How Do I Raise Money?

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Contents
HOW TO RAISE CAPITAL FROM INVESTORS…………………………………………..3
THE FUNDAMENTALS OF RAISING INVESTOR CAPITAL………………………….3
WHO SHOULD USE A REGULATION D OFFERING…………………………………..5
BACKROUND INFORMATION ON THE REGULATION D PROGRAMS.........6
OFFERING TYPES – DEBT OR EQUITY…………………………………………………….6
REGULATION D PROGRAMS………………………………………………………………….7
DOCUMENT CREATION…………………………………………………………………………9
MARKETING…………………………………………………………………………………………9
INTERNET MARKETING TO INVESTORS………………………………………………..10
TRANSACTION STRUCTURES………………………………………………………………..10
ADVANTAGES OF REGULATION D OFFERINGS……………………………………..11
THE PRACTICAL ISSUES SATISFIED………………………………………………………..11
ACCOMODATING NUMEROUS INVESTORS………………………………………….11
LIMITATIONS OF A BUSINESS PLAN………………………………………………………12
ABILITY TO USE STOCKBROKERS…………………………………………………………..13
LIMITED LIABILITY FOR PRINCIPLES………………………………………………………14
INDIVIDUAL INVESTORS – BETTER THAN VC’S……………………………………..14
PRE-OFFERING STRUCTURING……………………………………………………………..14
PREPARING THE DOCUMENTATION……………………………………………………..15
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HOW TO RAISE CAPITAL FROM INVESTORS

The very first step that most companies take when seeking private capital is the creation
of an executive summary and a business plan. While executive summaries and business
plans are an important facet of raising capital they are not designed to be investment
documents.
Executive Summaries and Business plans typically just provide general information about
the company, its business model, goals, etc. While this information is important to
investors, it does not provide a basis or structure for accepting capital investment.
A business plan does not allow a company to accommodate multiple individual investors.
Most business plans state an aggregate amount of funding needed, "$500,000" for
example, but provide no structure to allow for fractional investment. This means the
company must find one single investor with $500,000 to invest - and the patience to
develop the transaction structure and documents to process that investment. This
limitation is probably the single biggest reason why so many companies fail at raising
investor capital. Raising capital effectively and properly from investors requires very
specific documentation that far surpasses what a business plan provides.
Public companies don't raise capital from investors by putting a business plan in front of
them. If you wanted to invest into Dell Computer - do you think Dell would send you a
business plan to process your investment? Of course not - you would invest into Dell
Computer through a securities offering. The same holds true for private companies
seeking capital from investors. Don't expect an investor to invest unless you have
presented them with a securities offering. Business plans serve a purpose (especially for
start-up companies) - but they should not be relied upon as investment documents.
THE FUNDAMENTALS OF RAISING INVESTOR CAPITAL
There are certain fundamentals that you must have in place in order to raise any amount
of capital from investors properly (whether it be one investor or one hundred):
First, you must have proper transaction structure in place before you interact with
investors. The overwhelming majority of companies that are just using a business plan to
raise capital (whether for $50,000 or $15,000,000) typically have very little transaction
structure beyond "we're selling 20% of the company for $2,000,000". This is wholly
inadequate.
How many shares or units are being sold? Preferred return or common ownership? What
is the share/unit price? What is the total authorized share/unit pool and how will it affect
future dilution of the investment? What is the exit strategy? How is the investor return
modeled? Are the securities convertible?

