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How to minimize private placement risks
Corporate and securities lawyer, Joseph Chiummiento, of Core Lawyers, describes why you should rethink your private placement approach and how to minimize risks in this critical process.
Over the years, we have seen many of our clients raise substantial amounts of money through private placement exempt offerings, which in everyday speak is simply selling shares or debt to raise money without a prospectus.
Rethink your private placement approach.
Three Approaches to a Private Placement
We have noticed three distinct approaches that entrepreneurs will use to raise funds, and they include:
- the DIY approach
- the In-Charge Approach
- Collaborative Approach
The DIY Private Placement
Most DIYers are internet savvy, willing to put some time in to handle some of the leg work and are comfortable with less structure throughout the process of the deal. They are typically happy to jump right in and start running, As lawyers, we sometimes get caught up in the details and the paperwork, and this “kick open the door approach” can scare some of us.
The Biggest risk: Jumping too quickly can lead to higher or unexpected risks if problems arise or if a game-plan has to change.
The In-Control Approach
This approach is characterized by a “been there done that” mindset and usually comes with little need for direction, assistance or guidance from the lawyer. The lawyer’s role is seen as important to manage with very limited time, involvement or discussions, and the focus is on closing and ensuring legal compliance.
The Biggest risk: Some later unforeseen event can cause exposure and steal time from what’s most important – raising money.
The Collaborative Approach
The collaborators prefer to stake their reputation on every element of the private placement. They speak with friends, family and colleagues (and bankers) they have known for years or in different roles or former roles. This approach is tied to you, your name and your past accomplishments and credibility.
The Biggest Risk: a change in circumstances by a lead investor or banker could significantly harm the deal closing and make them look bad to all of the others they have spoken to or made promises to.
How to Minimize Private Placement Risks
Depending on the approach, we typically find the following helpful to minimize the risks in a private placement closing:
Use a checklist – understanding where you are going and what boxes need to be checked or circled will ensure unforeseen expenses are managed in advance.
Have a strategy meeting after the first 2 or 3 pitches to bankers or investors and identify commonalities in the questions. Ask for hard opinions from those around you and identify what you believe to be your biggest risk (other than not raising the money) ie. which investors/bankers share your timeline for closing and how you can address the common questions to shorten their timeline.
Focus the pitch on the long term relationship the company is building with key supporters. Reinforce the momentum that has been building but also emphasize that there is a need to share in the growth as a team for this and future deals.
Ensuring your lawyer or your CFO or your investment banker/broker/finder are aligned with your strategy is the first step. Then tell them how you want them to help or ensure they understand how you see their role assisting in the process. This simple discussion or email will ensure you can take advantage of opportunities, have peace of mind and protect your reputation on the “street”.