I get requests from companies daily to help them raise capital, but I end up turning most of them down because many are not marketable.
Here’s one that I recently turned away and I’ll share how you can avoid their challenging situation.
Last week I was contacted by a group whose company had recently launched a “semi” public offering under Reg. A+ in a “hot” new market. They were referred by one of our very successful clients in our PCG.
They were seeking my advice because he couldn’t understand why his offering wasn’t getting any traction since approval last summer.
They had spent a lot of money on legal and accounting fees to push the Reg. A+ through SEC approval so there was a sense of urgency to make this offering work.
To get to the bottom of why his offering was failing, I asked…
Why? Who? What? Why did he go the Reg. A+ route instead of the private exemption route under Reg. D? Who was he targeting? What was he offering?
Why did he go the Reg. A+ route?
The answer to this question wasn’t surprising. They went this route to be able to target non-accredited investors, in addition to accredited investors, nationwide. This also answered my “who” question.
That’s understandable since being able to raise funds from both accredited and non-accredited investors alike theoretically should make fundraising easier since the potential investor pool is greater. Right? Not necessarily.
Getting a Reg A+ is laborious,
expensive and time-consuming.
By the time the Reg. A+ is approved, you’ve wasted so much time and money that the benefit of being able to target non-accredited investors is completely negated, but this entrepreneur probably didn’t know this.
In my experience, the speed of launching a Reg. D offering far outweighs the restriction to accredited investors, which has never hindered my clients’ abilities to raise money. Time has always been a more valuable commodity than the potential additional funds that could be raised from non-accredited investors. Besides, based on 20 years of raising capital from high-net-worth (“HNW”) investors, I’ve found that if you have the right marketing plan, there are plenty of accredited investors floating out there with enough interest and money to fund your deal.
Now that I had the answers to the “why” and “who,” I moved on to the most important question. “What?”
What was he offering? His response revealed the weak point of his entire endeavor. His company was offering equity with the possibility of dividends based on the nebulous “company’s performance” language. I shook my head.
Why would a HNW invest in a private company like his when they could buy the exact same product in the open market? If HNW investors want to invest in something to earn dividends like Wall Street, why wouldn’t they just invest in a public company which has liquidity?
“Based on the company’s performance..” is too abstract of a reason for the savvy investor.
HNWs look to private markets because they’re
looking for an “alternative” to Wall Street. They
want better returns without the volatility.
Not only was this entrepreneur’s offering abstract but there were too many unknowns involving his business plan. Besides the tenuous promise of dividends, there was also the speculative assumption that new government legislation would be passed. HNW investors are not going to ‘bank’ on politicians passing anything. So this was another constraint.
Finally, was the promise of appreciation in the stock price based on the company going public. The IPO market has been in hibernation and again, this sounds like Wall Street.
When targeting savvy HNWs, they’re looking
for a DEFINED business plan, DEFINED
returns and a DEFINED exit strategy.
Let’s compare his offering to a DEFINED offering that would appeal to accredited investors.
Offering 1 | Undefined & Factors Beyond the Company’s Control
- Hot Market
- Dividends not stated nor guaranteed
- New valuation based on new government legislation
- New valuation based on the company going public
Offering 2 | Defined
- 9% Preferred Return
- Sharing of Profits (cash flow)
- Monthly Distributions
- Exit in five years
- Profit from Appreciation upon exit
- Hot Emerging Market
If you need the teacher’s key: Offering 2 is the right choice.
This company gained a valuable lesson for any future offering. And that lesson for any entrepreneur is if you proceed with a private offering, a DEFINED business plan, DEFINED return, and a DEFINED exit strategy are all essential for a successful raise. And never base your company’s success on politicians and their willingness to pass new legislation.
Keep in mind, in any hot sector, time is of the essence.
When competing for investors, the sooner you launch your offering and raise the capital the better. That’s why I like Reg D 506(c). It allows me to advertise although restricting the offering to accredited investors. I don’t see this as a restriction but as an opportunity.
The accredited investor limitation is a competitive advantage.
While others offer speculative returns with even more speculative business plans and exits, my DEFINED offerings resonate with HNWs who are more than happy to invest their money.
Take this one lesson home… give accredited investors Certainty.