lend? You could walk from your plans, but if growing your business, purchasing that new piece of equipment or making that acquisition is the right thing to do for your business, then you must find another way.

Accessing the private capital market is an alternative. What do I mean by private capital market – I mean tapping into the vast amount of capital available from private investors. Just like investor preferences in public stocks and bonds, private investors come in all shapes and sizes. Whether you are seeking debt financing or equity financing, you will be able to identify investors that are looking for investments that line up with your offering.

Fortunately, there are what is called Reg D exemptions under the Securities Act of 1933 that allow small businesses to issue securities to private investors. Reg D spells out the circumstances under which smaller companies can offer and issue securities without having to register them with the SEC. These exemptions make the regulatory part of issuing securities considerably more streamlined than if Reg D did not exist.

The various rules under Reg D include Rules 504, 505 and 506. The general application of the different Rules is a function of how much money is being raised:

- Rule 504 applies to offering up to $1,000,000
- Rule 505 applies to offerings from $1,000,000 to $5,000,000
- Rule 506 applies to offerings in excess of $5,000,000

Part of the process of issuing securities under Reg D is preparing a private placement memorandum, or “PPM”. This document presents the transaction to the prospective investors with all of the information an investor would require to make an intelligent decision on your offering. For you, the issuer, preparing an accurate private placement memorandum and complying with the requirements of Reg D will provide the issuer’s officers and directors some liability protection regarding disclosure.

You have a couple of choices when it comes to writing your PPM. One is to have a securities attorney draft it. Hourly rates for securities attorneys will vary depending on experience and location; however, it would not be unreasonable to pay $300 per hour for a good securities attorney. At 40 hours to complete your PPM, you can expect a $12,000 legal bill just to draft your PPM.

The other option is to do 98% of the work yourself. But how you ask? Work from a professionally prepared private placement memorandum template. In most cases, if you can use Microsoft Word, you can edit the template. A professional template will include disclaimer legends; a summary of terms; risk factors; a discussion of the company including products, customers, market, industry and competition; capital structure; forward looking statements disclaimer; tax discussion and more.