Raising Capital in Gray Areas by Joseph Lizio

No matter what the market is doing this month or this quarter, there are still strong, pre-public companies looking for growth capital to expand into new markets, launch new, wanted products, or too simply increase market share.

Down markets usually close the doors for IPOs or new secondary offerings. Thus, companies poised to take the next step, going public, are forced to pull their registration and wait, or hope, for a quick turn in the economy. Globally, 83 companies pulled their IPOs and some 24 others postponed their offerings during the first quarter of this year; mostly citing declining markets and recession concerns per The New York Times.

So, what can these companies do?

Many are looking too venture capital to raise enough cash to get them through the next few months or years until the IPO windows open again. But, Venture Capital comes with many strings that could be detrimental or hindering including lost of control and dilution.

There are other ways - private placements.

According to Wikipedia, '…a private placement is an offering of securities that are not registered with the Securities and Exchange Commission (SEC). Such offerings exploit an exemption offered by the Securities Act of 1933 that comes with several restrictions, including a prohibition against general solicitation. This exemption allows companies to avoid quarterly reporting requirements and many of the legal liabilities associated with the Sarbanes-Oxley Act.'

There are some caveats regarding the amounts that can be raised through private placements. Under 504, companies can raise up to $1 million in a 12-month period. Under 505, companies can raise up to $5 million in a 12-month period - with restrictions to the type and number of investors. Under 506, companies can raise any amount provided their investors meet very strict guidelines - usually institutional investors including banks and financial institutions, pension funds, and insurance companies who are still, despite declining markets, liable for hundreds of billions in capital that must be efficiently put to work.

Benefits of private placements for companies include:

- Can be used by mature companies, start-ups, or anything in between. - Much lower cost to issue than an IPO. - Little or no reporting requirements. - Limit the amount of information that a company has to disclose by limiting the number and type of investors. - Can issue debt and/or equity. - Can raise capital quickly. - Great for small issues or issues encumbered by complex security measures. And most important, - Can be sold to some of your stakeholders like your suppliers, your distributors, your retailers, or your franchisees - companies that already know you and respect your organization.

In conjunction with these private placements, the SEC has adopted Rule 144A of the Securities Act of 1933 that allows these securities to be traded amongst each other - provided the seller and investor are qualified institutional buyers with over $100 million in investable assets. The goal of this rule was to create liquidity for these private, restricted shares as well as foster foreign companies to seek equity in the US market.

John Jacobs, Executive Vice President of Nasdaq, stated, "The amount of capital raised last year (2006) through the 144A market - $162 billion - was bigger than all the IPOs and secondary offerings on Nasdaq, the NYSE, and Amex put together."

Further, the 144A market continues to grow as organizations like the Nasdaq are creating electronic trading platforms for these private placements. Prior to these new trading platforms, investors of these shares were extremely limited with these investments. They would typically buy and hold these securities until the investee went public.

Bottom line, if your company needs public type money but does not want to wait for the IPO markets to reopen, private placements may be the way to go. Start by talking with you CPA, your national bank, or your investment banker.

About the Author

Joseph Lizio holds and MBA in Finance and Entrepreneurship and has a strong commercial lending background. In his current venture, Mr. Lizio is the founder of www.businessmoneytoday.com - a site designed to help business owners find and obtain capital to grow their businesses