Finding Investors & Raising Capital
- To successfully raise capital and find investors you need to do the following:
- Create a good business plan that properly explains your project.
- Identify what your likely investor looks like (profile).
- Be willing to offer the investors a “good” deal”.
- Construct a marketing program to identify and show your project to prospects that indicate an interest in your business or business idea.
There are literally millions of individuals with IRA’s and 401K plans receiving a return of 1% or less on their retirement accounts. You may be one of these persons yourself. Many of these individuals are worried about how they will ever have enough money when it is time to retire. These individuals would be an example of one possible type of an investor profile. When advertising finding investors and presenting them with the details of your project is not difficult as long as we know that is our intended goal when we prepare the Offering Documents.
Regulation D – Rule 506(c)
is the Federal Regulation that allows for the direct solicitation of investors through advertising. However, the rule mandates specific restrictions and compliance responsibilities and must be done in a manner that complies with the law.
No one can force an investor to write you a check. To successfully raise capital your ultimate goal must be to drive as many “qualified” leads as possible to a “place” potential investor can be exposed to your ‘Offering Documents”.
Qualifying Leads to Find Investors:
Your likely ad/message will be restricted to less than (<) 130 characters. We must say something within your 130-character ad that will cause the reader (potential investor) to reach out to you and request more information. As a result, each response provides you with a “qualified” lead.
Showing your project to potential investors means identifying individuals who would be interested in the idea behind the project. In many cases, the likely investors will not be professionals. The “investor profile” will likely be that of a small investor, investing amounts from $5,000 – $50,000.
Though it may be possible to interest Venture Capitalist and Professional Angels; it makes sense not to limit your options to just them. The investor you should focus on will be driven by the deal and the idea behind the project. Every deal is unique and should be judged on its own specific merits.
Be realistic in your risk assessment:
It is very important that you properly identify what the likely prospective investor profile looks like and gear your presentations to that profile. This is a very important element of the strategy needed to raise capital.
Advertising for Investors: Federal Law from approximately 1934 to 2013 prohibited advertising or initiating a solicitation of any investor for the purpose of investing in a “private placement”. Recently, that law changed. The new rules now allow advertising and solicitation subject to specific guidelines that must be followed to stay in Federal Law compliance. The process can be frustrating and confusing but with the new law there has never been a better time to raise capital.
In the majority of cases, your Plan A to raising capital will be putting together a group of investors. Maybe, the average investment will be $25,000-$45,000. Your presentation is going to be through your investment documents (PPM) of which your business plan will be a principal exhibit. Remember: a business plan by itself is equivalent to a sales brochure and does not meet the standard required of the “PPM Offering Documents”. However, once the business plan is added to the Offering Documents it becomes an exhibit within your investor documents (Private Placement Memorandum / PPM). The PPM is also your best opportunity to present “all material information” about your project to each investor in a logical, orderly and well thought out manner. Once the prospect has read the offering documents they will have “all material information” about the investment at their fingertips. In so doing, you have complied with the requirements of the law, Regulation D. Any conversations with the investor after that will be to answer questions. Generally, if the prospect is asking questions, they are leaning toward investing.
Preparing Offering Documents:
The Offering Documents need to be prepared in compliance with Federal Regulation D and provide the investor with “all material” information necessary for the prospective investor to make an informed investment decision. Included in the (PPM) Private Placement Memorandum documents are the Business Plan, Subscription Agreement, Investor Questionnaire and if L.L.C. (Limited Liability Company) an Operating Agreement. Important reminder – whatever is contained within these documents must comport with what is represented by you to the investors as well as your advertisement. For more information about the Preparation of the Private Placement Memorandum …….Click Here
Offering Documents-What exactly are the Offering Documents
- Offering Documents are required to be given to any prospect that you talk with about investing in your project; regardless of whether they ultimately invest or not. The only exemptions are members of your immediate family i.e.: Mother, Father, Sister, Brother.
- Offering Documents consist of a Private Placement Memorandum, Subscription Agreement and Investor Questionnaire and Operating Agreement (if an L.L.C.).
- The Private Placement Memorandum contains the complete information about the project and all the information about the Offering. It should contain “All Material Information” showing you have complied with Federal Law – Regulation D requirements.
- The Subscription Agreement is signed and returned by the investor with their investment check. The Subscription Agreement among other things is an acknowledgment or receipt from the investor that they received the Offering Document. If in the future there is a disagreement about what you disclosures you provided, the investor cannot claim you did not provide them with the Private Placement Memorandum which should contain all relevant disclosures.
- The Investor Questionnaire is filled out and returned by the investor. It qualifies them as either a non-accredited investor or accredited investor. (the importance of this goes to your options for soliciting investors through advertising.)
Place: Now that we have the prospect requesting more information; we need to have a “place” for the prospect to access and review all available information about your project. However, because we can only solicit investors who meet the criteria of “accredited” investor; we also need to qualify them as appropriate “accredited” investors before giving them access to the Offering Documents. We need to incentivize the prospect with enough information to keep them interested but not information that would violate Federal Securities Laws. This “place” will enable us to not only provide them with the Offering Documents; but automate their ability to access the documents.
follow up: Once the Prospect has all the information a follow-up call from a company officer offers to answer any questions the prospects might have.
Results: Sending your information to prospects that have expressed an interest in your advertisement has a much higher chance of success.
Advertising Cost: The advertising cost should average between $1.50 – $2 per “qualified lead. $1,000 / $2 = 500 qualified leads that go to your “place” for more information. Dependent on the quality of the project, you would hope for 4% – 6% (20 -40) of these leads to pursue active discussions with you. If you can close half of these 10 -20 at $50,000 minimum investment per investor that translates to $500,000 – $1,000,000. In many cases this could provide sufficient funds to get your project off the ground with you retaining the option to have a 2nd Offering at a later date. In the event, of a 2nd Offering you will have the added benefit of being able to show the company’s performance enhancement that the initial 1st round of money has created.
The Federal Law (Regulation D) that governs the taking of money from investors can be very simply stated.
1- You must provide the investor with “all material information” needed for them to make an informed investment decision. The law doesn’t define what constitutes “all material information”.
2- You are responsible and liable for any information given or not given the investor. In other words, you are equally responsible for information omitted. Having your business plan critiqued by another party is a good practice. It doesn’t have to be critiqued by us. It could be anyone who’s opinion you respect. We charge $1,350 for our business plan review critique that will typical entail 7 – 10 hours in total of our time. For further info see about our Business Plan Critique – Click Here…..
3- The onus of responsibility will always be your responsibility to provide the investor with “all material information”.
4- Obviously, the written terms in your Offering Memorandum (Private Placement Memorandum aka PPM) must comport with any representations you have made verbally in conversation with the investor.
5- Failure to comply with the law (Regulation D) can result in what is called an “order of rescission”. This means that you can be ordered by the SEC to return ALL the investor’s funds.