Articles Posted in Raise Funding Phase

Tax Credits [CC BY 2.0 (], via FlickrPrivate equity, the process by which companies can raise funding from investors, comes with numerous rules and regulations enforced by the Securities and Exchange Commission (SEC). One of the most important rules that small businesses must understand is Regulation D, or “Reg D,” 17 C.F.R. § 230.500 et seq., which sets forth the procedures for offering securities for sale without going through the full process of registering with the SEC under the Securities Act of 1933, 15 U.S.C. § 77a et seq. Reg D prohibits advertising any sale of securities to the general public, and it states that a business may only issue securities to “accredited investors.” In August 2015, the SEC approved a venture capital firm’s plan to use an online platform to match investors with businesses, finding that it does not conflict with Reg D’s ban on public advertising. This could be good news for other businesses hoping to leverage the internet and social media to raise private equity funds.

Under Reg D, securities may only be issued to “accredited investors,” defined to include banks, nonprofit business trusts, directors, or officers of the issuing company, and individuals with a net worth of more than $1 million or annual income in excess of $200,000. 17 C.F.R. § 230.501(a). With some exceptions, an issuer under Reg D cannot advertise the sale of securities or solicit purchasers from the general public. 17 C.F.R. § 230.502(c). Issuers must file Form D with the SEC to indicate compliance with Reg D.

Rule 506 of Reg D, codified at 17 C.F.R. § 230.506, establishes procedures for communicating with potential investors. Most Reg D offerings follow Rule 506(b), which provides that issuers can approach potential investors if they have a pre-existing relationship, but they cannot advertise or solicit investors from the general public. Offerings under Rule 506(b) may also include up to 35 non-accredited, sophisticated investors who are “capable of evaluating the merits and risks of the prospective investment.” Id. at § 230.506(b)(2)(ii).

Continue Reading

By Urbanrenewal (Own work) [Public domain], via Wikimedia CommonsSmall business owners and entrepreneurs in New Jersey and New York have a wide range of options for financing their businesses. Venture capital (VC) financing is a rather well-known method of financing a startup business. While it accounts for only a small percentage of total business financing, venture capital has gained prominence in recent years because of its role in the technology sector in California’s Silicon Valley region and other areas of the country. Even if your company is not able to catch the interest of any VC firms, the VC process still offers useful ideas for business financing in general.

What is venture capital?

The term “venture capital” generally refers to private equity invested in startup businesses that demonstrate a high potential for growth and a return on investment. A VC firm manages a VC fund, which provides the capital to invest in promising business ventures.

Stage 1: Seed Financing

All businesses, to some extent, begin as an idea. In some cases, an individual or new business venture may be able to convince an angel investor or VC firm that their idea, which could involve a product or service, has a high potential for growth and is a worthwhile investment. Since an investment at such an early stage carries a high degree of risk, VC firms often require a “feasibility study” showing that the idea is both technologically and economically feasible.

Continue Reading

By Peosoldier photographer [Public domain], via Wikimedia CommonsEvery business may begin with an idea, but without money, a business cannot operate and grow. Most aspiring business owners fund their businesses from their own savings, or from credit cards or bank loans. A wide range of investment sources are available for businesses that can demonstrate a solid product or service, and the potential for growth and scalability, and profitability.

Stages of Business Financing

New businesses often follow several stages in obtaining financing:

– Seed stage:  The business solely consists of an idea or a product.
– Startup financing:  The business is ready to launch its product or service. In venture capital financing, this is sometimes known as the “Series A” financing round.
– Second-stage financing:  The business has demonstrated its viability and needs additional capital. This is sometimes called “Series B” financing.
– Line of credit, additional financing:  The business is nearing profitability and secures a line of credit from a commercial bank for “working capital.” It may also seek additional rounds of financing, beginning with “Series C” and continuing through the alphabet.
– Acquisition or IPO:  The business is acquired by another business or makes an initial public offering (IPO), which makes its shares available for purchase and sale on one or more stock exchanges.

Continue Reading

1.12.02NewYorkStockExchangeByLuigiNovi1.jpgThe number of initial public offerings (IPOs), in which a company first offers its stock for sale on public exchanges, has skyrocketed during the first nine months of 2014. 220 companies went public during that time, raising about $77 billion. The record-breaking IPO of the Chinese company Alibaba alone raised $21.8 billion, but the vast majority of 2014 IPOs reportedly consist of “emerging growth companies” (EGCs), a category established in 2012 by the Jumpstart Our Business Startups (JOBS) Act. EGCs are smaller companies that have often been unable to meet the regulatory requirements for IPOs, but now they account for most or all of the growth in the number of IPOs in recent years.

