Fund, Fund Me Do!!

by Keith Basik on June 27, 2012

Sure it is a play off of The Beetle “Love, Love Me Do” song.  Yet, the Fund, Fund Me Do also wholes true.  In order to do what you want to do, funding, funding is required. No if, ands or buts about it. Funding is a top priority in the business world.

In this blog, I will talk briefly about the first of the third party, equity financing sources. The others will be discussed in subsequent blogs:

Third Parties:

  1. Private Placements
  2. Private Equity Groups (PEGs)
  3. Venture Capital (VC)
  4. Angels
  5. Hedge Funds

Private Placements:

There are two primary ways for a company to legally sell their securities to investors:

  1. Initial Public Offering (IPO):  The transaction must be registered with the Security and Exchange Commission (SEC) when a company goes public.
  2. Private Placement.  The company must be exempt from SEC registration, often referred to as a private placement or limited stock offering.

Focusing on Private Placement, there are two questions to initially ask: Is it being offering within the state (intrastate) or outside the state (interstate).

If there placement is “intrastate,” there are three broad exemption from registration by the SEC:

  • Regulation D, Rule 504 provides an exemption from the registration requirements of the federal securities laws for some companies when they offer and sell up to $1,000,000 of their securities in any 12-month period.  A company can use this exemption so long as it is not a blank check company and does not have to file reports under the Securities Exchange Act of 1934. Also, the exemption generally does not allow companies to solicit or advertise their securities to the public, and purchasers receive “restricted” securities, meaning that they may not sell the securities without registration or an applicable exemption.
  • Regulation D, Rule 50 allows some companies offering their securities to have those securities exempted from the registration requirements of the federal securities laws. To qualify for this exemption, a company:
  1. Can only offer and sell up to $5 million of its securities in any 12-month period;
  2.  May sell to an unlimited number of “accredited investors” and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions;
  3. Must inform purchasers that they receive “restricted” securities, meaning that the securities cannot be sold for six months or longer without registering them; and
  4. Cannot use general solicitation or advertising to sell the securities.
  • Regulation D, Rule 506 is considered a “safe harbor” for the private offering exemption of Section 4(2) of the Securities Act. Companies using the Rule 506 exemption can raise an unlimited amount of money. A company can be assured it is within the Section 4(2) exemption by satisfying the following standards:
  1.  The company cannot use general solicitation or advertising to market the securities;
  2. The company may sell its securities to an unlimited number of “accredited investors” and up to 35 other purchases. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;
  3. Companies must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well;
  4. The company must be available to answer questions by prospective purchasers;
  5. Financial statement requirements are the same as for Rule 505; and
  6. Purchasers receive “restricted” securities, meaning that the securities cannot be sold for at least a year without registering them.


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