Types and Methods
"The term “due diligence” comes from the legal concept that corporate executives have a legal obligation to duly exercise reasonable diligence in researching any potentially adverse facts in a business or transaction.
The phrase “due diligence” was first made popular by multinational law firms. It later became even more commonly used when prominent financial consulting firms began to incorporate the related practices of law firms into their services. As a result of this widespread popularity, “due diligence” is like a diluted trademark, often used as an interchangeable synonym for a “background check”, although real “background checks” can only effectively be provided by detective agencies, investigative or security firms. The essence of professional due diligence work is to provide complete, accurate and reliable fact finding, to establish a true and correct representation of a business situation for effective decision making.
The Due Diligence methods used by the law and financial firms that made the term popular are generally limited, and are not “investigative” in character. Such professional practice firms generally advise the client on requesting available corporate documents or accounting statements from potential business partners prior to contract closings, and assist the client in obtaining copies of similar publicly filed records declared by the subject of the inquiry.
This method commonly uses “check lists” of documents, licenses, etc. that should be identified and collected as the basis for specific types of transactions, such as mergers and acquisitions, real estate development deals, franchising and product licensing, joint venture contracts, or direct investment. The firm will have different checklists that are used for each type or category of transaction. In addition to identifying and collecting legal and commercial documents, the firm will review them to ensure that documents are properly signed, complete, accurate and otherwise legitimate.
Legal and management consulting firms do not attempt or purport to meet the standards of the economic security industry for background checks or investigations. This type of Due Diligence is not intended to provide a conclusion as to whether a potential partner is reliable. Accordingly, law and financial firms often hire security firms to conduct economic security investigations as a supplement to the “management consulting” type corporate Due Diligence.
The most widely used due diligence methods in the security industry are referred to by professionals as “Open Source” research. This type of background checks are conducted on the level of official registered information, such as corporate registrations and business filings, proprietary ownership registrations, mass media articles, publications and broadcast transcripts (called “media search”), licensing records, and similar data that is commonly referred to as “public records”.
Taken by itself without any additional methods, however, this type of background check is highly limited in usefulness. There are many “security” companies on the market that offer “public records” and “open source” research, providing only unverified raw data obtained from the most readily available computerized databases. While this approach is popular for its minimal cost, it most often cannot address the most valuable information upon which clients must make important business decisions. At worst, limited “public records” checks can overlook critical facts and mislead decision makers. At best, they usually raise many more questions than they answer.
A professional “Background Check” investigation consists of a full and advanced “open source” investigation, enhanced by extensive verification and analysis of data. Conducting effective “open source” background checks for use in due diligence investigations is both an art and a science.
For reliable results, it is necessary to use experienced professional investigators who know exactly what factors and indications to look for, can quickly assess or verify the validity of information discovered. For results to have practical value and benefit for the client to use in real-world business situations, the investigators must also be able to fully explain and interpret the significance of information, and make practical recommendations."
-Advisory Counsel
Friday, May 14, 2010
Thursday, May 13, 2010
SECURITIES LOANS
A Securities-backed Finance Primer for Prospective Borrowers
What a Stock-Secured Loan Borrower Needs to Know Prior to Signing on the Dotted Line.
Is a securities-collateralized loan the right choice for you?
This may sound like a simple, easy-to-answer question, but it bears asking - and answering. Put another way, do you really need this loan? Or would you be wiser to wait, or maybe to sell your investments outright in the conventional manner through your brokerage or bank?
No one can answer that question other than you as the owner and prospective borrower, because at the end of the day your financial objectives, your assets, and and your needs are yours and yours alone. That isn't to say you shouldn't get outside advice, particularly if you are not well-versed in financing issues. To the contrary: Input from your qualified financial adviser, CPA, or attorney should be a standard part of your financial decision-making in any realm. Still, whether or not to proceed with securities-backed financing will be your decision alone to make, and just as you'd learn the different financing options, rates, and so forth before buying a car, so you owe it to yourself to learn all you can about securities loans.
However you ultimately decide – and whether you place your loan through our service or another – we have assembled this page for all prospective securities loan borrowers because there are several basic concepts we think you ought to understand before you sign on the dotted line. We hope you'll find this section useful in helping you make your decision wisely.
Should you have any comments or further questions after reading this, please feel free to drop us a line via our Contact Form and we will respond immediately.
TRANSPARENCY AND DISCLOSURE - WHY IT MATTERS.
Like any contract, it is important that you review all of the information carefully before you commit to anything, and to be sure that you are completely comfortable with and fully understand the terms of your lender's contract before you sign. You should understand and receive full disclosure covering the key elements of your loan, and these should be provided freely by the actual signatory lender (or a licensed advisor or intermediary for that institution)
The most important information you should have is much like what you should know about any financing anywhere, beginning with the total cost of the financing including interest and any points or fees. As a rule, there should be no administrative "processing fees" or any other form of advance fees payable up front before you receive your financing (Good securities loan programs do not charge fees in advance of the loan itself.)
Expect - insist - that your lender fully disclose how the interest rate is determined, whether fixed or floating or any other method is used, and when the loan and payments are due. Make sure the term (length) of your loan is likewise clearly stated. Make sure any fees are listed and clearly stated at the very outset, and that you understand what net loan amount to expect and how that amount will be determined. Do not proceed until you have asked all of these questions and have received satisfactory answers to all of them.
How we implement this. Our company gives you interest rate and LTV ranges verbally during our first phone call with you. Following that first call and confidential delivery of your account statement for review, we deliver a formal Term Sheet outlining in detail the total cost of your loan as quoted over the full term of your loan (average is 3-5 years). The interest rate is now firm and clearly stated. You understand precisely when your interest-only repayment would begin if you chose to proceed to your loan documents, and you will know what your total payments come to annually and over the full term using the lender's rate calculation method.