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Not addressing this information places the responsibility for creating proper transaction
structure on the investor - which is very unprofessional and reflects poorly on the subject
company. To raise private capital successfully you need to go well beyond simply stating
to investors an aggregate amount of capital needed and providing information on the
business. Do not expect investors to have any interest in your opportunity without
providing them concise terms and conditions regarding their capital investment in your
company. If you were an investor - would you not want the same information and
structure provided for your investment?
Second, proper documentation for raising capital from investors is of critical importance.
A business plan is not even the bare minimum needed for raising private funding - of any
amount. The specific documents needed for raising private capital are:
§
Private Placement Memorandum: The Private Placement Memorandum, or
"PPM", is the document that discloses all pertinent information to the investors
about the company, proposed company operations, the transaction structure
(whether you are selling equity ownership or raising debt financing from the
investors), the terms of the investment (share price, note amounts, maturity dates,
etc.), risks the investors may face, etc. Do not confuse the detailed corporate
disclosures, SEC disclosures, and transaction structure in a PPM with the general
information a business plan provides - they are not the same.
§
Subscription Agreement: Business plans do not even provide the documentation
necessary to allow the investor to actually invest. Don't expect investors to
provide you funding based on a handshake. Would you invest funds into a
company without signing a document that sets forth the terms and conditions of
the investment? The Subscription Agreement sets forth these terms and conditions
- this is the document the investor signs and returns to you with their investment
check. You will have a very hard time raising debt or equity capital without this
basic document.
§
Promissory Note: In debt offerings you need to have a Promissory Note outlining
the terms of the loan arrangement with the investors. The note is the actual "loan
document" between the company and the investor. It is impossible to have a
"loan" without a "loan agreement" that sets forth the terms and conditions of the
loan.
Third, in order to sell securities to investors you must follow the rules and regulations
that govern these sales as set forth by the Securities and Exchange Commission and State
securities regulators. The SEC has specific rules concerning how a private company
solicits capital from investors - even if very few investors are involved. The Regulation D
Offering program is the exemption program designed by the SEC for private business. It
is the most widely used program the SEC offers and provides the proper exemption
needed to raise capital from investors. Not raising capital properly can provide investors
with a "right of rescission" in the future - meaning they can get their investment back
regardless of the circumstances.

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Don't rely on your business plan to perform a function it was not designed to accomplish.
Let us structure a Regulation D securities offering for your transaction and begin raising
capital the right way.
WHO SHOULD USE A REGULATION D OFFERING?

Any private company or entrepreneur that is seeking to raise equity capital or private debt
financing from investors should have a securities offering in place. Only a securities
offering can provide the needed practical framework to accommodate investment.
Even if your transaction will only involve one or two investors - you still need to provide
the proper transaction framework, disclosure documentation and investment agreements
necessary for raising capital. Raising capital from investors, debt or equity, of any
amount requires very specific documentation that far surpasses what a business plan
provides. It is imperative that a company seeking capital from investors have in place a
Private Placement Memorandum, a Subscription Agreement, and in debt offerings a
Promissory Note Agreement. Raising capital without these documents is nearly
impossible - they are a necessity.
You also need to use an SEC program, like Regulation D, to properly sell your company's
securities to the investors. The SEC and States have specific rules concerning how a
private company solicits capital from investors - even if very few investors are involved.
The Regulation D Offering program is the exemption program designed by the SEC for
private business. It is the most widely used program the SEC offers and provides the
proper exemption needed to raise capital from investors. Not raising capital properly can
provide investors with a "right of rescission" in the future - meaning they can get their
investment back regardless of the circumstances. You could also face fines and other
penalties resulting from an improper sale of securities to investors.
The Regulation D Offering Programs are typically utilized to raise from $25,000 to
$50,000,000 in capital. Regulation D Offerings are used for a wide variety of transaction
and industry types: corporate seed capital, corporate expansion capital, film production
capital, real estate equity funding (acquisitions, development projects, golf courses,
rehab), capitalization for early to pre-IPO stage Internet and technology companies,
expansion funding for retail companies, and product development and distribution
funding.
A Regulation D Offering provides the fundamentals for raising capital from investors -
regardless of your industry type, age of your company, or the size of your organization.





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BACKGROUND INFORMATION ON THE REGULATION D PROGRAMS
There are several programs that are available under the Regulation D Exemption. Of the
available Regulation D Programs we support the 504, 506 and SCOR programs. Most
companies typically use the 504 and 506 programs - which program you utilize is based
primarily on transaction size. Detailed information on each program can be found in the
gray menu on the right.
OFFERING TYPES - DEBT OR EQUITY
There are 2 basic types of Regulation D Offerings that can be structured; an "equity"
offering where the company is selling partial ownership in the company (via the sale of
stock or a membership unit) to raise capital - or a "debt" offering where the company
raises debt financing by selling a note instrument to investors with a set annual rate of
return and a maturity date that dictates when the funds will be paid back to investors in
full.
An equity offering is where the subject company sells an ownership stake in the
company to investors. Equity is usually preferred by early stage companies that need
flexibility regarding capitalization. In an equity situation investors profit as the company
profits since they are partial owners. This provides the advantage of not having a debt
service payment draining revenue from the company in its early stages of growth. Most
companies sell 10-30% of their company for a first round funding - obviously there are
exceptions but this is the average. We recommend using either a "C" Corporation (where
you would sell stock to investors) or a Limited Liability Corporation LLC (where you sell
a membership unit to investors). Investors typically profit in two ways from an equity
deal; via their proportionate "per share" percentage of company profit (called a dividend)
and via the final sale of the security through an exit strategy (example: the company
buying the securities back from the investors, the company and its issued and outstanding
securities being bought out by another company, going public and selling on the open
market, etc.)
A debt offering functions much like a private business loan where the company sells a
promissory note to investors. The note sets forth the terms and conditions of the loan
arrangement between the company and the investor. Thus a note would provide a certain
interest rate typically paid annually to investors with a maturity date that dictates when
the principal is paid back in full to investors. The notes are sold in fractional amounts
providing flexibility for accommodating investors - thus a typical debt offering for
$100,000 would be the sale of 20 notes at $5,000 per note. An investor investing $10,000
would get two notes. If the interest rate was 12% then he would get $1,200 paid to him
annually based on the $10,000 investment. If the maturity date was 36 months then at the
end of the 36 months the company would pay back the $10,000 to the investor. Many
early stage companies that lack the required equity or operating history for conventional
bank financing will use private debt from investors for a short period of time (12-36
months) to establish a credit and operating history. They then have the capability to take
out the private debt loan from the investors with a standard bank business loan at a lower
interest rate.
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REGULATION D PROGRAMS

