Corporate Blog: Revisiting Capital Structure and Its Importance – Private Capital Raising Options – Securities
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In the current economic environment, cash flow and the availability of cash have become kings. These economic circumstances are causing many companies to reassess their capital structure, even those with strong balance sheets. Private companies exploring options for raising capital have two main decisions to make: (1) what type of security to offer and (2) what method to use to comply with securities laws.
1. Capital structure options: what security to offer
Rising interest rates make raising equity or other similar solutions more attractive to founders and business owners looking to fund their growth. The table below illustrates capital structure options ranging from senior debt (much like a typical secured bank loan) to common stock.
CAPITAL STRUCTURE
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senior debt
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Mezzanine debt
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Hybrid financing (e.g. convertible debt, convertible equity)
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Simple Agreement for Future Fairness (SAFE Rating)
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Favorite stock
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Common equity
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2. Methods to raise private capital
After deciding which security to offer, issuers typically evaluate four main factors to determine the type of securities offering to pursue: (1) the dollar value of the offer, (2) whether the offer will require general solicitation to be successful, (3) whether funds can only be raised from accredited investors, either through the friends and family of the issuer or through the contacts of a broker or crowdfunding platform, and (4) what type of SEC filing is required.
After the changes made by the JOBS law and the adoption of the CF regulations, the main difference between the methods of exempt offer is
whether the offer permits general solicitation. It is also the most influential factor in terms of the risk that the offer represents for the issuer. General solicitation offers require additional compliance efforts. Below is a summary of bid waivers based on the above factors. Although there are other things to consider, such as whether securities will be restricted after the offering, or what requirements apply (for example“bad actor” disqualifications apply or audited financial statements must be provided), the bulk of evaluating the appropriate offer often comes down to these factors for medium and small businesses.
Capital Raising Methods and Exemptions Available
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Nature of exemption
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Offer a limit of $ in a 12 month period
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Prohibits general solicitation
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Allows general solicitation
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Accredited investors only
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SEC Filing Required
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None
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Reg. D Rule 506(b)
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Unlimited accredited investors, limited to 35 sophisticated investors in a 90 day period
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Yes. Form D
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None
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§4(a)(2) Transactions must not involve any public offering. Typically involve institutional buyers performing due diligence who do not need the protection of the 1933 Act. SEC vs. Ralston Purina Co.
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Nope
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No, but state registration requirements are not preempted by federal law.
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None
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Reg D, Rule 506(c)
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Only Accredited Investors and Reasonable Due Diligence Steps Required
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Yes. Form D
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$5 million
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FC regulations
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Non-accredited investors subject to investment limits based on income and net worth.
Requires the use of a regulated crowdfunding platform, such as Dealmaker, Republic.com
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Yes. Form C (including 2-year financial statements, certified, revised or audited, as required)
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Individual state limits typically $1-5 million
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Intrastate Rules: §3(a)(11), Rule 147, Rule 147A
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Current requirements for the issuer and the investor
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No SEC filings, but states vary in notice/registration filing requirements
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$10 million
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Rule 504
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Applicable requirements for issuer and investors
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Yes
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$20 million
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Reg A, Level 1
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None
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Yes
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$75 million
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Reg A, Level 2
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Non-accredited investors subject to investment limits, unless the issuer is listed
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Yes
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Securities Filings Required: State or Federal
The vast majority of waivers require the filing of a securities filing with state and/or federal regulatory authorities (e.g., Form D, Form C, Form 1-A, or state filings) and the preparation of subscription agreements and disclosure documents. Many offerings also require audited financial statements and the issuance of an offering circular to each investor. These documents should be prepared by a securities lawyer.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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