It's a good idea generally (and particularly so if you are not accustomed to lending contracts) to have your securities loan agreement reviewed by a knowledgeable trusted third party, for example your attorney or your CPA. If you do not understand any aspect of your securities loan contract, you should always ask and get the answers you need. Never enter into any contract unless you fully understand it and your questions have been answered in full. Remember - You have every right – and we would add, every responsibility – to know precisely what each word in your loan contract means or implies before you close.
PROMPT AND COMPLETE ANSWERS SHOULD NOT BE OPTIONAL
Make sure your lending firm has an "open door" policy when it comes to your questions. Your lender should have no hesitation to provide answers to even the simplest of questions, and you should feel completely comfortable asking them and not rushed. If you do not, then consider moving on to another loan program.
Like any industry, product, or service, the securities-backed lending field has it's share of poorly managed operations, often staffed by people who know very little about the securities business or any financial business. Out-of-work mortgage brokers, failed internet entrepreneurs, people looking for second careers - just about anybody - can put on a hat and call him/herself a loan broker. (As of this writing, plans are afoot that mean this may all change, should the administration's proposed Consumer Financial Protections Agency come into being). Wise borrowers will always keep their feet on the ground and consider their written term sheets as their guide at first, followed by their loan documents, rather than to rely on warm spoken phone assurances alone or a flashy website.
Accessibility goes hand-in-hand with prompt answers. It does no good if your lender or advisor is off vacationing in the Bahamas while you have a pressing question that cannot (and should not) wait.
How we implement this. You will start your inquiry using your online form, and one of our staff will call you typically same day to answer your questions and help you gain a full picture of our loan program and its administration. You'll be given our direct toll-free number, and if you have an account statement, you'll be provided with a no-obligation Term Sheet. We'll be on hand from 8AM-8PM Monday through Friday, and by email 24/7 for any follow-up questions. Once you have signed your Term Sheet, we'll take you directly into desk at one of our institutional program providers in New York, a top-tier, well-know "household name" firm where you will be warmly welcomed. You'll have access to your licensed account advisor from that point onward, by phone or email or in person, who will work with you to finalize your loan documents and to ensure you are full apprised of all elements of the loan.
This access extends beyond the loan signing as well. Your account advisor will be on hand whenever you need him/her; we too will be on hand should there by any questions for which we can help. Access, and a culture of personal service for over ten years means you're covered from the day you first contact us to the day you exist your loan - and beyond.
TO TRANSFER OR NOT TO TRANSFER ...
If your lender is requiring you to transfer the title into the lender's name during the loan term, this is something you need to be sure meets with your expectations and that you fully understand before you send a single share over. It is a very important question overall because it addresses the core issue of whether allowing lender contractual control over your securities until the loan is repaid is acceptable to you, or too risky.
In recent years the Internal Revenue Service has often come to treat such loan programs, particularly those where the borrower receives at least 90% LTV in collateral, as taxable at inception. Their view is that since some or all of the shares are sold as part of the funding with all transfer-of-title loans, they are therefore taxable events from the day the shares transfer to the lender. Before you choose any transfer-of-title type loan, therefore, be sure to consult with a qualified tax professional to determine if this structure will work within your financial planning model. Note also: The proceeds of such programs are in any case not tax-free by definition.
With some lenders such transfer may indeed mean more risk, although the level of risk will depend on many different factors, chief among them the financial heath and stability of the transfer-of-title lender.
HOW FINANCIALLY HEALTHY IS YOUR TRANSFER-OF-TITLE LENDER?
This is why we recommend that you ask for a statement of assets or similar review by a licensed professional to ensure that the lending firm has the assets and financial wherewithal to properly manage and process your loan. You should also request a thorough background check to ensure that you are aware of any legal or regulatory issues they may have faced. Your final decision should incorporate all of these areas, and you should not be reluctant to ask the hard questions.
Step One
Before you do anything, your first step is to conduct a legal background check. If you do not have access to a background checking service, consider using the U.S. government's own PACER database. For a nominal fee, any U.S. citizen can open a Pacer account and get access to all public records on federal-level (and many state-level) civil and criminal legal cases.
When beaming backgrounds using a search service like PACER, use the "All Courts" setting and conduct completely separate searches with these types of variations so as to bring up all applicable background information:
1) Last name, first name (no not use initials)
2) Full company name without "Inc" or "LLC" etc.
3) Names of any known principals in the company
4) It is always best to have the full name, including middle name, and state. This can usually be obtained from a copy of any picture ID, but it is especially important in the case of common names, e.g., John Smith will be harder to pinpoint that John Stanhouse Smith. If you have the full name, search on the Middle and Last name too. Sometimes those with problems in their backgrounds will use their middle name and last name as their professional name to throw background researchers off.
One technique that is useful is to use Google to start, which will allow you to collect a lot of information quickly, and then to use that with Pacer or any of the many other services to highlight information that can be searched on later. Put the name in quote marks e.g., "Alexander Smith" with words that pull out fraud or court issues, e.g.,
"Alexander Smith" court
"Alexander Smith" fraud
If you continue to get too many results, use Google's "+" function to make sure the results have what you are looking for:
"Alexander Smith" +court
"Alexander Smith" +fraud
HOWEVER: Remember that if you find derogatory information that does not necessarily mean you should do absolutely no business with that lender. You should ask for an explanation, in writing, of the circumstances surrounding the incident or case, and perhaps consult with your attorney for an opinion prior to proceeding. It is difficult for any financial firm to remain in business for any length of time without having at least one legal issue appear along the way, particularly in our overly litigious society nowadays. If the matter is minor, dismissed, or settled, and the lender's explanation is adequate, and/or enough time has passed since it occurred, you may want to still consider working with them.
If the matter involved criminal issues - criminal financial or securities fraud - that is a different matter entirely. We cannot recommend any interaction with any individual or company involved actively in an unresolved criminal securities or finance-related case, or who has been found guilty thereof of either a criminal or civil case involved securities fraud.
