| THE MONEY RAISING PROCESS
By Joseph Fullop III Ph.D.
It never ceases to amaze me as a professional financial consultant how little people know about raising money. Raising investor dollars for business remains a cornerstone in our free enterprise system. The great historical industrial leaders of our nation built their fortunes with the help of other peoples money. You only have so many years to live and its a million to one that you can start with a small bank loan and create a multi-million dollar industry without the aid of investor capital. Raising money is probably one of the most important abilities that a CEO can possess. It seems strange that no college in our nation has any courses that deal specifically with the "ART" of raising money!
Many shun the idea because they really don't understand the myriad of ways you can structure an investment. I have listened to hundreds of people that think that "going public" is the way you raise money and if you don't qualify for that you shouldn't even consider the effort. How wrong can you be! Some don't want to raise money because they don't want to loose control of their business. Some people are on an ego trip and want to be able to say, "This is all MINE". People that think this way are paying a high price for their lack of knowledge. An old oilman once told me; "If you think professional help is expensive, look at the cost of ignorance". A good CEO needs to have an open mind on the subject. Investor dollars can not only eliminate debt, expand production, and increase markets, but it can make the risks of business much less and literally add years on to your life. Thousands of topnotch CEOs bite the dust every year with heart attacks because they chose the hard way. Most have chosen this road because they didn't know how to do it any other way.
The first thing you must decide before you raise money is exactly what are you wanting to accomplish. Simple question, but to arrive at the answer it will take some thinking. Most of my clients start with the obvious. 1) I want to be out of debt completely 2) I want to be able to operate at maximum efficiency 3) I want to expand to become a major player in my industry. Once a complete list of goals have been established the next step is to calculate exactly how much money it will take to guarantee that those goals will be met. You noticed I said "guarantee". Do not worry at this point how much money it will take. You must define the amount, regardless how much it is. When you offer someone the opportunity to invest it is much better to be able to tell a story that all but guarantees success than to tell one that might make it with this amount of money. The first rule in raising funds is to raise enough to assure success. Don't ever settle for less.
The next step will define in writing the "Use of Proceeds". List in detail what you are going to spend the investor dollars on. Be sure to allow monies for the costs of raising the money. This is normally for accounting, legal, broker, due diligence fees, and filing fees.
You need to look at your cost of doing business as it exits presently and compare it to what it will look like after you are funded. If you have done your job correctly there will be a significant difference. For incentive purposes, calculate the savings, times your projected sales over the next 5 years with the new sales budget. This saving is what we call the "Pie" in the financial business. The pie will be divided up with the investors and yourself. Remember not to worry what other people make, pay attention to what you make and the different perks you get while you make it.
The next part is very difficult for many. You need to do your homework. The term homework in this context means that you must now gather all the facts you can get about your business and the industry you participate in. When you raise money, regardless of the type of security you choose to offer, the law says you must make a full disclosure of "ALL THE MATERIAL FACTS". Well that is a mouth-full if taken literally. Just so there is no misunderstandings - you must take this literally! Now this can be a two edged sword. On one hand its a lot of work and you must tell, in writing, all of the good and bad about what you're doing. On the other hand disclosing the risks protect you from litigation in the event those bad things become reality. Raising money from an investor carries one very large risk, fraud, and fraud by omission. You obviously know that lying is going to get you in serious trouble. What you need to understand is by failing to disclose a material fact- good or bad- you can be charged with fraud by omission. The rule here is not really all that complicated, just be as honest as you can possibly be.
All of this material is called "due diligence" information and should be organized as to category such as material availability, competition, markets, insurance, key personnel, transportation, etc. This gathering is also good for your soul because it forces you to take a fresh, objective look at all of the elements of business that you are engaged.
