Your company has created a product or service and is marketing it with some degree of success. Yet, you are short of the funds needed to continue to grow your business. This is a common dilemma for small and large businesses alike. Frustrated with trying to raise expansion dollars through banks and venture capitalists, more small companies are turning to private placements-offering shares of the business for sale to a small pool of investors.
As long as you maintain control of the business (a minimum 51% equity stake), a private placement can be a viable avenue to take. In most cases, a company will sell 20%-35% ownership and offer a greater than 20% return on investment (ROI), says James Liggett, portfolio manager with New York-based Hunter Financial Services, a firm that specializes in developing business plans for companies seeking equity financing.
Many companies seeking $1 million or less use the Small Corporate Offering Registration (SCOR) form, which is a standardized question-and-answer disclosure document, according to The SCOR Report, the Dallas-based industry newsletter (972-620-2489). SCOR guidelines fall under the Securities Exchange Commission’s Regulation A and D, Rule 504. Under Regulation D, Rule 504, you may raise up to $1 million within a 12-month period. You don’t have to report the sale to the SEC, but you must obtain clearance to sell in the state. There are no limitations placed on the number of people purchasing shares. And solicitations may be made through traditional advertising.
Under Regulation A, entrepreneurs may raise up to $5 million in any 12-month period and must file certain disclosure information with the SEC and every state in which the company hopes to sell securities.
You can write a private placement memorandum yourself or with the aid of an investment bank. Selling stock in your small enterprise is no different than selling stock on the New York Stock Exchange in that the price is determined by profit potential, not asset value. If individuals believe they will make an attractive return on their investment, they will buy stock in your company.
Typically, SCOR offerings are priced at $2-$5 per share, and most companies require a minimum investment of $500-$1,000. Shares can be offered as common stock, preferred stock or debt securities (loans).
There are at least five steps you’ll need to follow to do a private placement:
Step one. Develop or update your business plan (see “BE Entrepreneurial Workbook Series,” Enterprise, September 1997-April 1998). You must have all the key elements, including a mission statement, product/service description, competitive analysis, market potential, management and organizational plan, income statement, balance sheet, plus three- to five-year projections on cash flow and profit and loss.
Step two. Create a financial budget. You can expect to spend at least $15,000-$50,000 for a small private placement to raise up to $1 million.
Step three. Write a prospectus. This document must be given to prospective investors and must spell out how the stock is to be sold and how the money will be used to achieve the objectives of the business plan.
Step four. Develop