Step Two
If you've determined that your Transfer-of-Title lender has no unresolved legal issues, then the next step is to determine their financial health. This process is divided into two subsections:
A) Determine the managerial background of the lender; and the adequacy and quality of financial management.
One of the issues with Transfer-of-Title lenders has been that of careless, incapable, or under-capitalized lenders that become unable to service their loan portfolios, effectively making it impossible for them to return shares upon payoff.
Generally speaking, anyone can lend money privately to anyone else in the United States unless specifically prohibited from doing so in a court of law. Except for certain collection and usury laws, there is no prohibition against the lending of money.
This has helped make financing available widely, stimulating business growth, home ownership, and investments, but it has also opened the door to incompetent or incapable lenders touting themselves as "skilled" or "experienced". Even those with degrees in business may make very poor securities loan managers. Your job is to look for signs of good financial management.
Your civil/criminal and Internet background check will go a long way towards defining some background on the individual(s) managing your collateral portfolio. Your lender needs also to provide financial health verification as well.
B) Verify the lender's ability to service all loans under contract; financial health of lender.
In theory, a well-capitalized lender or a lender with adequate liquid assets who has traded or sold part or all of the collateral portfolio as part of the funding of the loan can go back into the market and purchase whatever shares he does not own when the client pays off his loan. If the lender is competent and capable, he will trade the account sufficiently to ensure that the loan cash from repayment of the loan is sufficient to cover any shortfall.
In practice, however, there are pitfalls when the lender is not particularly skillful, makes bad calculations, and/or does not have the liquid resources needed to cover any cash shortfall needed to enter the market and deliver the shares he owes to the client at loan exit. Even if properly hedged, that lender may have not paid attention to his portfolio, for example, or may have engaged in reckless practices that make it impossible to deliver the shares on time when the loan is repaid.
The only way to be sure that your lender has the capital needed to service their portfolios properly -- that is, to return shares in full upon repayment of the loan -- is to have their status verified by an independent, licensed third party. That might be a licensed CPA, or it could be an attorney specializing in finance-related business in some manner. Whoever it is must have access to the financial records of the company and the individuals who own it, and you must be able to speak with and verify the individual themselves. Needless to say, the individual must be licensed and in good standing in their state.
Obviously a full audit is ideal. However, if the reviewing party truly has access to the lender's loan portfolio, bank accounts, and other relevant financial data, and is a licensed professional in good standing, that individual can review and verify the lender's status and produce a solid picture of their financial standing.
Of course, these steps are not necessary in the case of institutional loans, since they are heavily regulated and required to abide by many strictures for licensing and SIPC-membership. Their financial statements are also, by and large, open to the public
What should you be looking for?
You are looking for verification that the lender has sufficient assets to return every portfolio under management - all of them - even under the most extreme and unusual circumstance, namely, as if all of the outstanding loans under the lender's management were paid off and all of the collateral shares had to be returned to those borrowers within a few days. Ideally, the lender should have at least ten times the liquidity needed to achieve that feat, so they have a buffer. Using this very strict system would ensure that, in the extremely unlikely event all loans under management came due simultaneously, every share could be easily returned.
But a strong as that would be, professional/licensed third-party verification should take it even a step further. The third-party evaluator should consider all of the portfolios currently under management, examine their price histories, then make "worst case" extrapolations. If all portfolios under management were to rise 20%-30% that have historically risen that much of a period of X months, how would the lender fare? A good "worst case" scenario would take the worst-case figures and play them out into forecasts over six months or longer, so that if all portfolios were to come due the lender would no only have at least 10 times the assets to service every portfolio, they'd have them even six months or a year (or more) from now given the historic price projections.
That's a lot of due diligence, but if you are contemplating a Transfer-of-Title loan, your lender should have liquidity that allows that to happen for at six months down the road based on a reasonable expectation of portfolio growth, verified by a third-party financial professional as noted.
WHAT MAKES AN INSTITUTIONAL SECURITIES LOAN SO STRONG?
The instinctive reaction to a question like this "isn't it obvious?" - but in fact one is not necessarily comparing apples to apples in this situation. True, a loan like the fully-licensed, capital-enhanced institutional loans we offer provide, on the face of it, a level of security and flexibility that is far ahead of anything currently available privately. SIPC membership for all of our managing institutions, for example, ensures that the lending brokerage has met a broad range of quality and disclosure standards in particular. In addition, major U.S. institutions have had to abide by additional safety measures over and above those they've practiced in the past, as regulatory scrutiny has increased in the wake of the subprime mortgage crisis of recent years
But as important as a regulated, licensed institutional setting is, a good securities-backed loan should offer much more than just security alone. It should include a range of features and strong, competitive terms that meet modern financial consumer's demands. Today's investors, after all, are not simply concerned about security when it comes to their financing. They want a good loan too.
Most people thinking of institutional securities loans immediately assume they are talking about standard margin loans.
* The loan-to-value of a margin loan is limited to 50% of the value of the collateral.
* Our loans go as high as 95% for some types of securities (our proceeds, however, cannot be used to purchase marginable securities).
* Interest rates may or may not be competitive, often are not.
* Our rates are always very competitive, some of the lowest monthly-LIBOR-based rates in financing.
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* Special structures including limited-recourse loan contracts are not common and usually available, if at all.
* Our limited recourse (in default loan variant is available to any borrower with marginable, optionable securities.
* The loans are all easily callable if the value declines, requiring the borrower quickly up with cash or further shares to cover the shortfall or risk default
* Our program can be tailored to have no call, or a very deep call that will only be triggered in extreme cases, with a liberal cure policy.
* In many ways, traditional institutional loans meet the needs of certain investors,
* Our loans are flexible enough to meet the needs of virtually any investor, and a client's securities are not sold to fund their loan.
