Private Placement Offering

This post continues on my two prior blog posts regarding private equity raises (Private Equity I; Private Equity II).  In my business law practice, one of my jobs is to help clients raise capital through selling securities which are exempt from SEC public company filing requirements.  The beauty of these exempt securities is that the company can raise cash without taking on debt and without having to comply with strenuous and costly SEC filing requirements for public companies.  The down sides are that the qualifications for investors under these exemption rules are typically narrow and the type of investor who is willing to invest in private equity can be hard to find.

“Is anyone going to buy it?”  

Finding investors can be particularly difficult with pre-revenue offerings (i.e., start up companies that are not yet at a revenue generating stage of business).  Investors like seeing exactly how a business makes money.  A majority of my practice is in the software licensing industry.  This is a fast moving market.  Everyday somebody comes up with the next HUGE idea that is going to revolutionize some aspect of the industry.  The developer sets up a company, develops a beta product, and begins looking for cash to take the product to market.  This is where the chicken and egg issue arises.  Investors often don’t trust ideas in and of themselves and want to see actual cash coming in – but the company cannot afford to take the product to market and generate revenue unless they have capital.   

Potential Solution: Try to parallel the beta product with a beta market which will generate early revenues for the company.  Anything here will help.  Prove to the potential investors that people will pay for your product.

Economic Considerations

Finding investors can also be difficult in hard economic times.  Over these past few weeks we have noticed this.  When the public markets start falling, investors seem to value liquidity over long term ROI.  That is a problem for raising private equity as most private raises require between a 3 and 7 year capital commitment from the investor.  Reality is, private offerings can offer a nice diversification tool for investors as private investments are less schizophrenic than public markets and often result in a higher ROI over time.

Potential Solutions: Key is to be creative.  We are all in this together - so, try reducing the amount of an investor's minimum investment, reduce the total capital to be raised and tighten the belt on your company's budget (determine "needs" vs. "wants").  Another idea is to look to foreign investors who are less impacted by the U.S. public markets.