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Municipal-Private Security Offering
A Community Economic Development Application of Royalty Finance that Qualifies as a Community Development Limited Partnership as defined in the Community Reinvestment Act
FIRST PRINCIPAL ROYALTY CORPORATION
J M P S O
JOINT MUNICIPAL-PRIVATE SECURITY OFFERING
New methods are emerging for financing the modernization and expansion of American business and industry. JMPSO provides one of the most exciting and promising new financial tools for use by creative community development professionals. JMPSO creates a unique relationship between progressive community development leaders, business and industry owners and private investors. For many years, states, counties, and municipalities have used Economic Development Entities to attract new industry. They have been the "community deal makers" to bring about industrial development, working on behalf of taxpayers. However, like conventional debt financing methods and "government grants" the leverage game is changing rapidly. Since current success rates for conventional methods of funding are not very promising a new funding approach is needed. Industrial development organizations are more frequently being asked to deal with private sources of capital. They now have the opportunity to do so with a new financial tool known as JMPSO.
What is JMPSO ?
A Joint Municipal-Private Security Offering (JMPSO ) is a security offering formally made by a political subdivision of a state ( a 501-C1 corporation ) with private investors in the name of Economic Development. JMPSO is very similar to an industrial bond issue in that it is offered in conjunction with the use of an exemption under the Securities Act of 1933 - but it is sold to the general public. This security is issued by an economic development agency "to the public" for a specific project. Unlike more common tax revenue bonds, JMPSO securities are NOT guaranteed by the issuing organization or its revenue base. They are issued and sold with a detailed disclosure memorandum which describes all the material facts of the offering. This includes the community's interdependent relationship with other industries and the risk factors involved.
There are minimum suitability standards for investors which must be considered before the issue is offered for sale. FPRCs rules must be strictly adhered to by the political subdivision utilizing the JMPSO financial structure. A "NO ACTION LETTER" is required by FPRC to be secured from the Director of Securities in the state that the offering is made by the political subdivision that is the official ISSUER of the security.
Once understood, this type of structure offers the serious industrial development representative an exciting new approach to raising capital for businesses and industries in their communities.
BASIS OF MARKETABILITY
There are other private security exemptions available for use by businesses and communities. However, most are unacceptable and useless in the majority of instances:
JMPSO is a valuable economic tool because it can be used by any political subdivision of the state, including cities, counties, municipalities or properly structured 501C-1 corporations. Under Section 3(A) of the 1933 Federal Securities Act, any political subdivision of a state is exempt from registration if it issues, or guarantees the security. This is interpreted to mean political subdivisions can, in the name of industrial development and for the betterment of the community as a whole, issue a security (not just bonds) which can be sold to an unlimited number of participants in the state of registry (themselves or through agents or brokers). The resulting security may be structured to meet the combined interests of the issuing community, the business to be funded, and the investors who provide the capital.
A properly structured JMPSO should provide total funding for the building facility, equipment, raw materials (at maximum cash and volume discounts), and other necessary operating and marketing funds to provide a "better than adequate" business start. Companies who negotiate a JMPSO relationship with a community should not blend this method of funding with conventional financing. Those preferring to leverage themselves heavily should not consider the JMPSO program.
The repayment of capital from the JMPSO is based upon the gross sales of products or services. This is what makes it a "royalty". The amount of "royalty" should remain constant until investors recoup a predetermined level beyond 150% of their initial investment. The royalty payment to the investor is then reduced as much as 50% until the investors receive up to 250% of their initial investment. A final reduction of royalty to the investor should be defined based upon long term competitiveness in the particular industry. Companies should negotiate an attractive initial rate of return for their investors with a good, but reduced, long term return. The initial royalty is usually arrived at by defining the increase in profits and savings generated from the use of the JMPSO.
The issuing municipality or other exempt entity receives a negotiated, disclosed fee to be shared with the broker/agents representing the sale of the issue. Success of any project is dependent upon an initial, affordable cost per item produced or service rendered, and a return which is appropriately divided between all parties involved. (See "The Royalty Program EXPLAIN" document.)
