Is a private placement in your firm’s future?

A new law and new platforms enable companies to more easily issue securities and reach a larger pool of accredited investors

When camera maker GoPro went public on June 26, the company sold 8.9 million shares to raise more than $255 million, valuing the company at some $4 billion at the end of trading.

Raising money is a different ballgame for most companies. The bank will only lend so much and excess earnings usually aren’t enough to cover a major expansion or fund an acquisition.

But thanks to recent legislation and emerging business models, the landscape is starting to change.

The JOBS Act, passed two years ago, removed some of the regulatory burdens while new technology platforms are evolving to make the $1 trillion private capital market function more efficiently, like public stock exchanges.

The new platforms, including one backed by the New York Stock Exchange, are designed to enable companies to more easily issue securities — a private placement of debt or equity — and reach a larger pool of accredited investors (those with a net worth of $1 million or more) than ever before.

Companies using the platforms include software startups seeking capital to fund development, medical device manufacturers hoping to commercialize new instruments and real estate developers financing new projects.

Typically, issuers are trying to raise $1 million or more, with most seeking $5 million to $25 million. The issuer determines the minimum investment size, with thresholds as low as $2,500 and as high as $1 million.

“The rate at which accredited investors and issuers are embracing [our] marketplace is encouraging,” says Todd Ryden, founder and CEO of FNEX, a private placement platform based in Indianapolis, launched last year.

Breaking it down, any company that needs to raise debt or equity is a candidate for a private placement. Startup and fast-growing companies typically sell equity to preserve cash, while more established companies might issue debt because they are able to make interest payments from cash flow.

But while relaxed by the JOBS Act, federal and state securities regulations still apply, and issuers must be careful to comply with anti-fraud rules and regulations covering the size of an offering, the number of investors allowed and whether general solicitation to the public is permitted.

Business owners considering private placement will be well-served to consult with an experienced attorney and a licensed investment banker first.

Once an owner determines a private placement is the right approach, there are three core documents that need to be prepared to facilitate an offering. All need to be prepared and reviewed by qualified professionals. These include:

• Private placement memorandum: Also known as a PPM, spells out everything investors should know prior to investing. This includes details about the company and its products as well as its financial performance, planned use of proceeds and potential risk factors facing the company.

• Subscription agreement: This is the “sales contract” for purchasing the securities being offered by the issuer. This document must 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 offering.

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

Phil Curatilo, a principal at Cyprium Partners in Cleveland, is one of those investors. Cyprium screens and reviews as many as 300 deals a year as part of its investment search process. He 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.”

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 often is lots of tweaking going on.” nhbr

Craig O. Allsopp, a licensed investment banker with Corporate Finance Associates, can be reached at callsopp@cfaw.com or by calling 603-676-6005.