Clients love the security of a fully regulated financial institution, particularly today, which is understandable. But they do not like the limits and restrictions that often make it impossible for a borrower to achieve their financial objectives. Private funding, though possibly attractive, can bring in issues of safety and stability as noted in the discussion above. Yet institutions are loathe to experiment with alternative financing or expanded loan features at a time when economic concerns present unacceptable levels of risk.
We discovered that the market demanded a loan product superior to both private and institutional variants without sacrificing the superior safety and predictability of institutional underwriting and management.
How we implement this. Public-private integration was the path we chose. By using capital depository relationships with several top brokerages, we were able to "open the door" to the creation of equity-enhanced lending facilities that would be far closer to what our clients were demanding in their lending program. With this enhanced loan facility, many benefits over traditional institutional lending became possible, chief among them much higher loan-to-value and low, monthly-LIBOR-based interest rates.
With the additional presence of private capital to back the loan facility, many features normally associated with the higher tier of private banking become available for every client of his loan program, even those with portfolios as low as $150,000. Swapping one set of collateral stocks for another set of equivalent value, mid-loan, for example. Consideration for additional loan cash if the portfolio rose in value while it secured the loan for another. Or executing a hedged portfolio structure, institutionally managed, to help reduce or eliminate the potential claim on other assets in default.
That would be attractive in any loan package of course. But in our institutional package it has brought all the benefits and features of a modern top-tier financial firm's custom financing desk (some crafted to our specifications) to our loan clients, including online account reporting and full access to the institution's collateral offerings on more exclusive terms. Best of all, the collateral securities remain in our client's title and account throughout the entire loan, with no question as to who owns them.
SO AGAIN: SHOULD YOU PROCEED WITH A SECURITIES-BACKED LOAN?
Again, the most important question of all. Why not just pick up the phone, call your stock broker, and tell him to sell your stocks at today's or some set price?
We don't think a stock-secured loan is the answer for everyone. But we do think that if retaining your stocks rather than a direct sale through your brokerage, or an indirect hedge-type sale through a transfer-of-title lender is important to you, then our institutional lending facility is without question the finest of its kind. And if your still prefer a transfer-of-title loan, our lender has provided documented verification throughout that matches the recommended requirements noted above.
Whether or not you choose to fund with us, keep in mind that wherever you place your collateral, you should always strive to know your actual lender, the signatory to your loans and how your loan is funded and administered. If you choose an institutional program, that work has been largely done for you. If you choose a transfer-of-title lender, then you'll need to do the work yourself. Above all, when there's anything you do not understand, ask. Make sure you are fully comfortable with your loan as well as your lender and if you are, you can sit back and enjoy the assurance of knowing you've "done your homework" prior to taking this important step.
What a Stock-Secured Loan Borrower Needs to Know Prior to Signing on the Dotted Line.
Is a securities-collateralized loan the right choice for you?
This may sound like a simple, easy-to-answer question, but it bears asking - and answering. Put another way, do you really need this loan? Or would you be wiser to wait, or maybe to sell your investments outright in the conventional manner through your brokerage or bank?
No one can answer that question other than you as the owner and prospective borrower, because at the end of the day your financial objectives, your assets, and and your needs are yours and yours alone. That isn't to say you shouldn't get outside advice, particularly if you are not well-versed in financing issues. To the contrary: Input from your qualified financial adviser, CPA, or attorney should be a standard part of your financial decision-making in any realm. Still, whether or not to proceed with securities-backed financing will be your decision alone to make, and just as you'd learn the different financing options, rates, and so forth before buying a car, so you owe it to yourself to learn all you can about securities loans.
However you ultimately decide – and whether you place your loan through our service or another – we have assembled this page for all prospective securities loan borrowers because there are several basic concepts we think you ought to understand before you sign on the dotted line. We hope you'll find this section useful in helping you make your decision wisely.
Should you have any comments or further questions after reading this, please feel free to drop us a line via our Contact Form and we will respond immediately.
TRANSPARENCY AND DISCLOSURE - WHY IT MATTERS.
Like any contract, it is important that you review all of the information carefully before you commit to anything, and to be sure that you are completely comfortable with and fully understand the terms of your lender's contract before you sign. You should understand and receive full disclosure covering the key elements of your loan, and these should be provided freely by the actual signatory lender (or a licensed advisor or intermediary for that institution)
The most important information you should have is much like what you should know about any financing anywhere, beginning with the total cost of the financing including interest and any points or fees. As a rule, there should be no administrative "processing fees" or any other form of advance fees payable up front before you receive your financing (Good securities loan programs do not charge fees in advance of the loan itself.)
Expect - insist - that your lender fully disclose how the interest rate is determined, whether fixed or floating or any other method is used, and when the loan and payments are due. Make sure the term (length) of your loan is likewise clearly stated. Make sure any fees are listed and clearly stated at the very outset, and that you understand what net loan amount to expect and how that amount will be determined. Do not proceed until you have asked all of these questions and have received satisfactory answers to all of them.
How we implement this. Our company gives you interest rate and LTV ranges verbally during our first phone call with you. Following that first call and confidential delivery of your account statement for review, we deliver a formal Term Sheet outlining in detail the total cost of your loan as quoted over the full term of your loan (average is 3-5 years). The interest rate is now firm and clearly stated. You understand precisely when your interest-only repayment would begin if you chose to proceed to your loan documents, and you will know what your total payments come to annually and over the full term using the lender's rate calculation method.
It's a good idea generally (and particularly so if you are not accustomed to lending contracts) to have your securities loan agreement reviewed by a knowledgeable trusted third party, for example your attorney or your CPA. If you do not understand any aspect of your securities loan contract, you should always ask and get the answers you need. Never enter into any contract unless you fully understand it and your questions have been answered in full. Remember - You have every right – and we would add, every responsibility – to know precisely what each word in your loan contract means or implies before you close.