The JOBS Act was introduced in Congress as H.R. 3606 in March 2012. It quickly passed both houses of Congress, and the President signed it into law that April. The law relaxes various regulatory requirements for smaller public companies and expands their eligibility to go public. It also increases, from 500 to 2,000, the number of record stockholders a company may have before it must register with the Securities and Exchange Commission (SEC).

The JOBS Act amends the Securities Act of 1933 and the Securities Exchange Act of 1934 to include “emerging growth companies.” H.R.3606 §§ 101(a) – (b), 15 U.S.C. § 77b(a)(19), 15 U.S.C. § 78c(a)(80). An EGC is defined as a company that began issuing securities to the public after December 8, 2011, and that had less than $1 billion, adjusted for inflation, in annual gross revenues during the most recently ended fiscal year.
Continue Reading

2008-03-13_Rave_crowd.jpgNew federal laws may allow entrepreneurs and small business owners to seek investors publicly without having to go through the complex and expensive process of creating an initial public offering (IPO). New businesses may soon be able to raise capital via social media and the internet, in a process known as “crowdfunding.” Currently, websites like Kickstarter allow people to crowdfund creative projects, but businesses seeking equity investments have had to follow strict regulations enforced by the Securities and Exchange Commission (SEC). New rule proposals recently issued by the SEC, however, may change that.

Entrepreneurs have generally had to limit their efforts to raise capital to private sources. According to Forbes, most startup capital comes from the entrepreneurs themselves, who might invest their own savings, take out loans, or use credit cards. Family members, such as parents and spouses, account for a small percentage of startup capital. “Outsiders,” including government programs, venture capitalists, angel investors, and other businesses, account for some startup financing. Venture capitalists fund 0.04% of all startups, and angel investors fund 0.91%. Despite such a small percentage of businesses, venture capitalists are expected to invest $2.7 billion in New York-based startups in 2013. A startup seeking individual equity investors may only approach people who meet certain criteria as “accredited investors,” such as individuals whose net worth is at least $1 million or whose annual income exceeds $200,000.

The Jumpstart Our Business Startups Act (JOBS Act) became law in April 2012. Its purpose was, in part, to help businesses that are not large enough for an IPO but have difficulty raising capital through private channels. It raises the maximum number of shareholders corporations may have, from five hundred to two thousand, before they are required to register with the SEC. The JOBS Act allows companies to raise up to $1 million per year from individual investors, and it greatly relaxes the restrictions on who may invest. Individual investors with a net worth or annual income below $100,000 may invest up to the greater of $2,000 or five percent of their annual income, while investors with a net worth or annual income above $100,000 may invest a maximum of ten percent of their annual income. Companies must still provide information to the SEC, such as names of directors and officers, but the reporting burden is far less than for fully public companies.
Continue Reading

911378_21359151.jpgThe U.S. Supreme Court will review the Securities and Exchange Commission’s (SEC’s) five-year statute of limitations for civil actions to recover penalties. The question before the Court in Gabelli v. SEC, Docket No. 11-1274, is precisely when the statute begins to run. The SEC contends that the statute begins to run when it actually learns of an alleged violation, a position that the Second Circuit Court of Appeals affirmed in SEC v. Gabelli, 653 F.3d 49 (2nd Cir. 2011). Marc Gabelli, who petitioned the Court for certiorari, argues that the statute should have begun when the SEC’s cause of action actually accrued, i.e. when the alleged violation occurred. For small businesses and startups pursuing financing options, this case could have important implications for how the SEC investigates and prosecutes alleged wrongdoing.

Gabelli was the portfolio manager of a mutual fund known as Gabelli Global Growth Fund (GGGF). The SEC filed a complaint against him and Bruce Alpert, who was the chief operating officer of GGGF’s adviser Gabelli Funds, LLC, accusing them of engaging in a practice called “market timing” in a way that preferred certain GGGF investors over others. The practice involves making rapid trades in order to exploit short-term inefficiencies in pricing. It is not illegal per se, but it can be detrimental to a fund’s long-term investors by, for example, affecting transaction costs and disrupting the overall management of the fund.

The SEC alleged that Gabelli and Alpert allowed a form of market timing in GGGF between 1999 and the spring of 2002. While the market timing was taking place, the SEC claimed, the defendants did not notify the fund’s board, nor did they disclose the activity to the fund’s other investors. The SEC argued that this was “materially misleading” to the fund and its investors. SEC v. Gabelli, 653 F.3d at 55.
Continue Reading

Facebook_HQ.jpgFacebook, the social networking website that began as a college dorm room project and grew into a multi-billion dollar corporation, in many ways embodies the dreams of small business owners and entrepreneurs. It has enjoyed explosive growth since its founding in 2004, and its service has become a feature of daily life for almost a billion people. In light of this, it may not be surprising that Facebook’s initial public offering (IPO) had very high expectations. The IPO broke records and raised billions of dollars. At the same time, the stock price failed to rise much above the initial price, disappointing many investors who hoped to see the price skyrocket.