There are three primary SEC Regulation D Programs that offer support for; the
Regulation D 504 Offering, Regulation D 506 Offering, and the Small Corporate
Offering Registration ("SCOR") Offering.
Determining which program best suits your company is based primarily on transaction
size. We normally recommend the standard 504 or 506 offering programs (not SCOR) for
most companies.
Regulation D 504 Offerings are typically used for transactions under $1,000,000 in size
Regulation D 506 Offerings are used for deals over $1,000,000.
504 Program

Regulation D 504 Offering: allows companies to raise up to a maximum of $1,000,000
in a 12 month period - the exemption is renewable meaning the company can use the 504
program again 6 months from their last securities sale under 504.
The 504 is the least restrictive of the Regulation D programs regarding structure,
financials, disclosure, and investor suitability. A 504 offering allows a company to sell
securities to an unlimited number of purchasers without regard to their sophistication or
experience - although some States may limit the company to 35 non-accredited investors
while still allowing an unlimited number of accredited investors.
The 504 is the most popular and widely used of the Regulation D programs. Many
companies use 504 for an initial round and then float a 506 for a larger second round -
both offerings can be done in a 1 year period because they are separate exemption
programs.
The 504 program is available for private corporations only. Public reporting companies
cannot use the 504 program.
The 504 program is regulated at the Federal level and State level (the State the investor
resides). Companies using the 504 program must file a Form D notification filing with
the SEC (included in our service) and may be subject to informational filings at the State
level depending on the residency of the investor. We have streamlined the State filing
process - most companies only need to file in 1-5 States to sell out a 504 offering.





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506 Program

Regulation D 506 Offering: allows companies to raise capital through the sale of
securities with no principal amount cap per 12 months. The 506 program provides an
exemption for limited offers and sales of securities without regard to the dollar amount of
the offering. Most companies use the 506 program to raise amounts from $1,000,000 up
to $50,000,000 - although there is no cap on how much capital can be raised via a 506.
506 offerings have basic disclosure requirements regarding transaction and company
details - our PPM documents exceed the Federal minimum disclosure level. Only
financial statements for the most recent fiscal year need to be certified by an independent
public accountant. If an issuer cannot obtain audited financial statements without
unreasonable effort or expense, or if the company is a start-up with no operating history,
only the issuer's balance sheet (to be dated within 120 days of the start of the offering)
must be audited. An issuer can forgo providing audited financial informat ion if the
offering is made solely to accredited investors or if the information on the balance sheet
is not material to the investment decision.
A 506 offering allows up to 35 non-accredited investors and an unlimited number of
accredited investors. 506's are exempt from State securities laws - the Federal regulations
supersedes the State rules, however most States will want a copy of the Form D
submitted if you are selling securities to investors that reside in their State. As with the
504 program a company must file Form D in conjunction with a 506 offering to notify the
SEC of the offering.
SCOR Program