PROMPT AND COMPLETE ANSWERS SHOULD NOT BE OPTIONAL
Make sure your lending firm has an "open door" policy when it comes to your questions. Your lender should have no hesitation to provide answers to even the simplest of questions, and you should feel completely comfortable asking them and not rushed. If you do not, then consider moving on to another loan program.
Like any industry, product, or service, the securities-backed lending field has it's share of poorly managed operations, often staffed by people who know very little about the securities business or any financial business. Out-of-work mortgage brokers, failed internet entrepreneurs, people looking for second careers - just about anybody - can put on a hat and call him/herself a loan broker. (As of this writing, plans are afoot that mean this may all change, should the administration's proposed Consumer Financial Protections Agency come into being). Wise borrowers will always keep their feet on the ground and consider their written term sheets as their guide at first, followed by their loan documents, rather than to rely on warm spoken phone assurances alone or a flashy website.
Accessibility goes hand-in-hand with prompt answers. It does no good if your lender or advisor is off vacationing in the Bahamas while you have a pressing question that cannot (and should not) wait.
How we implement this. You will start your inquiry using your online form, and one of our staff will call you typically same day to answer your questions and help you gain a full picture of our loan program and its administration. You'll be given our direct toll-free number, and if you have an account statement, you'll be provided with a no-obligation Term Sheet. We'll be on hand from 8AM-8PM Monday through Friday, and by email 24/7 for any follow-up questions. Once you have signed your Term Sheet, we'll take you directly into desk at one of our institutional program providers in New York, a top-tier, well-know "household name" firm where you will be warmly welcomed. You'll have access to your licensed account advisor from that point onward, by phone or email or in person, who will work with you to finalize your loan documents and to ensure you are full apprised of all elements of the loan.
This access extends beyond the loan signing as well. Your account advisor will be on hand whenever you need him/her; we too will be on hand should there by any questions for which we can help. Access, and a culture of personal service for over ten years means you're covered from the day you first contact us to the day you exist your loan - and beyond.
TO TRANSFER OR NOT TO TRANSFER ...
If your lender is requiring you to transfer the title into the lender's name during the loan term, this is something you need to be sure meets with your expectations and that you fully understand before you send a single share over. It is a very important question overall because it addresses the core issue of whether allowing lender contractual control over your securities until the loan is repaid is acceptable to you, or too risky.
In recent years the Internal Revenue Service has often come to treat such loan programs, particularly those where the borrower receives at least 90% LTV in collateral, as taxable at inception. Their view is that since some or all of the shares are sold as part of the funding with all transfer-of-title loans, they are therefore taxable events from the day the shares transfer to the lender. Before you choose any transfer-of-title type loan, therefore, be sure to consult with a qualified tax professional to determine if this structure will work within your financial planning model. Note also: The proceeds of such programs are in any case not tax-free by definition.
With some lenders such transfer may indeed mean more risk, although the level of risk will depend on many different factors, chief among them the financial heath and stability of the transfer-of-title lender.
HOW FINANCIALLY HEALTHY IS YOUR TRANSFER-OF-TITLE LENDER?
This is why we recommend that you ask for a statement of assets or similar review by a licensed professional to ensure that the lending firm has the assets and financial wherewithal to properly manage and process your loan. You should also request a thorough background check to ensure that you are aware of any legal or regulatory issues they may have faced. Your final decision should incorporate all of these areas, and you should not be reluctant to ask the hard questions.
Step One
Before you do anything, your first step is to conduct a legal background check. If you do not have access to a background checking service, consider using the U.S. government's own PACER database. For a nominal fee, any U.S. citizen can open a Pacer account and get access to all public records on federal-level (and many state-level) civil and criminal legal cases.
When beaming backgrounds using a search service like PACER, use the "All Courts" setting and conduct completely separate searches with these types of variations so as to bring up all applicable background information:
1) Last name, first name (no not use initials)
2) Full company name without "Inc" or "LLC" etc.
3) Names of any known principals in the company
4) It is always best to have the full name, including middle name, and state. This can usually be obtained from a copy of any picture ID, but it is especially important in the case of common names, e.g., John Smith will be harder to pinpoint that John Stanhouse Smith. If you have the full name, search on the Middle and Last name too. Sometimes those with problems in their backgrounds will use their middle name and last name as their professional name to throw background researchers off.
One technique that is useful is to use Google to start, which will allow you to collect a lot of information quickly, and then to use that with Pacer or any of the many other services to highlight information that can be searched on later. Put the name in quote marks e.g., "Alexander Smith" with words that pull out fraud or court issues, e.g.,
"Alexander Smith" court
"Alexander Smith" fraud
If you continue to get too many results, use Google's "+" function to make sure the results have what you are looking for:
"Alexander Smith" +court
"Alexander Smith" +fraud
HOWEVER: Remember that if you find derogatory information that does not necessarily mean you should do absolutely no business with that lender. You should ask for an explanation, in writing, of the circumstances surrounding the incident or case, and perhaps consult with your attorney for an opinion prior to proceeding. It is difficult for any financial firm to remain in business for any length of time without having at least one legal issue appear along the way, particularly in our overly litigious society nowadays. If the matter is minor, dismissed, or settled, and the lender's explanation is adequate, and/or enough time has passed since it occurred, you may want to still consider working with them.
If the matter involved criminal issues - criminal financial or securities fraud - that is a different matter entirely. We cannot recommend any interaction with any individual or company involved actively in an unresolved criminal securities or finance-related case, or who has been found guilty thereof of either a criminal or civil case involved securities fraud.
Step Two
If you've determined that your Transfer-of-Title lender has no unresolved legal issues, then the next step is to determine their financial health. This process is divided into two subsections:
A) Determine the managerial background of the lender; and the adequacy and quality of financial management.
One of the issues with Transfer-of-Title lenders has been that of careless, incapable, or under-capitalized lenders that become unable to service their loan portfolios, effectively making it impossible for them to return shares upon payoff.
