• Share
  • Email
  • Embed
  • Like
  • Save
  • Private Content
Top 11 Information Memorandum Mistakes
 

Top 11 Information Memorandum Mistakes

on

  • 11,647 views

A guide to raising capital through production of a high quality offer document and learning what mistakes to avoid.

A guide to raising capital through production of a high quality offer document and learning what mistakes to avoid.

Statistics

Views

Total Views
11,647
Views on SlideShare
11,621
Embed Views
26

Actions

Likes
3
Downloads
262
Comments
1

3 Embeds 26

http://www.lmodules.com 19
http://www.linkedin.com 6
http://kendal.posterous.com 1

Accessibility

Categories

Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel

11 of 1 previous next

  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

    Top 11 Information Memorandum Mistakes Top 11 Information Memorandum Mistakes Document Transcript

    • Top 11 Small Scale Offer Document Mistakes morgan cradock Morgan Cradock’s “Top 11 Small Scale Offer Document Mistakes” provides advice on how – and how not – to approach the process of raising capital under the Section 708 placement rules. +61 (0)2 4946 8765 www.morgancradock.com PO Box 3177 Valentine NSW 2280 AUSTRALIA
    • morgan cradock About The Report Morgan Cradock is an investment advisory firm that specialises in working with privately-held emerging and middle market companies. We are a notified operator and publisher of Business Introduction and Matching Services in Australia; as notified to the Australian Securities & Investments Commission. We provide the following services: • Raising Equity Capital • Strategy Consulting • Deal Transaction Advisory • Small Scale Offer Document Services We created the “Top 11 Small Scale Offer Document Mistakes” report based on our experience advising more than 100 emerging growth businesses on their capital formation strategies. If you are seeking assistance with a Small Scale (defined as up to $5 million in a 12 month period) offering in Australia, please do not hesitate to contact us at +61 (0)2 4946 8765 or write to Michael Cradock at michael@morgancradock.com. © Copyright Morgan Cradock, 2009
    • morgan cradock Top 11 Small Scale Offer Document Mistakes Mistake #11: An entrepreneur not being open to leveraging through the participation of third party investors On the one hand, there is this image of a venture capitalist (VC) as one who seeks to control the investment with an iron fist; while at the extreme is this picture of the investor being totally passive and patient. Neither is true except in exceptional cases. Typically the VC will only invest after the first two to three financing rounds have been completed by large private (angel investors) as well as founders, friends and family investors. The goal is that the company’s valuation will increase in each subsequent funding round such that when the VC does invest the larger sums of money required for, say, global expansion, the VC will only receive a minority interest. By definition, therefore, they have no control. A good VC brings vast commercial experience and robust examination of all major decisions. Rather than control their desire is almost always to add value and they do this through participation at the table via a directorship or some informal executive role. © Copyright Morgan Cradock, 2009
    • morgan cradock Top 11 Small Scale Offer Document Mistakes Mistake #11 continued... An individual (and earlier stage) private investor, particularly one who has some strategic interest in the business will be equally valuable. The best deals arise when the investor can bring you contacts in the The best deals industry, resources like knowledge about inventory management, arise when the warehouse logistics, supply chain and investor can bring IT scalability. you contacts in the industry, resources Very, very few investors have any like knowledge desire to remove the chief executive about inventory or founders unless there is absolute chaos and financial disaster ahead management, of them. Dare we say you may well warehouse logistics, welcome the investors’ intrusion? supply chain and IT scalability. With these common misconceptions behind us, let’s move on to the next 10 mistakes made on the capital raising pathway and what to do about them. © Copyright Morgan Cradock, 2009
    • morgan cradock Top 11 Small Scale Offer Document Mistakes Mistake #10: Believing That You Don’t Need a Small Scale Offer Document to Raise Capital If you are raising capital from an individual, as opposed to a venture capital fund, then you need to comply with Section 708 of the Corporations Act that is governed by the Australian financial regulators, the Australian Securities & Investments Commission. A business plan is a component of the Small Scale Offer Document Package, but in and of itself it does not provide sufficient risk disclosures. Many companies naively ignore the Corporations Act legal requirements hoping that they will be in the majority of cases that “fly under the ASIC radar”. The risk of running this gauntlet is to be forced to repay shareholder’s funds, face the embarrassment and discredit this will cause you and your family forever, pay a hefty fine to ASIC, and, if this wasn’t bad enough, risk going to jail for 5 years. Mistake #9: Assuming a Small Scale Offer Document is ALL You Need to Raise Capital A Small Scale Offer Document, because of its boiler-plate and rigid structure with exhaustive disclaimers, is in many ways a document that highlights everything that can go wrong. As such, it needs to be supplemented by more promotionally-focused materials, such as a Key Investment Highlights Summary, a PowerPoint 10 Minute Pitch, and/or multi-media including a website and/or a video presentation of the investment opportunity. © Copyright Morgan Cradock, 2009
    • morgan cradock Top 11 Small Scale Offer Document Mistakes Mistake #8: Providing Insufficient Detail in The Use of Funds Section You cannot have a vague plan of what you will do with the money once you have raised it. Investors are assessing the management’s skill set and in particular the ability to execute on a plan. All too often entrepreneurs issue their Small Scale Offer Document with scant details Investors are in the Use of Funds Section. This is the assessing the one opportunity to provide an executive summary of where the investment funds management’s will be directed and, more importantly, skill set and in what milestones will be achieved in the particular the coming 12 to 18 months before another ability to execute financing round is required. on a plan. Note: Once the first round for investment is complete this is not the end of the capital-raising journey. More likely than not you will be raising another three, if not four to five further rounds, of capital to successfully provide a liquidity event (returning invested cash plus profit) for your investors. © Copyright Morgan Cradock, 2009
