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So where
do you go for capital if you run or own a
private company? There are several sources of
capital for privately held businesses. One is
the capital generated internally by judiciously
managing the company’s working capital. Another
source is your local bank, which is the one the
primary financing vehicles for private
companies. And of course, there is always the
owner’s pocket.
But where
do you go if your capital needs outstrip what
is available from a bank, especially if your
company is in need of permanent capital to fund
long term growth objectives, capitalize a
start-up, or finance an acquisition? If you do
not have the wherewithal to write checks
yourself, you will need to raise outside
capital.
Junior Capital
Junior capital is a term used to describe
capital that sits below bank debt, and includes
mezzanine, or subordinated, debt, and equity.
Sources of junior capital include institutional
investors, such as insurance companies, hedge
funds, private equity funds, mezzanine funds
and SBICs.
Individual
Investors
Another source of junior capital is individual
investors. This class of investor includes
friends, family, and high net worth
individuals. And if you are issuing securities
to individual investors, you may be required by
law to write and distribute a private placement
memorandum to each of your potential
investors.
Protect Yourself Against
Securities Fraud Claims
Besides the
compliance issues, there are two major reasons
for preparing a Private Placement Memorandum.
First is to give you cover against securities
fraud claims. By writing and delivering a PPM,
you are establishing a record of what has been
communicated to the investors about the
offering and the company. When issuing
securities, state and federal law is most
concerned with securities fraud issues.
Anti-fraud requirements call for the issuer to
not make any unture statements of a material
fact, or to leave out a material fact, the
absence of which would make any statements made
misleading; i.e. the issuer must disclose all
relevant and material facts of the issuance and
the company. A well-prepared PPM will
establish a record of the information presented
to investors, and will provide a level of
protection for the company and issuer against
claims of securities fraud.
Professional
Image
The other reason for writing a Private
Placement Memorandum is that it presents a
professional face to the issuance. The image
presented to investors by presenting a document
that is well-prepared is one of professionalism
and competency. Approaching sophisticated
investors with a poorly drafted offering
document will scream “unprofessional”,
“novice”, “don’t know what they’re doing” – the
exact opposite of what you are trying to
project.
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