Generally speaking, anyone can lend money privately to anyone else in the United States unless specifically prohibited from doing so in a court of law. Except for certain collection and usury laws, there is no prohibition against the lending of money.
This has helped make financing available widely, stimulating business growth, home ownership, and investments, but it has also opened the door to incompetent or incapable lenders touting themselves as "skilled" or "experienced". Even those with degrees in business may make very poor securities loan managers. Your job is to look for signs of good financial management.
Your civil/criminal and Internet background check will go a long way towards defining some background on the individual(s) managing your collateral portfolio. Your lender needs also to provide financial health verification as well.
B) Verify the lender's ability to service all loans under contract; financial health of lender.
In theory, a well-capitalized lender or a lender with adequate liquid assets who has traded or sold part or all of the collateral portfolio as part of the funding of the loan can go back into the market and purchase whatever shares he does not own when the client pays off his loan. If the lender is competent and capable, he will trade the account sufficiently to ensure that the loan cash from repayment of the loan is sufficient to cover any shortfall.
In practice, however, there are pitfalls when the lender is not particularly skillful, makes bad calculations, and/or does not have the liquid resources needed to cover any cash shortfall needed to enter the market and deliver the shares he owes to the client at loan exit. Even if properly hedged, that lender may have not paid attention to his portfolio, for example, or may have engaged in reckless practices that make it impossible to deliver the shares on time when the loan is repaid.
The only way to be sure that your lender has the capital needed to service their portfolios properly -- that is, to return shares in full upon repayment of the loan -- is to have their status verified by an independent, licensed third party. That might be a licensed CPA, or it could be an attorney specializing in finance-related business in some manner. Whoever it is must have access to the financial records of the company and the individuals who own it, and you must be able to speak with and verify the individual themselves. Needless to say, the individual must be licensed and in good standing in their state.
Obviously a full audit is ideal. However, if the reviewing party truly has access to the lender's loan portfolio, bank accounts, and other relevant financial data, and is a licensed professional in good standing, that individual can review and verify the lender's status and produce a solid picture of their financial standing.
Of course, these steps are not necessary in the case of institutional loans, since they are heavily regulated and required to abide by many strictures for licensing and SIPC-membership. Their financial statements are also, by and large, open to the public
What should you be looking for?
You are looking for verification that the lender has sufficient assets to return every portfolio under management - all of them - even under the most extreme and unusual circumstance, namely, as if all of the outstanding loans under the lender's management were paid off and all of the collateral shares had to be returned to those borrowers within a few days. Ideally, the lender should have at least ten times the liquidity needed to achieve that feat, so they have a buffer. Using this very strict system would ensure that, in the extremely unlikely event all loans under management came due simultaneously, every share could be easily returned.
But a strong as that would be, professional/licensed third-party verification should take it even a step further. The third-party evaluator should consider all of the portfolios currently under management, examine their price histories, then make "worst case" extrapolations. If all portfolios under management were to rise 20%-30% that have historically risen that much of a period of X months, how would the lender fare? A good "worst case" scenario would take the worst-case figures and play them out into forecasts over six months or longer, so that if all portfolios were to come due the lender would no only have at least 10 times the assets to service every portfolio, they'd have them even six months or a year (or more) from now given the historic price projections.
That's a lot of due diligence, but if you are contemplating a Transfer-of-Title loan, your lender should have liquidity that allows that to happen for at six months down the road based on a reasonable expectation of portfolio growth, verified by a third-party financial professional as noted.
WHAT MAKES AN INSTITUTIONAL SECURITIES LOAN SO STRONG?
The instinctive reaction to a question like this "isn't it obvious?" - but in fact one is not necessarily comparing apples to apples in this situation. True, a loan like the fully-licensed, capital-enhanced institutional loans we offer provide, on the face of it, a level of security and flexibility that is far ahead of anything currently available privately. SIPC membership for all of our managing institutions, for example, ensures that the lending brokerage has met a broad range of quality and disclosure standards in particular. In addition, major U.S. institutions have had to abide by additional safety measures over and above those they've practiced in the past, as regulatory scrutiny has increased in the wake of the subprime mortgage crisis of recent years
But as important as a regulated, licensed institutional setting is, a good securities-backed loan should offer much more than just security alone. It should include a range of features and strong, competitive terms that meet modern financial consumer's demands. Today's investors, after all, are not simply concerned about security when it comes to their financing. They want a good loan too.
Most people thinking of institutional securities loans immediately assume they are talking about standard margin loans.
* The loan-to-value of a margin loan is limited to 50% of the value of the collateral.
* Our loans go as high as 95% for some types of securities (our proceeds, however, cannot be used to purchase marginable securities).
* Interest rates may or may not be competitive, often are not.
* Our rates are always very competitive, some of the lowest monthly-LIBOR-based rates in financing.
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* Special structures including limited-recourse loan contracts are not common and usually available, if at all.
* Our limited recourse (in default loan variant is available to any borrower with marginable, optionable securities.
* The loans are all easily callable if the value declines, requiring the borrower quickly up with cash or further shares to cover the shortfall or risk default
* Our program can be tailored to have no call, or a very deep call that will only be triggered in extreme cases, with a liberal cure policy.
* In many ways, traditional institutional loans meet the needs of certain investors,
* Our loans are flexible enough to meet the needs of virtually any investor, and a client's securities are not sold to fund their loan.
Clients love the security of a fully regulated financial institution, particularly today, which is understandable. But they do not like the limits and restrictions that often make it impossible for a borrower to achieve their financial objectives. Private funding, though possibly attractive, can bring in issues of safety and stability as noted in the discussion above. Yet institutions are loathe to experiment with alternative financing or expanded loan features at a time when economic concerns present unacceptable levels of risk.
We discovered that the market demanded a loan product superior to both private and institutional variants without sacrificing the superior safety and predictability of institutional underwriting and management.
