December 14, 2011
By HunterMaclean Attorneys, published on December 14, 2011, in Business in Savannah.
Most businesses require additional capital from time to time for various reasons, including growth, capital expenditures, or the acquisition of a competitor or related business.
The owner of a small to mid-size business may find that in the current lending environment banks and other traditional sources of capital are unwilling to lend on reasonable terms. This is especially true for owners who will not provide a personal guaranty and for businesses involved in the construction or real estate industries. Fortunately, there are alternatives to traditional financing that can result in obtaining capital on reasonable terms.
One popular option is the offering of securities. Under the Securities Act of 1933 (“Securities Act”), an offer to sell securities must either be registered with the Securities and Exchange Commission (“SEC”) or meet an exemption to the registration requirement. A small to mid-size business will want to pursue an exempted offering due to its significantly fewer regulatory reporting requirements and thus overall cost.
An offering of securities proceeds as follows: The owner of a company offers ownership interest in the company to investors. The terms and conditions of the offer are determined by the business owner, but generally investors become “silent” owners without management or control rights. The owner may also secure the right to buy out an investor for a fixed price in the future. The ability to set the specific terms of the offering is one of the most compelling characteristic of a private offering and obviously very beneficial to a business owner.
There are four main exemptions from registration under the Securities Act. The first, and by far the most popular offering by businesses in the coastal area, is a Regulation D offering. Regulation D provides for three types of “private” offerings; however, in practice almost all Regulation D offerings are conducted as Rule 506 offerings. Rule 506 allows an offering of any amount to an unlimited number of accredited investors plus up to 35 sophisticated persons.
The term “accredited investor” includes individuals and companies in 8 categories and is determined by income, net worth and sophistication measurements. Practically, most individuals and companies interested in investing in an offering qualify as accredited investors, so this requirement does not hinder investment. In addition, a Rule 506 offering can be made to investors throughout the United States and the business owner maintains control over accepting investments at all times in the process.
The main constraint on a Regulation D offering is that it must be private. Regulation D prohibits the use of general solicitation or general advertising in connection with the offering, but intermediaries and placement agents can be and are often utilized with success to find prospective investors.
The second exemption, Rule 147, is known as the Intra-State Offering Exemption. Rule 147 grants an exemption from registration to issuers conducting an offering solely in the state the offeror is organized and doing business. This exemption has limited appeal in Savannah and the coastal area since a business owner usually wants to discuss the offering with potential investors throughout the coastal area, including Georgia and South Carolina.
The third exemption, Rule 4(6), allows private offerings of securities exclusively to accredited investors up to a maximum amount of $5 Million. The Rule 4(6) exemption is generally not relied upon because of the parallels between it and Regulation D offering, discussed above.
The final exemption, Regulation A, is known as the Small Public Offering Exemption and grants an exemption from registration for offerings of securities of no more than $5 Million in a twelve-month period. An offering under Regulation A is unique in that it is a “public” offering exempted from registration; the offeror is allowed to engage in general solicitation and advertising to sell the securities.
Consultation with knowledgeable legal counsel is essential when seeking funding through securities offerings in order to avoid serious ramifications from the SEC.