    • morgan cradock Top 11 Small Scale Offer Document Mistakes Mistake #7: Selling Securities to Unsophisticated Investors Within the Corporations Act, Section 708(5) proscribes very specifically regarding the various types of offerings that do not need disclosure to investors, “excluded offers”. One of the most important categories of investors where a Small Scale Offer Document is not needed is the Limiting your sophisticated investor category. offering to only sophisticated What is a “Sophisticated” Investor? investors is When marketing to individual private beneficial both equity investors (e.g. “angel” investors), from a fundraising the following three definitions of and legal liability sophisticated investor apply: perspective. 1. Has net assets of a least $2.5 million; or 2. Has a gross income for each of the last 2 financial years of at least $250,000; or 3. The amount invested is at least $500,000. By restricting your private offering to sophisticated investors, you help ensure that you retain your excluded offer status. Limiting your offering to only sophisticated investors is beneficial both from a fundraising and legal liability perspective. Sophisticated investors are capable of investing larger sums, they tend to be more familiar with the risk and illiquidity associated with private equity investments, and they are in a better financial position to withstand a potential loss of investment. © Copyright Morgan Cradock, 2009
    • morgan cradock Top 11 Small Scale Offer Document Mistakes Mistake #6: Publicly Advertising a Private Offering to Potential Investors Your success in offering an investment opportunity to third party investors – in terms of fundraising as well as legal liability – is not only affected by how you create the Small Scale Offer Document, but also by how you market your opportunity. You cannot Under The Corporations Act Section advertise your 708(2), Personal Offers (or Small Scale Offers in more commonly used business offering in the language) must only: newspaper, TV, or radio or you risk • Be made to a person who is likely a jail sentence of to be interested in the offer up to 5 years. This means that you cannot advertise your offering in the newspaper, TV, or radio or you risk a jail sentence of up to 5 years. Instead of generally advertising an investment opportunity, issuers are required to limit the marketing of their opportunity to people with whom they have a pre- existing business or personal relationship. If an issuer does not have a pre-existing network of prospective investors, the company can demonstrate such a relationship through a “matching service” that is acting on behalf of the issuer. © Copyright Morgan Cradock, 2009
    • morgan cradock Top 11 Small Scale Offer Document Mistakes Mistake #5: Using Unregistered “Matching Services” to Market Your Offering In order to broaden their network of potential investors, issuers will often use “business brokers”, “finders” or “intermediaries” to help promote their offering. It is unlawful for an individual and/or firm to conduct a business as a Business Introduction Service Operator without registering with the Australian Securities & Investments Commission (ASIC). More importantly, the company who hires a Business Introduction Service Operator that has not notified ASIC of its compliance with the relevant rules and Class Order [CO 02/273], puts the whole capital raising in jeopardy, with significant risk of recession of the transaction. © Copyright Morgan Cradock, 2009
    • morgan cradock Top 11 Small Scale Offer Document Mistakes Mistake #4: Not Having a Solid Board of Directors in Place Investors are investing in the management team’s ability to execute on a strategic framework against which decisions are made that influence the direction and nature of the business. Our experience of the single most important factor of why some companies fail to raise equity capital while others are highly successful and have their opportunities completed within months, is the Board composition. The Board of Directors provides the necessary guidance, counsel and accountability for the management team staying within the parameters of the strategic framework. Getting this governance and skill set in place before marketing the opportunity will dramatically increase the success of attracting all the necessary private equity. © Copyright Morgan Cradock, 2009
    • morgan cradock Top 11 Small Scale Offer Document Mistakes Mistake #3: Assuming Only Attorneys Can Prepare Small Scale Offer Documents While there is much to be said for the higher-end securities law understanding and perspective when preparing a Small Scale Offer Document, it is wrong (and extremely costly) to assume that only securities lawyers can prepare Small Scale Offer Documents. The core aspects As advised above, the core aspects of of the Small the Small Scale Offer Document are as Scale Offer much business and marketing challenges, Document are as as they are legal ones. And it is the rare much business attorney with fluency in both. And for and marketing the resource-constrained entrepreneur, those types of attorneys are extremely challenges, as expensive – with hourly billing rates in they are legal excess of $400/hour. It is not unusual for ones. And it is the a high-end securities law firm to charge rare attorney with $60,000+ for a full Small Scale Offer fluency in both. Document package. There are very good options out there at significant fractions of this price. We’re not suggesting one of these options be the CEO writing the Small Scale Offer Document themselves; far from it. Aside from the poor use of expensive CEO time, they often don’t know what they don’t know when it comes to sufficient risk disclosures. © Copyright Morgan Cradock, 2009
    • morgan cradock Top 11 Small Scale Offer Document Mistakes Mistake #2: Thinking That the Small Scale Offer Document is “Just a Template” While some aspects of the Small Scale Offer Document are standard, its core, and material aspects – the proposed capital structure and terms of investment, the business plan and financial projections, and the risk disclosures – are completely customised and unique to each offering. It is a true art with a blend of skill sets and experience necessary to fully assemble the Small Scale Offer Document that conveys an attractive investment opportunity. Mistake #1: Assuming That a Small Scale Offer Document is “Locked” and Not to Be Edited Probably the #1 mistake we see in Small Scale Offer Documents for operating companies is their lack of updating. Especially in tightened credit markets, where fund-raising time lines are elongated, it is not unusual for an investment offering to take 6 months (or sometimes much longer) to complete. The business updates that occur during this offering time need to be disclosed to both the existing and prospective subscribers to the offering via circulating amendments to the original document. © Copyright Morgan Cradock, 2009
    • morgan cradock Top 11 Small Scale Offer Document Mistakes +61 (0)2 4946 8765 www.morgancradock.com PO Box 3177 Valentine NSW 2280 AUSTRALIA