How we implement this. Public-private integration was the path we chose. By using capital depository relationships with several top brokerages, we were able to "open the door" to the creation of equity-enhanced lending facilities that would be far closer to what our clients were demanding in their lending program. With this enhanced loan facility, many benefits over traditional institutional lending became possible, chief among them much higher loan-to-value and low, monthly-LIBOR-based interest rates.
With the additional presence of private capital to back the loan facility, many features normally associated with the higher tier of private banking become available for every client of his loan program, even those with portfolios as low as $150,000. Swapping one set of collateral stocks for another set of equivalent value, mid-loan, for example. Consideration for additional loan cash if the portfolio rose in value while it secured the loan for another. Or executing a hedged portfolio structure, institutionally managed, to help reduce or eliminate the potential claim on other assets in default.
That would be attractive in any loan package of course. But in our institutional package it has brought all the benefits and features of a modern top-tier financial firm's custom financing desk (some crafted to our specifications) to our loan clients, including online account reporting and full access to the institution's collateral offerings on more exclusive terms. Best of all, the collateral securities remain in our client's title and account throughout the entire loan, with no question as to who owns them.
SO AGAIN: SHOULD YOU PROCEED WITH A SECURITIES-BACKED LOAN?
Again, the most important question of all. Why not just pick up the phone, call your stock broker, and tell him to sell your stocks at today's or some set price?
We don't think a stock-secured loan is the answer for everyone. But we do think that if retaining your stocks rather than a direct sale through your brokerage, or an indirect hedge-type sale through a transfer-of-title lender is important to you, then our institutional lending facility is without question the finest of its kind. And if your still prefer a transfer-of-title loan, our lender has provided documented verification throughout that matches the recommended requirements noted above.
Whether or not you choose to fund with us, keep in mind that wherever you place your collateral, you should always strive to know your actual lender, the signatory to your loans and how your loan is funded and administered. If you choose an institutional program, that work has been largely done for you. If you choose a transfer-of-title lender, then you'll need to do the work yourself. Above all, when there's anything you do not understand, ask. Make sure you are fully comfortable with your loan as well as your lender and if you are, you can sit back and enjoy the assurance of knowing you've "done your homework" prior to taking this important step.
Wednesday, May 5, 2010
reciprocity
Trivia
Today's Question: All of Henry Ford's cars
were black until 1925 when he introduced
two new colors. What were they?
Yesterday's Question: A 1959 commercial for
Good Luck Margarine featured whom as the
spokesperson?
Answer: The spokesperson was former First
Lady Eleanor Roosevelt.
Today it would probably be impossible to
get the First Lady to endorse your product,
but the power of endorsements remains
an incredibly powerful marketing tool.
Think about who could be a powerful spokesperson
or endorser of your products or services. In
many cases, that person may be a or local or industry
celebrity and could be paid just a small sum,
paid in equity, or not paid at all if you have
a strong relationship with them.
*** Months Later & This LAW Still Holds True
Several months ago, there was a huge snow storm
that caused my power to go out for two days.
Fortunately, a friend of ours living a few miles away
didn't lose power and invited us (my wife, kids and I)
to stay with them until our power was restored.
Well, the other day, I ran into William, the father
of that family. William is a great guy, so I was excited
to see him. But I felt slightly awkward because I
felt a little as if I owed him something.
Now, after our stay, we gave William and his wife
a nice bottle of wine and a nice thank you card.
But that must not have made me feel "even."
You see, a very powerful law was in force here --
The Law of Reciprocity.
The Law of Reciprocity was made famous by
Dr. Robert Cialdini in his book "Influence: The
Psychology of Persuasion." The Law states
that if you give someone something, they feel
compelled to give you something back in return.
That is why you'll often receive "gifts" in the mail,
like return address stickers from non-profits. Their
hope is that by sending you something of value, that
you will reciprocate by sending them a donation.
The Law of Reciprocity is clearly very powerful.
And it should be added to your marketing mix.
- Can you give your customers or prospects a
product sample, a book, or a report of value to them?
- Can you give quality advice that can improve
their success?
- Can you make a helpful introduction to a
potential partner?
Think about what you can do for others.
Since if they truly value it, they will seek to
help you out when they can.
Note: I am not saying to do this in sneaky way
where you give someone something just to try
to get the Law of Reciprocity working for you.
You must be genuine in your efforts to
help someone out for this law to take hold.
*** Watch This to Protect Your Company
Entrepreneurs are always concerned (and rightfully so)
about protecting their business ideas and concepts.
Not only are there numerous cases of individuals and
companies unlawfully stealing ideas and infringing on trade
secrets, but there are even tons of examples of
companies losing the right to use their company name
or product name after they start achieving success.
To make sure you are protected, I asked Stephen
Strauss from the law firm Fulwider- Patton LLP to give me
a private webinar on these key topics.
You see, Stephen specializes in trademark, copyright,
unfair competition and trade secret law. He's at the top
of the game in this field, not only representing a diverse
list of startups and large corporations, but top
entertainers like Stevie Wonder.
Today's Question: All of Henry Ford's cars
were black until 1925 when he introduced
two new colors. What were they?
Yesterday's Question: A 1959 commercial for
Good Luck Margarine featured whom as the
spokesperson?
Answer: The spokesperson was former First
Lady Eleanor Roosevelt.
Today it would probably be impossible to
get the First Lady to endorse your product,
but the power of endorsements remains
an incredibly powerful marketing tool.
Think about who could be a powerful spokesperson
or endorser of your products or services. In
many cases, that person may be a or local or industry
celebrity and could be paid just a small sum,
paid in equity, or not paid at all if you have
a strong relationship with them.
*** Months Later & This LAW Still Holds True
Several months ago, there was a huge snow storm
that caused my power to go out for two days.
Fortunately, a friend of ours living a few miles away
didn't lose power and invited us (my wife, kids and I)
to stay with them until our power was restored.
