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Course Outline Part XVII (Partnerships and Private Placements)
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Course Outline Part XVII (Partnerships and Private Placements)

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  • 1. XV. Partnerships, Private Placements, & Venture Capital
  • 2. A. PARTNERSHIPS
    • Types of Partnerships
      • General Partnership an agreement between individuals to share in running a business, sharing gains and losses
        • Personal Liability – each partner has unlimited liability for partnership debts, could lose more than his or her investment
        • Unless specified otherwise, all gains and losses are shared equally among the partners
        • The partnership agreement provides the legal framework for operations, including division of profits and losses
        • Investment Club – a partnership formed to invest pooled funds – generally divides profit and loss by initial investment
  • 3. A. PARTNERSHIPS
      • Limited Partnerships – a form of ownership in which investment control is assumed by a general partner, while the other partners have limited control
        • General Partner – organizes the partnership, writes the partnership agreement, assumes any partnership liabilities in excess of the limited partners’ investment, and obtains a majority of partnership profits in return
        • Limited Partner – passive investors, provide money only, can lose no more than the money invested, receive a share of the partnership’s profits
  • 4. A. PARTNERSHIPS
    • Partnership Agreement – the legal document specifying partners’ rights and division of gains and losses
    • Prospectus – for limited partnership investments, includes the partnership agreement and details fees and the division of profits between limited and general partners
    • Limitations on Partnership Investment – for a general partnership, there are no restrictions, however, limited partnerships generally require limited partners to be accredited investor
  • 5. B. PRIVATE PLACEMENTS
    • Can be used for either private (not publicly traded) stock offerings or other ownership shares of a business
    • For a formal private placement, the investor must be an accredited investor
    • Private placement memorandum – similar to a prospectus, details the risks of an offering, business officers, actual and pro forma financial standards, and related material
    • Subscription agreement – a contract between the business and the investors requiring the investor to provide the agreed upon capital
  • 6. B. PRIVATE PLACEMENTS
    • Private Placement Defined
      • A private placement is an agreement for equity investment in a business made directly between the business and the investor
      • Offered to a limited number of investors
      • Illiquid – ownership interests can not be publicly sold or purchased – generally, the private placement agreement specifies who the investor will be, and the ownership interest is not transferable
      • No regulation – because private placements are a direct contract between a business and an investor, they are not regulated
  • 7. C. VENTURE CAPITAL
    • Generally regarded as “seed money,” used to help start or expand a new business
    • A business can receive venture capital as a start up, when expanding before profitability, or after the business becomes profitable (but before a buy-out or an initial public offering)
    • The required rate of return or portion of equity required to receive venture capital funding is relatively high, the venture capitalist often provides advice and may take control of a corporation to protect its investment
  • 8. C. VENTURE CAPITAL
    • Forms of Venture Capital investments
      • Debt – loan contract between the business and the venture capital firm, generally with above market interest rates
      • Equity – where the venture capital firm purchases an ownership share of the business, generally in the form of private placement stock
      • Preferred Stock – the favored type of venture capital investment, provides interest yields and seniority to capital in the event that the firm fails, but with an equity interest if the firm succeeds
  • 9. C. VENTURE CAPITAL
    • Sources of Venture Capital Funding
      • Partnerships – business owned by individuals specifically to provide venture capital for other businesses
      • Limited Liability Corporations – a cross between a partnership and a corporation, does not have the restrictions on making investments that publicly traded corporations must adhere to
      • Investment Management Firms – pools of money from accredited investors, with an investment manager making decisions concerning which venture capital projects to fund
  • 10. C. VENTURE CAPITAL
    • Advantages and Disadvantages of Venture Capital
      • Advantages
        • Venture capitalists generally have expertise in guiding new firms, can help with management
        • Venture capitalists can provide substantial funds for business development
        • A venture capital firm’s investment in a business can give the business a “stamp of legitimacy”
      • Disadvantages
        • The venture capital firm often requires some control over the business’ operations
        • Venture capital money is expensive – the venture capitalists expect to obtain investment returns commensurate with their risk of loss of capital