Now you must decide what you want to sell and for what reasons. Do you want to sell stock - Common, Preferred, A, or B, Stock Options, etc? Do you want to sell Limited Partnership units? These all have different attributes and choosing one can have dire long-term consequences. Be very careful here. My choice will always be the Limited Partnership. It affords much greater flexibility as to how you can structure the returns. Do not use a LLC if you intend to raise money. Many legal issues are without court precedent on LLCs and you don't want to be the one that has the honor of going to court and setting them. Once you decide what form of security you are going to sell now you have to develop your "story line" for investors. This will include what the return on investment should be if your projections are correct. Here is where a lot is normally left on the table and not utilized. If you have chosen the right structure to sell you will have not only cash disbursements to offer the investor but also some form of depreciation pass through from the assets you bought with their money. What kind of income is it? Passive or Active income? What amount is their net after taxes? You must keep in mind that an investor is interested in what you are going to make or do however his main concern that makes him get out the checkbook is what is going to be his return on his investment. You can have the greatest moneymaker in the world for a business but if you structure the returns improperly you will never be able to raise a dime. This is when professional help becomes priceless. There are many options to consider on this subject. Let us suffice in saying that the better you make it for the investor the better your chances for getting him to invest. Talk to someone that raises money for a living. I don't mean a stock broker or an attorney or accountant!
You now must assemble what is called the "offering document". This is the disclosure we talked about earlier that has the structure and story you have designed embodied within it. Please have a competent attorney review this after it is assembled and listen to his advice as to what is missing or needs alteration. Now, you can have an attorney write the offering document for you if you have enough money. Enough money will depend on to whom you are talking. Prices range from 10,000.00 to 150,000 dollars. You read it right. That is a lot of money for anyone. Obviously you can save a lot if you can write it yourself and just have an attorney review the work. What really costs here is if you ask the attorney to issue a legal opinion on the offering document. If he renders this opinion he must be insured to do so and this insurance protects him, not you. If anything goes wrong you will have to hire him to defend the litigation. If, in fact, you have really done a good job of disclosure, you can save a lot without any additional risk, by just having the attorney review and recommend the necessary changes you need. Make sure you are talking to a security attorney. Many times as a consultant I have witnessed corporate attorneys giving advise on raising money. This is absolutely unethical. Do not listen to them unless they are an experienced security attorney with gray hair.
The security attorney will give you advice as to what security exemption you should choose. You must choose and perfect at least one exemption. If it is under 1 million dollars you would most likely use a 504 Reg A or D. If you need over a million you will probably use a 506 Reg. D exemption. Your attorney will provide upon request the necessary subscription documents and filing forms necessary. Make absolutely sure you do your filings on a timely basis. Most of the security infractions today stem from non-filing or late filings.
Now you are ready to sell the securities. There are only 2 entities that can legally sell securities. One entity is the "principal" of the offering. The only other is a licensed Broker Dealer. The principal of the offering means in laymen terms "the person or persons that are officers of the corporation issuing the security, or the operating general partner of a Limited Partnership". Make sure, by asking your security counsel, who the principals are in your offering under law. Most of the time on offerings under a million dollars you are much better off selling the securities yourself. Offerings over a million you need to at least consider hiring a licensed Broker Dealer to sell the securities for you. These boys are not cheap. I am not only addressing the initial costs for their participation but also the trailer commission they will probably negotiate with you. Many times using a Broker Dealer will also constitute a complete rewrite of your documents until they are satisfied. These are not easy people to work with. They are normally arrogant, and treat you with complete indifference as to your needs. Be prepared for long delays and disappointment. Unless you are actually going public you will want to deal with a broker that specializes with private placements. A "Stock" Broker doesn't know how to sell this type of security. Selling a security is no different than selling any other product. The product needs to be attractive, and it needs to have an interesting story attached to it that captures the investor's imagination. The single most important aspect of selling a security is actually showing the offering to people that can afford to invest in it. I can't tell you how many people that I have seen that puts all the necessary paperwork together and then never shows it to anyone. Selling must be completed before starting the endeavor. Don't start before all the funds are raised. This is a major mistake many make. Understate and over perform with your investors. Build their confidence and they will be there for your next project.
© Copyright September 1997 Joe Fullop III Ph.D.
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