June 13th, 2021
According to U.S. Securities and Exchange Commission (SEC) recent publication, “Division of Risk, Strategy and Financial Innovation (RSFI), each year somewhere between 15,000 – 25,000 businesses, small companies, or individuals raise private capital (on average amount or mean average) between $28m-$31m per funding, although most funding capital raised (in terms of actual number of funding) are between $1-$1.2 million.
Based on this publication, it is easy to calculate that between 2009 and 2019 (in only 10 years), some 200,000 businesses and startup ventures raised money through a private financing method.
Since the (mean) average relatively high capital funding has been around $30m, the numbers show that – in fact, private financing is ideal for those that are looking for $1-$2m funding strategies, as these seem to be, by far, the bulk of the funding sizes. Based on this fact, this type of funding for raising startup capital seems to be an ideal strategy for small businesses and startups.
So why only approximately 200,000 startups/businesses opted for this flexible private financing strategy?
Well, couple of reasons:
1. For those that know or hear about it, the lingo about this kind of financing strategy is unfamiliar so they shy away from it and can’t imagine how they could implement and execute such financing strategy, Or,
2. They just don’t know about it, so they stick to more traditional financing strategy.
In most cases, it is a combination of both above.
Many business owners and startup entrepreneurs are unaware of alternative, creative, and flexible financing methods. These types of methods are often clouded by fancy legal phrases, hard to understand lingo, and sometimes even involve the SEC, and their guidelines, regulations, and/or federal laws. To add to the complexity, the whole process confounds the mind when you add to all this, the fact that each State in U.S. has its own state securities laws, and how each interprets the Federal (SEC) laws, and how these are applied to residents in their state who would be your potential investors.
One of the legal stipulations regarding sale of company shares (securities) is that, “it is unlawful to sell shares of a company to any person or persons, directly or indirectly, unless the registration statement, or an exemption from registration, has been filed with the Federal (SEC), and local state securities officials”.
But is this really a hard thing to do? How much does it cost to make a filing? Do you need a lawyer? What is involved in all of this?
I have done this myself a number of times which including filing with SEC, and local State Securities Divisions. I have also been consulting with more than 150+ companies in the last 15 years regarding such private financing strategies.
Having done them myself for my business ventures, gave me a valuable insight into how these work, what are the obstacles and challenges, and how easy/difficult these can be.
Overall, I would say, it is easy if you understand the entire process, and what you need to do, and what you MUST ABSOLUTELY NOT DO. The “NOT DO”, is really the essential part.
But I have to admit, I find this type of private financing easy to do. Any many people have disagreed with me in the past, and have said that they tried and they did not understand how to proceed and get to the end and raise capital.
My most important suggestion is to find someone who is truly knowledgeable and knows how to do this and hopefully they have “ACTUALLY” done this before, and done it successfully. This individual can help you understand and plan for the entire process, from the beginning to the end.
Private financing really starts with a ‘good’ business plan. This plan needs to describe the key products or services, the main differentiation and strengths versus the competition, pricing and promotional strategies, marketing and campaigning, goals and objectives, and the key management. The people behind the company is often very important, and there needs to be a bio section on the key management team. These are the individuals who are entrusted with the money raised to bring the goals of this venture into fruition.
There are two important things to be very much aware of, during the entire process of filing and raising capital:
1. Accredited Investors
2. Number of individuals/entities participating in purchase of these offerings
Let’s start first by explaining what is an accredited investor.
These are individuals or entities that are regarded as “somewhat sophisticated” investors. How does SEC define such accredited investors? Well, here’s the list of who is regarded as “accredited investors”:
a) Directors and officers of the company raising capital
b) Individuals whose net worth exceeds $1 million (that is some 12 million Americans currently)
c) Individuals whose income exceed $200,000 annually (in the past 2 years, and expecting to be so in the next financial year)
d) Individuals whose joint income with their spouse exceeds $300,000 for past two years.
e) “institutional accredited investors”, i.e. small investment companies (SBICs), insurance companies, savings and loan, credit unions, banks, corporations with total assets in excess of $5m, financial brokerage firms, registered investment firms, small investment companies (SBICs), and even some others.
You should also have the investor attest in writing that they are indeed an accredit investor, to avoid major issues in the future. Although, it is always your responsibility to prove that you reasonably believed they were an accredited investor.
The second important thing to consider, is the number of individuals/entities you can sell shares to and raise capital from. Here’s an important distinction many startup CEO’s miss out on and somehow not quite understand.
In simple terms, in a few of the SEC private financing methods, you are allowed to raise capital from bonafide/legitimate accredited investors without limitation on the quantity. Yes, again, the limit on the number of purchasers of your shares/stocks does not include ‘accredited investors’ and you can sell to as many as you want (or is as realistic).
There are other conditions, for instance, you can raise capital one time in a 12-month period. Some have limitations of $1 million and others are as much as you want (yes, unlimited). The number of investors (non-accredited) varies with how much capital you want to raise.
In conclusion, in 1980s, the SEC came up with a simplified method for small businesses to file for raising capital and facilitated the process for selling shares by a small company or startup to raise capital for their business financing. The most advantageous part of this process is that the buyer and seller of these shares for investment in a new venture, can perform the transaction as soon as they are ready. This eliminates the necessity for preparing and filing complexities, and saves legal and accounting costs.
There are a few other issues regarding intrastate financing (raising capital from residents in other states), and rules regarding advertising and/or solicitation or “generally solicit” practices that need to be adhered to. However your private venture financing consultant will discuss these with you in much more detail.
Again, since I have done this a few times myself, I find the process somewhat easy for me. I understand those that disagree with me and say that they did not find it as easy.
You may just find this to be one of the most flexible financing strategies that best meets your circumstances.