When most people think about raising money from investors, they often first think of public offerings (the stock market and initial public offerings (IPOs)) and secondly, they often think of it as an equity (or ownership/profit interest) investment. However, there exists both equity and debt offerings. Debt offerings are just what they sound like. Instead of selling an equity interest in the company, the company is selling a debt (promissory note/bond/debenture) investment.
The equity offering is the most common type of securities offering. In these offerings, the company is usually selling stock (corporations), membership units/interests (limited liability companies) or limited partnership units/interests (limited partnerships). In the public market, they’re often structured as corporations. In the private market, they are most often structured as limited partnerships and limited liability companies (with limited partnerships being the traditional method and limited liability companies being the more up to date method).
The investor in an equity investment typically receives a form of ownership in the company. Investors in an equity offering generally have voting rights, although they may also be non-voting interest holders. However, these investors may also be profit interest holders or interest holders with limited or short-term ownership rights, such as the right to inspect books and records, receive distributions and vote in a capital call. Equity investors may also have certain preferred distributions, such as an annualized return hurdle or a preferred return which function like the interest rate on a loan.
Debt offerings do not involve anything resembling an equity offering. The legal way of saying what a debt offering is would be to say that you are offering a promise to pay. In other words, you’re borrowing the money from investors, with an interest payment like any other debt. These debt offerings can involve the sale of promissory notes, bonds and debentures. Debt offerings are subject to the same securities laws as equity offerings, both at the federal and state level.
Investors in a debt offering are lending money for a return of principal and some form of interest payment. The interest payments can be structured on any payment schedule, whether quarterly, monthly, bi-yearly, etc. There can be exit fees, balloon payments and virtually any other term that you would see as part of a normal debt. All investors in a debt offering may be purchasing the debt interests at the same terms, or different terms and in the same investment, or in different investments, all based on the terms of the offering. An investor should find most of this information, such as interest rates, type of debt purchasing, maturity dates, fees, etc., by the time they make their deposit.
Different Types of Investors
Equity offerings and debt offerings are at their core offered to different types of investors. Some investors feel safer investing in a debt offering while some find the potential of an equity offering investment’s returns, even though often riskier and often involving a longer investment commitment, more attractive. If either a debt offering or equity offering interests you, please give Dodson Legal Group a call at 844-4DODSON for more information.