Most small to midsize businesses and joint ventures raise capital from investors through a private placement securities offering. A private placement is conducted when a business or joint venture makes an offering of securities (an offering of an equity or debt investment in or with the business or joint venture) to a small amount of investors (generally from 2 to 100 investors).
Although a broker dealer, registered investment advisor or other registered investment professional can be used to raise capital for these offerings, capital is most often raised in a private placement by the business’ or joint venture’s management with the amount of capital being sought averaging at about $1,000,000. The greater the amount of capital being sought, the more likely it is that a registered investment professional such as a broker dealer or a registered investment advisor will be needed.
The biggest advantage of a private placement is that if it’s organized correctly, it does not qualify for public federal securities registration with the Securities and Exchange Commission, an often expensive and lengthy process better suited for larger businesses and joint ventures seeking $50 million or more in investor capital. Overall, this makes them more cost effective for small to midsize businesses and joint ventures.
Another advantage touched on above is that private placements on average do not require a broker dealer, a registered investment adviser or another registered investment professional. This in general makes them less expensive and less time consuming, although as the amount of capital you are seeking starts rising above $1,000,000, the more likely it is you will need one of these investment professionals. Broker dealers, registered investment advisors and other registered investment professionals not only have fees that can add significant costs to the capital raise, they also have more thorough due diligence procedures and requirements that often add time and expenses to capital raises.
Another big advantage of a private placement is that it’s an option available when many other options are not. A private placement provides a significant advantage to new businesses or business ventures and businesses and joint ventures that are on the riskier side. Traditional financing is often not available to these types of businesses and joint ventures, available at bad rates or available on the condition that a certain amount of equity capital be contributed. Private placements are often a good way to finance a business or joint venture in these scenarios, and there are investors out there willing to finance a business or joint venture where a bank, a hard money lender and an institutional investor will not.
The biggest disadvantage of a private placement securities offering is finding suitable investors. Not only do the investors have to meet certain sophistication and/or income standards, there are also investor amount requirements and solicitation restrictions, which often adds a layer of difficulty for those who don’t have a suitable investor network already readily available. Also, just finding investors who can invest enough capital to fund the business or joint venture can be difficult. There are securities registration exemptions that ease this disadvantage, but the more capital being sought, the more this disadvantage comes into play, and it can make the private placement more expensive or even impractical.
Another disadvantage to a private placement is the potential that terms will need to be heavily in the favor of investors. As already mentioned, finding suitable investors can prove to be difficult for a private placement. This may lead to the need to make terms better for the investors to convince them to invest, which may be terms better than a broker dealer, registered investment adviser, institutional investor or any larger business may have to offer to raise the same amount of capital. Having a network of suitable people that meet the investor standards already interested in what you are selling or selling an investment that has a high return potential can ease the burden of having to offer these significantly better terms.
A private placement securities offering can be a great tool for small to midsize businesses or joint ventures seeking equity or debt capital from investors from the several hundred-thousand-dollar mark to the several million-dollar mark. The ideal securities exemption and structural strategies vary among business types, sizes and capital requirements, management experience raising capital and investor networks. Please call Dodson Legal Group for a consultation at 844-4DODSON for more information if you are looking to raise capital from investors for your business or joint venture.