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FREQUENTLY ASKED QUESTIONS
General Questions
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General Questions
- What is a Private Placement Offering (PPO)?
A Private Placement Offering (PPO) refers to any type of offering of securities to an unlimited number of private accredited and usually a limited number of nonaccredited investors. Securities offered through a private placement are exempt from registration with the Securities an Exchange Commission (SEC), provided that the appropriate offering documentation is prepared in compliance with Federal and State regulations (usually referred to as the Private Placement Memorandum or PPM).
To determine whether a private placement is a sensible strategy for your entity, you must:
a) have a fundamental understanding of federal and state securities laws affecting private placements; b) be familiar with the basic procedural steps that must be taken before this capital formation alternative is pursued; and c) have a team of qualified professionals to assist in structuring the appropriate offering type, offering terms and offering documentation.
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- Who must prepare a Private Placement Offering (PPO)?
Any entity seeking to raise equity or debt capital (regardless of amount), from multiple private investors in the US is required by the SEC to prepare a compliant offering. Whether you are raising $50,000 or $50,000,000, you will definitely benefit from the structure of a PPO.
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- What is a Private Placement Memorandum (PPM)?
A Private Placement Memorandum (PPM) is the document that discloses everything the investor needs to know to make an informed investment decision. This includes: the offering structure, the share structure of the company, SEC required disclosures about the securities being purchased, company information, information about company operations, risks involved with the investment, terms of securities being sold, management information, use of proceeds, information on certain transactions that could affect the investor, and investor suitability data. The PPM also includes the subscription agreement which is the actual "sales contract" for purchasing the securities. This is the document that the investor will sign and send in with their investment funds.
PPMs are designed as a stand-alone document - there does not need to be other information presented to the investor for them to make an accurate investment decision. Many companies will attach their business plans to the PPM as supporting documentation. This is an acceptable practice as long as the information in the business plan properly corresponds with the information in the PPM and the investor is made aware that the business plan alone does not constitute an offer to sell securities - only the PPM can make that offer.
It is imperative that you assemble a qualified team to assist you in the preparation of the documents and exhibits that will constitute the Private Placement Memorandum. Each transaction or proposed offering of securities must be carefully reviewed to determine the minimum level of disclosure required under applicable federal and state laws.
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- What should we be presenting to our investors?
The typical investor package should include the following items:
Summary Presentation: The summary presentation should resemble a power point version of your executive summary. This will serve as the first impression of your entity to the investor; therefore, it is important that this be done in a professional manner. Company overview, products, market, competition, summary projections and return on investment are all topics that should be addressed.
Private Placement Memorandum: This is the disclosure document that is required by the SEC and presented to investors. This document details all pertinent information about the offering, the company, management, use of proceeds, SEC legends, etc…
Financials: The financials should include all historical data as well as detailed three-year projections. Income statements, balance sheets and cash flow statements are normally provided. When possible, monthly pro forma information should be included for the first year.
Exhibits: Letters of intent, pending contracts, partnership agreements, news clippings and a copy of the business plan are all examples of valuable exhibits.
Subscription Agreement: This is the actual sales contract for the purchase of the stock or membership units. When an investment is made, you will receive a signed subscription agreement along with a check from the investor.
Investor Suitability Questionnaire: This is a basic questionnaire that queries the investor about certain financial data to qualify them as an accredited or non-accredited investor.
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- How will a PPO help our fund-raising initiative?
A PPO will allow you to swiftly penetrate capital markets in a sophisticated and legally compliant fashion while allowing your agreement with investors to be creative and confidential. Additionally, a private placement facilitates a rapid "Solicitation - Negotiation - Close" cycle.
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- Are PPO's appropriate for any industry?
A private placement offering can be tailored to meet the needs and requirements of most any capital needs. It is imperative to assemble a qualified team of professionals to assist you in structuring the offering type that will best suit your particular industry.
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- What is the success rate of private offerings?
PPO's are available to nearly any entity that has the practical or legal need to use them. The success of your PPO will entirely reflect the merits of the opportunity you are presenting. A private offering will not change a bad opportunity into a good one, but it will drastically enhance the capability of good opportunities to raise capital.
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- Will my company be a public company at the end of this process?
Absolutely not - you will still be a private company.
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- What are the related costs and fees to selling an offering?
The average commission offered to registered brokers for selling
securities is 10% (commissions are deducted from offering proceeds). However, you do not have to have a broker to sell your securities - as a principal of the company you can sell your securities directly to investors and bypass paying commissions to brokers.
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- Do I need to guarantee the invested capital?
