The first classic obstacle any prospective business faces is raising sufficient capital to fund its startup and early-stage operations. Sure, some well-connected entrepreneurs have access to capital, but many viable business plans will die on the vine every year because the principals cannot overcome the inertia of skepticism:
“How much of your own money are you risking?”
“Your cash flow is negative. Come back when you are profitable.”
“How can I believe this will really work? You’ve never done this before.”
“This idea may have potential, but it’s not big enough to interest my group.”
“We might be able to help, but we will require 75% ownership and operational control.”
Does this sound familiar?
What has been needed is a practical mechanism to allow small and medium-sized enterprises (SMEs) to bypass the traditional capital marketplace and allow them to raise capital directly from the millions of well-to-do individuals throughout the USA who have the knowledge and the willingness to invest in entrepreneurial ventures. Such general solicitations had been strictly prohibited by the Securities and Exchange Commission (SEC) since the passage of the Securities Act of 1933, and with good reason; without safeguards, naïve investors had often been lured into making risky investments, either because they were defrauded by unscrupulous practitioners, or because they did not have sufficient knowledge of investment practices or information at their disposal to make an informed decision regarding the potential risk and reward.
Passage of the JOBS Act by Congress and the subsequent adoption of amendments to SEC Rule 506 of Regulation D have modernized the regulatory environment by eliminating the prohibition on general solicitation so long as certain conditions are strictly met. Under the new Rule 506(c) of regulation D, securities may be offered to the public through general solicitation provided that:
All purchasers are ‘accredited investors’;
Reasonable steps are taken to verify that each purchaser is an ‘accredited investor’; and,
All other provisions of Regulation D (and all other applicable law) are fully satisfied.
An accredited investor is defined as a person having income of at least $200,000 per year (or $300,000 including spouse) for two successive years with the expectation of the same for the current year, or a person (with or without a spouse) having a net worth in excess of $1,000,000, excluding the value of that person’s primary residence.
The key to making the new Regulation-D §506(c) process practical and viable for SMEs is, of course, the ability to cast a wide net through various means to identify and attract potential investors. Years ago, the only means of general solicitation would have been direct mail or possibly radio or TV, all of which were (and are) expensive. But with the proliferation of modern Internet access and social media, it is possible for almost any SME or individual entrepreneur to reach thousands (if not millions) of potential investors.
Now that the regulatory mechanism is in place and the means of general solicitation exist, how should the entrepreneur or SME proceed? That is where the expertise of Create Acquire Exit, LP (CAE) comes into play. CAE has the expertise to navigate the Regulation-D §506(c) process in order to maximize the prospects for a successful campaign and to assure strict compliance with all of the SEC’s arcane rules and regulations.
Specifically, CAE provides consulting services and market access for qualified businesses needing to raise capital for such purposes as growth and recapitalization, merger and acquisition, or for ‘going public’. CAE functions as a marketing and support organization providing expertise, guidance and a suite of support services to its clients. CAE is not a licensed broker or broker-dealer, and does not accept success fees.
There are two approaches by which CAE may participate in transactions:
Sponsored Transactions. CAE participates in Sponsored Transactions as principals directly involved at the management level. Each transaction is a self-issue under current regulations and will be marketed as a Direct Public Offering (DPO) or Direct Funding Offering (DFO) to accredited investors and institutions only; or,
Client-Centric Transactions. CAE provides the necessary support and strategy guidance for a client to undertake a self-issue of their securities under current regulations. These self-issued securities will be marketed as a Direct Public Offering (DPO) or Direct Funding Offering (DFO) to accredited investors and institutions only.
CAE believes that the new Regulation-D §506(c) rules marks the advent of a new era of growth and opportunity by opening up a heretofore underutilized and largely unavailable source of capital for SMEs and entrepreneurs. But to take advantage of this resource will require knowledge and expertise; the new rules are strict and the consequences for missteps, even if inadvertent, could be devastating to a business project. CAE’s purpose is to function as a trusted, independent advisor, agent, partner, or principal; CAE is oriented toward long-term relationships with successful clients.
CAE is a Delaware Limited Partnership with partners in Maine, Florida, New Jersey, Maryland, Virginia North Carolina and Illinois operating as a Private Investment Company, Merchant Banking Firm and Transition Specialist offering investment strategies, operational experience, and securities knowledge working in concert to accomplish both wealth preservation and growth.