Small Corporate Offering Registration ("SCOR") Offering: The SCOR is a more
complex version of the 504 offering. The SCOR offering provides a standardized
disclosure format that is accepted by 43 States and allows increased freedom of
solicitation and advertising over the standard Regulation D 504 exempt program. The
standardized disclosure format (the U-7 form) also allows the company to comply with a
large number of individual States securities laws utilizing one regional review instead of
filing the offering with each individual State the company sells securities in.
The SCOR does require audited financial statements for the past 2 fiscal years for
offerings exceeding $500,000 and has a maximum 12 month cap of $1,000,000. You
must also have 10% equity relative to the amount of capital you are raising through the
offering. We typically recommend the standard 504 over SCOR due to its lack of
restrictions, its ease of implementation, and its use of the more sophisticated and
professional PPM disclosure document. The SCOR U-7 disclosure document is a
question and answer document that we do not feel is very professional in its appearance
to investors.
If you have any questions about whether a SCOR or 504 would be best for your
transaction please feel free to call us directly to discuss specifics.
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DOCUMENT CREATION
Step two of preparing an offering invo

lves the creation of the documents, these inclue:
§
Private Placement Memorandum: The Private Placement Memorandum, or
"PPM", is the document that discloses all pertinent information to the investors
about the company, proposed company operations, the transaction structure
(whether you are selling equity ownership or raising debt financing from the
investors), the terms of the investment (share price, note amounts, maturity dates,
etc.), risks the investors may face, etc. Do not confuse the detailed disclosures and
transaction structure in a PPM with the general information a business plan
provides - they are not the same.
§
Subscription Agreement: The Subscription Agreement sets forth the terms and
conditions of the investment. It is the "sales contract" for purchasing the
securities. It is practically impossible to raise capital without this document -
investors are not going to invest into your company or opportunity based on a
handshake. Would you invest into a company without having the terms and
conditions of the investment set in writing and agreed to by both parties?
§
Promissory Note: In debt offerings you need to have a Promissory Note outlining
the terms of the loan arrangement with the investors. The note is the actual "loan
document" between the company and the investor.
§
Form D SEC Filing: The Form D is the notification filing that is sent to the SEC
in Washington, DC. It notifies the SEC that you are using the Regulation D
program and provides them basic information on the company and the offering. It
is not an approval document or registration - it is merely a filing that notifies the
SEC that you have a Regulation D Offering in place.
MARKETING
A Regulation D Offering will solve all of the technical issues you will face when dealing
with investors (investment structure, investment documentation, etc.) - these are issues
that should be addressed before you interact with investors. Not addressing them ahead
of time presents a very unprofessional image of you to the investor.
The Regulation D Programs can be used by domestic as well as foreign corporations.
While the programs can be used by any corporation type - the preferred structure is a
stock "C" Corporation or Limited Liability Corporation "LLC".




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INTERNET MARKETING TO INVESTORS

The advent of the Internet has provided private companies with a powerful tool that
allows the capability to cost effectively introduce their opportunity to a large number of
potential investors. There are many web-based services available that are specifically
designed to promote private investment opportunities. Internet marketing is a proven way
to locate potential investors.
The problem is that most companies are severely hampering their ability to effectively
use these Internet resources to raise capital because they are using only a business plan to
promote their investment opportunity. Most of the investors that will be contacted via the
Internet (whether through your corporate site or on a commercial marketing site) will not
have the capability to capitalize an entire transaction - thus being able to accommodate a
pool of these investors in a sophisticated and legal manner becomes critical. A Regulation
D Offering will allow you to make the most out of marketing your opportunity to
investors via the Internet.
Savvy companies are also providing links to their private placement memorandum and
subscription materials on their corporate websites so that interested parties can acquire
the investment documents online. These documents are password protected - thus the
investor must pass through an investor suitability questionnaire first before they are
allowed access to the offering documents. This turns your corporate website - and the
traffic that it encounters everyday - into a resource for locating potential investors.
TRANSACTION STRUCTURE

In order to raise capital properly it is crucial that you have a pre-set transaction structure.
What is transaction structure?
How much of the company are you selling for the requested capital?
How are you raising capital - equity or debt?
If equity - what is being sold - stock, units, preferred or common?
What is the share structure of the company?
Do I as an investor face the risk of dilution in the future?
What is the available share capital of the company?
What is the minimum amount of capital the company needs to move forward?
In debt transactions - what is the annual rate of return, maturity date, and note amount?
What is the minimum any one investor can invest?
In a Regulation D Offering the company dictates the terms and conditions of the
investment to the prospective investors. This is important because you want to provide to
investors a clear, concise investment proposal with zero ambiguity. It is not the investors
job to set up your transaction properly for investment. If you do not have in place proper
transaction structure investors will see your company as unsophisticated and they will
probably not invest.
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