As the volume of sales increases, the contingent liability (royalty) goes down. As royalties reduce, the ability to compete increases, generating a larger volume of sales which further reduces the contingent liability (royalty). The system allows a business to concentrate on the bottom line -sales- rather than having to discount receivable to meet current obligations. The net result is a much more efficient, focused company which did not have to sell a portion of its value in the form of stock, nor subject itself to the problems associated with heavy "conventional" debt.
It is important for economic development directors to understand that the "structure" of the offering greatly affects the future success of any business. Most economic directors have been taught that a traditional "business plan" is the "crystal ball" which can look into the economic future of any given venture. This is far from the truth. Any business plan should be viewed only as an "intended goal" and an "explanation of a business strategy." Actual success in the business is gauged entirely on sales, and no one can predict upcoming business conditions with accuracy. Companies funded with a conventional loan structure, depending on high minimum sales in order to meet loan demands, have a far greater risk of failure than those funded through a JMPSO. JMPSO - based payments are tied directly to the volume of sales as a "fluctuating rate of return" or "royalty." The rate can be coupled with minimum payments or many other appropriate variables. Businesses commonly fail because of unexpected sales declines. Many failures occur, not because the people of the company do not work hard, but because of unforeseen business forces. The structure will allow a business to make necessary adjustments before it gets so far behind it can't recover. Investors in JMPSO - structured businesses know that companies have peaks and valleys in sales. These investors receive exactly what they bargained for a portion of the income stream without cost of operations deducted as in other business structures.
Success is further enhanced in the JMPSO program when more than one business or industry is funded through a single project. This creates a "mutual fund" effect where the investment group can experience some failure and still have a very successful investment.
FACTS AND CONSIDERATIONS
According to the SBA (Small Business Administration) figures, 99% of U.S. businesses are small with less than one hundred employees and 90% have less than twenty employees. Small business is responsible for 56% of the jobs in the private sector and 47% of private output. Companies with fewer than twenty employees create 98% of all new jobs, and they employ a disproportionate share of the youngest, oldest and women. Also, small businesses have more productivity per employee and produce most technological innovations.
Given these facts, it seems that most Economic Development Directors, their boards, as well as individual state Departments of Commerce have their priorities out of order. Their efforts have centered on creating opportunity for big business, usually at the expense of the taxpayer in the form of abatements. These days are coming to an end, because grants are virtually non-existent. A new approach to economic development opportunity must be sought.
"Financing," without question, is the key to "economic development." "Financial structure" is the key to "risk management." The time has come when private investors are the only real source of growth capital practical to consider. It follows, therefore, that the JMPSO structure can provide a community and its businessmen a decided advantage over conventional funding methods.
Communities who offer the JMPSO program have a much better chance of retaining and expanding existing industries. Many companies, given the opportunity to locate within a desirable community using a JMPSO finance package, will choose to do so.
Research has proven that 90% + of the businesses in America are operating at a 45-50% rate of inefficiency because of improper initial capitalization. This fact is the number one reason for bankruptcy today. The second biggest killer of small business is unpredictable cyclical events. The proper structuring of debt through a JMPSO royalty offering eliminates both of these problems once and for all.
Many communities need help in funding industries within their localities who prefer not to move, but do not have the necessary resources to stay. Many other communities are in a position to attract existing industry which is ready to relocate, but lack the funds to do so. JMPSO will effectively unite a company's needs to acquire capital with the community's desire to provide jobs for their people, and investors desiring a good return on their investment.
There are literally hundreds of businesses and industries looking for assistance in structuring a new financial program. Company executives also now realize they could spend a lifetime of effort with their company, funded by conventional debt-only to find that cyclical economic conditions have turned against them and effectively put them out of business.
Communities that desires economic development will need to:
The JMPSO program couples the exempt power of local government to issue a well designed industrial development security on behalf of selected industries and make community economic development happen. IT IS TIME IN AMERICA TO BRING WALL STREET TO MAIN STREET.