Facebook began in a Harvard dorm room in 2003. Within a year, it had moved to Silicon Valley and acquired millions in start-up funding. The basic story of the company’s founding, with a fair amount of artistic license, is familiar to moviegoers from the 2010 film The Social Network. By the time the film came out in theaters, Facebook had over 500 million active users. By the time of the company’s IPO in May 2012, the total number of users had surpassed 900 million. This amounts to roughly three times the population of the United States and one-seventh of the world population.

On February 1, 2012, Facebook filed a registration with the Securities and Exchange Commission (SEC) for an IPO. The registration form, known as Form S-1, provides basic information for investors about the business, including the financial risks associated with investing in the IPO. Facebook’s registration declared an intention to raise $5 billion through sales of shares of common stock, but it did not say how many shares it hoped to sell or at what price. An analysis of the IPO registration by the technology blog Mashable compared the IPO’s potential earnings to those of companies like AT&T Wireless and Deutsche Telekom.
Continue Reading

1340694_63317981_12152011.jpgThe U.S. Small Business Administration (SBA) announced last week that it will make economic injury disaster loans (EIDL’s) available to small businesses and other qualifying organizations in Bergen County, New Jersey. Because Bergen County is adjacent to several New York counties that were designated disaster areas, it is eligible for inclusion in the program. The disaster designation came as a result of damage caused in August and September by Hurricane Irene and Tropical Storm Lee. The SBA’s disaster declaration accompanied a similar declaration from the U.S. Secretary of Agriculture. Loans are available to small businesses, aquaculture businesses, and agriculture cooperatives, as well as many private nonprofits.

Bergen County, in northeast New Jersey, is directly across the Hudson River from New York City. It is New Jersey’s most populous county, with more than 900,000 residents. Hurricane Irene hit the area in August 2011, followed by Tropical Storm Lee a few weeks later, and caused more than $60 million in damage to north New Jersey municipalities. Local businesses and other private property sustained as much as $200 million in damage. Authorities have called it one of the worst natural disasters in the state’s history. President Obama declared all twenty-one New Jersey counties to be eligible for disaster relief, with the Federal Emergency Management Agency (FEMA) covering much of the cost of repairing infrastructure and government buildings. The SBA’s disaster declaration now makes federal assistance available to area businesses hurt by the storms.

EIDL’s are available to certain businesses and organizations in disaster areas designated by the SBA or the Department of Agriculture. The purpose of an EIDL is to help a business recover from economic damage resulting from a physical disaster such as a hurricane or earthquake, and to maintain a “reasonable working capital position.” EIDL’s are only available to businesses that, in the SBA’s determination, cannot get credit from private sources. Loans are available up to $2 million, with interests rates not to exceed four percent. For nonprofit organizations, the interest rate is three percent. The term of an EIDL cannot be longer than thirty years. The SBA will review a business’ total amount of debt and its ability to repay its debts in determining the amount and term of a loan.
Continue Reading

The New Jersey Assembly last week approved legislation, designated as S-3052 and A-4336, that would create a Small Business Loan Program. The bill passed both houses of the state legislature and went to Governor Chris Christie for his review on December 5, 2011. If the governor signs it, it could quickly have a positive effect on the New Jersey economy and offer new opportunities for New Jersey’s small businesses.

The bill was first introduced in the state senate on September 19, 2011 and referred to the Senate Economic Growth Committee. The Committee reported on it favorably on September 22, and it passed the state senate unanimously (39-0) on September 26. The Assembly received it on November 10 and referred it to the Assembly Commerce and Economic Development Committee. The bill was reported out of the Committee on November 21 and sent to the Assembly Appropriations Committee. That Committee reported favorably on it on December 1, and the Assembly passed it on a 52-23-3 vote on December 5.

If the bill is signed into law by the governor, it will instruct the state’s Economic Development Authority to initiate a program to provide low-interest loans to New Jersey small businesses that commit to meet certain goals. Businesses could use loan funds to acquire capital, train new employees, and pay salaries. To qualify for a loan, a business must make a commitment to raise its employment levels by 10 percent or more over a four-year period. Qualifying businesses must have their primary business operations, as well as a physical place of business, in the state of New Jersey. They must be owned and operated independently and not be the dominant business in their field. They must have fewer than 100 full-time employees, less than $10 million in equity financing, and less than $10 million in total financing. Loans up to $250,000 would be available at annual interest rates of two percent or less.

Authorities say that the program would support itself through loan repayments and interest, adding no additional costs to the state government. Senators who sponsored the bill tout its ability to stimulate economic growth by offering small businesses an incentive to acquire capital and add jobs. It would hopefully open the door to new financing opportunities for small businesses that have struggled in the difficult economic conditions of the past few years.
Continue Reading