No, individuals who invest in private placement offering do so because they feel the long term possibilities of the company are good and/or a profitable exit strategy will develop - i.e., the company will be acquired by a competitor at a substantial increase in stock value; the company will complete an IPO, or the company will be successful and produce a profitable return for the investor each year. Private investors are much less concerned about the traditional criteria for lending.
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- How much of my entity do I need to sell to investors and what type of return do they look for?
This depends on many factors, however most companies sell between 10-35% of their stock for a first round funding - less, if it is a second or third round situation. We will work you through a "projected income model" to establish your valuation which in turn helps to determine how much of the company to sell in an equity offering. Returns vary depending on risk.
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- Can we use the programs to raise capital for a real estate transaction?
Yes. Many real estate professionals and developers use the programs to raise equity capital and then utilize the enhanced balance sheet of the company post-offering to qualify for real estate loans. That is one of the critical advantages of raising equity - the investment is shown as an asset of the company (cash) rather than a liability as in debt arrangements. The programs are excellent for raising needed equity for re-hab projects, commercial real estate purchases, and real estate development.
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- What is the preferred corporate structure for an offering?
This depends on the type of transaction. S Corporations do not make good choices for PPO offerings simply because most States limit S Corporations on the maximum number of shareholders that can be in the company (usually 35-75).
Limited Liability Company "LLC" formats are popular with companies that have one-off type deals (film deals, real estate development, etc.) where there is a definitive end of the transaction, and with companies that are going to remain private and only need one or two rounds of funding. In an LLC the company sells a membership unit in lieu of stock - it is basically an ownership stake in the company, the same as stock ownership but with some "pass through" tax advantages at the corporate level.
C Corporations are the most used entity type because the C corporation structure provides for more flexibility in future rounds of funding and allows for the company to go public without the massive entity restructuring that would be needed in an LLC.
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- How do you market a Private Placement Offering?
PPO's are not necessarily marketed differently than any other type of investment opportunity. Companies that have Private Placements in place are much better equipped to interact with investors and accommodate their capital investment. There are some key marketing advantages to a PPO:
Internet Resources: The dawn of the Internet has created some excellent venues by which entrepreneurs can market their opportunities to investors. There are numerous online exchanges that cater to marketing deals to private investors. The companies that have the most success with Internet based marketing resources are the companies that have private placement offerings in place. Most of the Internet resources specialize in attracting investors with between $10,000 - $50,000 to invest. Thus - it becomes critical for the entity to approach these investors in a sophisticated manner and to be able to practically and legally accommodate their fractional investment.
Brokerage Resources: Brokerage firms do sell Private Placement Offerings. The offering is sold through the brokerages stockbrokers to investors just like an IPO is sold by a lead underwriter (like Raymond James).
Sphere of Influence Resources: Most entrepreneurs and growth companies have a wealth of potential investors all around them. The problem is that when these companies just use a business plan to seek capital they get into a "one big investor" mentality that blinds them to the potential resources in their midst. Since a business plan cannot provide the practical, efficient, or legal capability to raise capital from numerous investors these companies typically miss out on excellent resources for capitalization. With PPO everyone becomes a potential investor: customers, accountants, lawyers, employees, trade groups, local stockbrokers, members of the chamber of commerce, etc.
The key thing to remember is that a PPO is the practical and legal method used to solicit and accommodate investment from individual investors. Where you locate investors is actually secondary to being able to properly accommodate their investment in the first place.
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- The PPO process seems overwhelming.
GemStone Equity Advisors will provide assistance to your entity by evaluating the benefits and potential pitfalls of the various offering types available to your corporate structure. Additionally, we will work closely with management to create offering terms that satisfy the expectations of potential investors and your entity. Once completed, GemStone Equity Advisors will prepare and file all necessary documentation so you can begin to raise the capital you require.
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- What determines the maximum amount of dollars we are able to raise?
In order to ascertain the amount you're capable of raising, a current valuation must be established for you entity. GemStone Equity Advisors will provide an understanding and substantiation of your entities current value and help to identify immediate opportunities to increase that value.
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- How long does it take until the offering is ready to be marketed to investors?
Working collaboratively with you, GemStone Equity Advisors can complete most offerings with in a forty-five day period.
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- What about compliance requirements?
GemStone Equity Advisors will complete all applicable state and federal filings and assist you in other related compliance issues.
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- What are related costs and fees to preparing an offering?
Offering related expenses can be broken down into two categories:
- Preparation of Legal Documentation
- Private Placement Memorandum
The fees associated with structuring and completing the PPM can vary greatly depending upon the complexity of the offering and the expertise and resources of your entity.
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