campaign to raise capital and securities laws

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Campaign to Raise Capital and Securities Laws. New venture financing. The campaign to raise capital. The vast majority of funded deals using venture capital follow this course of events: Set funding objectives Prepare the plan to attract investors Pick the best capital-raising strategy - PowerPoint PPT Presentation


Securities law and private financing

Campaign to Raise Capital and Securities LawsNew venture financingThe campaign to raise capitalThe vast majority of funded deals using venture capital follow this course of events:Set funding objectivesPrepare the plan to attract investorsPick the best capital-raising strategyAssign tasksLaunch the campaignMake presentationsIncorporate feedback from presentationsThe campaign to raise capitalModify plan but maintain visionDue diligenceThe lead VC says We will invest!Closing the VC contractClosing weekCash in the bankThe Road ShowDefinition: a presentation by an issuer of securities to potential buyers The term road show applies to the presentations management gives to analysts, fund managers, and potential investors around the country when they want to issue securities or do an initial public offering (IPO)The road show is intended to generate excitement and interest in the issue or IPO, and is often critical to the success of the offering.Also known as a "dog and pony show."

1994: Netscapes Road ShowNetscape files to go public on June 23, 1994Overwhelming reception on the road suggests a bubble psychology is taking over the investment communityInstead of meeting with 3-4 analysts from a given institutional investor in each city, Netscape got 50-75 at their presentations most wanted to understand the InternetInvestors didnt want to miss the next Microsoft

Chips and Technologies

Chips and TechnologiesFirst products

EGA = Enhanced Graphics Adapter. EGA produces a display of 16 simultaneous colors from a palette of 64 at a resolution of up to 640350 pixels. Yes, its now obsoleteHeres the full 64-color EGA palette

Chips and Technologies Financing

Chips and Technologies Equity Ownership

Chips and Technologies Equity Ownership

How do they figure out valuations? Angel investor valuation techniques for seed stage companiesCost-to-duplicateMarket multipleDiscounted cash flowValuation by stage (milestones) how much it would cost to build another company just like it from scratch the idea is that a smart investor wouldn't pay more than it would cost to duplicate. The cost-to-duplicate a software business, for instance, might be figured as the total cost of programming time that is gone into designing its software.Problem: Doesnt reflect future earnings potential of company and ROI multipleValues the company against recent acquisitions of similar companies in the market.Example: mobile application software firms are selling for 5x sales. Knowing what real investors are willing to pay for mobile software, you could use a five-times multiple as the basis for valuing your mobile apps venture, while adjusting the multiple up or down to factor for different characteristics (Note: if your mobile software company, say, were at an earlier stage of development than other comparable businesses, it would probably fetch a lower multiple than five, given that investors are taking on more risk)Problem: Difficult to find comparables cash flowFor most startups especially those that have yet to start generating earnings the bulk of the value rests on future potential.DCF involves forecasting how much cash flow the company will produce in the future and using an expected ROI to calculate how much that cash flow is worth. Startups get higher discount rate to account for high risk company fail to generate sustainable cash flowsProblem: depends on the analyst's ability to forecast future market conditions and make good assumptions about long term growth rates by stageRule of thumb" values are typically set by the investors, depending on the venture's stage of commercial development. The further the company has progressed along the development pathway, the lower the company's risk and the higher its value. by stageMany private equity firms will utilize an approach whereby they provide additional funding when the firm reaches a given milestone. For example, the initial round of financing may be targeted toward providing wages for employees to develop a product. Once the product is proved to be successful, a subsequent round of funding is provided to mass produce and market the invention. by stage examplesEstimated Company Value

Stage of Development

$250,000 - $500,000

Has an exciting business idea or business plan

$500,000 - $1 million

Has a strong management team in place to execute on the plan

$1 million $2 million

Has a final product or technology prototype

$2 million $5 million

Has strategic alliances or partners, or signs of a customer base

$5 million and up

Has clear signs of revenue growth and obvious pathway to profitability law and private financingWhat are the rules for issuing shares of private equity?What is a security?Common and preferred stock, notes, bonds, debentures, voting-trust certificates, CDs, warrants, options, subscription rights, etc. investor must be passive or nearly soExists whenever one person provides money or some item of value with the expectation that it will be used to generate profits or other monetary return for the investor primarily from the efforts of othersWhat is a security?A limited partnershipA cowAn orange groveA condominium unitA parcel of oil property

Business financing disclosuresLaws require seller of securities to make buyer aware of material factors that bear on present conditions and future prospects of the business, plus relevant details regarding participation in business and its profitsProspectus, offering circular, or memorandum are common practiceThese prevent arguments over whether disclosures have been made or what they wereSince 1995 safe harbor statements are allowable in disclosures when making future-looking statementsThe company not the accountant is responsible for the accuracy of pro forma financialsPrivate offeringsDo not require company to undergo expensive and lengthy registration process with SECOfferees are presumed to be sophisticated enough not to need review of prospectus by governmentHistorically exempt from govt oversight based on sophistication of investor, number of purchasers, and amount of $ raised all highly subjective and resulted in liabilities for issuersRegulation D to the rescueFile a notice with the SEC on Form DRule 504 issuer can sell up to $1M in securities during any 12-month period no limits on sophistication or number of investors not available to investment companies or blank check companiesRule 506 issuer can sell unlimited amount of its securities but only to sophisticated investors available for transactions that do not involve > 35 investors sales to accredited investors, relatives of investors are not includedRule 505 adds flexibility to 506 issuers; permits sale of up to $5M in 12-month period to any 35 investors + unlimited accredited investorsForm D is 3 (ish) pages long!

Other issues with private securitiesIssues are still subject to antifraud and civil liability provisions, even if exempt from federal regulationResale is severely restricted, limiting liquiditySecurities regulation is complex an error can cost the entrepreneur and its effects last for several yearsThe prospectus is your business plan with risk factorsExecutive summaryCompany descriptionRisk factorsProductsMarketCompetitionMarketing programManagementManufacturingService and field engineeringFuture productsFacilitiesCapital requirementsFinancial data and forecastsOther stuffTerm sheetsStock rights issue


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