Private Placements

Table of Contents

1. What is a Private Placement?

2. Who is This Good For?

3. When is This the Best Choice for Me?

4. When is This Not Advised?

5. Tips for Getting The Money.

6. Ingredients You'll Need on Hand.

7. Watch Out For...

1. What is a Private Placement?

A private placement is a limited offering of shares in your company. You sell shares in your corporation -- not on the open, public market, but to select individuals. You'll be deciding how much of the company to sell, at what price, to how many private investors, and even which investors. That's a lot of control, but also a lot of footwork. There are federal Securities and Exchange Commission regulations covering Private Placements, so you will need to make certain you are in compliance. These regulations limit the number and type of people who can invest in a private placement.

2. Who is This Good For?

New companies that need to raise a relatively substantial sum of money (usually $100,000 to $1,000,000 but it can be much larger) but aren't good candidates for one investor to come up with this amount; investors in private placements often invest in the $5,000 - $25,000 range;

Established companies that need an infusion of capital to get to the next level of growth that are successful enough to be a solid investment for outside investors, but don't want the hassle and interference of a public offering or won't get large enough to justify one.

3. When is This the Best Choice for Me

When you're looking for a substantial infusion of capital but aren't a good candidate for a venture capital firm or don't want to do a public offering;

When you prefer to have many investors, each with very limited ownership interest, rather than one or a few with a lot more clout;

When you know a large number of fairly wealthy individuals who are interested in your business;

When you're a terrific salesperson of your own business.

4. When is This Not Advised?

When your business is not likely to grow to a point where it can distribute substantial profits to a good number of investors;

When you don't have the time to raise money from a large number of people;

When you are a terrible salesperson of your own company and you don't have anyone who can raise the money for you; doing a private placement is like being a salesperson, having to "close" a lot of sales.

5. Tips for Getting The Money

Hire an attorney experienced in private placements. There are not only federal Securities and Exchange Commission regulations, but there are likely to be state laws covering private placements. You need to make certain you are in conformance with all laws, as the SEC is very serious about people who offer stock to the public (which is what you are doing in a private placement). You will probably also need an Offering Memorandum which is a legal document required by the SEC.

Hire an experienced Business Plan consultant to help you draw up a convincing, but honest Business Plan to show prospective investors.

You may want to secure one or two "anchor" investors who will help bring their friends into the investment or host meetings with other potential investors. If these people are respected, they can be very helpful to you in attracting other investors.

6. Ingredients You'll Need on Hand

• A Business Plan
• An Offering Memorandum (most likely)
• Basic Financial Package
• Legal Documents to meet SEC and state regulations

7. Watch Out For...

Regulations that require you to qualify your investors by income. Investors in private placements must have substantial personal wealth and annual income. Recognizing that private placements often represent risky investments, the government wants to make certain investors can afford to lose the money, and you're not ripping off little old ladies;

Regulations that limit the maximum number of investors you can have (usually 35);

Spending an immense amount of time trying to get investors in your private placement rather than starting or running your business. Private placements can be a very time-consuming way to raise money.

Lawsuits. It's all too easy for investors to hear your plans as promises. If they buy shares expecting a windfall, they may be disappointed -- and sue.

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