Well, the other day, I ran into William, the father
of that family. William is a great guy, so I was excited
to see him. But I felt slightly awkward because I
felt a little as if I owed him something.
Now, after our stay, we gave William and his wife
a nice bottle of wine and a nice thank you card.
But that must not have made me feel "even."
You see, a very powerful law was in force here --
The Law of Reciprocity.
The Law of Reciprocity was made famous by
Dr. Robert Cialdini in his book "Influence: The
Psychology of Persuasion." The Law states
that if you give someone something, they feel
compelled to give you something back in return.
That is why you'll often receive "gifts" in the mail,
like return address stickers from non-profits. Their
hope is that by sending you something of value, that
you will reciprocate by sending them a donation.
The Law of Reciprocity is clearly very powerful.
And it should be added to your marketing mix.
- Can you give your customers or prospects a
product sample, a book, or a report of value to them?
- Can you give quality advice that can improve
their success?
- Can you make a helpful introduction to a
potential partner?
Think about what you can do for others.
Since if they truly value it, they will seek to
help you out when they can.
Note: I am not saying to do this in sneaky way
where you give someone something just to try
to get the Law of Reciprocity working for you.
You must be genuine in your efforts to
help someone out for this law to take hold.
*** Watch This to Protect Your Company
Entrepreneurs are always concerned (and rightfully so)
about protecting their business ideas and concepts.
Not only are there numerous cases of individuals and
companies unlawfully stealing ideas and infringing on trade
secrets, but there are even tons of examples of
companies losing the right to use their company name
or product name after they start achieving success.
To make sure you are protected, I asked Stephen
Strauss from the law firm Fulwider- Patton LLP to give me
a private webinar on these key topics.
You see, Stephen specializes in trademark, copyright,
unfair competition and trade secret law. He's at the top
of the game in this field, not only representing a diverse
list of startups and large corporations, but top
entertainers like Stevie Wonder.
Thursday, April 29, 2010
a great opinion
An innovator and strategic thinker with hands-on diversified sector and international experience who is recognized for his track record, knowledge, and experience of successfully funding and growing companies.
Thomas has a wealth of experience in business execution, successfully directing a number of sourcing customers towards their goals and objectives. Thomas successfully achieved rapid returns on investment providing services that allowed revenue turnaround with staggering speed.
An innovator and strategic thinker with hands-on diversified sector and international experience who is recognized for his track record, knowledge, and experience of successfully funding and growing companies.
Thomas has a wealth of experience in business execution, successfully directing a number of sourcing customers towards their goals and objectives. Thomas successfully achieved rapid returns on investment providing services that allowed revenue turnaround with staggering speed.
Thomas has a wealth of experience in business execution, successfully directing a number of sourcing customers towards their goals and objectives. Thomas successfully achieved rapid returns on investment providing services that allowed revenue turnaround with staggering speed.
An innovator and strategic thinker with hands-on diversified sector and international experience who is recognized for his track record, knowledge, and experience of successfully funding and growing companies.
Thomas has a wealth of experience in business execution, successfully directing a number of sourcing customers towards their goals and objectives. Thomas successfully achieved rapid returns on investment providing services that allowed revenue turnaround with staggering speed.
Monday, April 26, 2010
membership
1.) Meet investors in our network
Join our investor Network and put your business in the investor spotlight. We take great pride in our investor network, interviewing and categorizing each investor who applies. Use our network to meet investors who are in your area and interested in your industry.
Post Your Plan Membership
* Post a Business Plan for our accredited Investors to view
* Get Feedback on your plan from a professional analyst
* Post a video pitch for investors to watch
* 13 Lesson Funding Bootcamp: over 30 hours of educational podcasts, webinars, and article from funding experts
* Business Plan Templates
* Pro-forma Financial Templates
Meet investors in our network
* Contact 10 of our accredited investors each month
* Search through our database of over 1,500 angel group's contact info and submission pages
* Everything from 'Post Your Plan' Membership
2.) SpeedPitch event: pitch to qualified investors
SpeedPitch is personal & exclusive. You'll get to meet and pitch to 20 - 30 active and engaged investors. The format is simple & personal. Five entrepreneurs are each given 4 minutes to present their business to 30 - 40 investors, with an additional 3 minutes for Q&A. The event is focused on funding and each investor in attendance is prepared to invest.
3.) InvestorReady Analysis
We analyze your business the same way investors do
A 56-point inspection detailing
* Traction
* Market Opportunity
* Sustainable Competitive Advantage
* Investment Offering
* Management Team
* A quick look under the hood (financials)
--
Venture Capital Intl., Thomas Duffy, CEO
Office 860-350-4440
Cell: 203.775.9999
Fax: 203.648.4942
Funding & Advisory
Join our investor Network and put your business in the investor spotlight. We take great pride in our investor network, interviewing and categorizing each investor who applies. Use our network to meet investors who are in your area and interested in your industry.
Post Your Plan Membership
* Post a Business Plan for our accredited Investors to view
* Get Feedback on your plan from a professional analyst
* Post a video pitch for investors to watch
* 13 Lesson Funding Bootcamp: over 30 hours of educational podcasts, webinars, and article from funding experts
* Business Plan Templates
* Pro-forma Financial Templates
Meet investors in our network
* Contact 10 of our accredited investors each month
* Search through our database of over 1,500 angel group's contact info and submission pages
* Everything from 'Post Your Plan' Membership
2.) SpeedPitch event: pitch to qualified investors
SpeedPitch is personal & exclusive. You'll get to meet and pitch to 20 - 30 active and engaged investors. The format is simple & personal. Five entrepreneurs are each given 4 minutes to present their business to 30 - 40 investors, with an additional 3 minutes for Q&A. The event is focused on funding and each investor in attendance is prepared to invest.
3.) InvestorReady Analysis
We analyze your business the same way investors do
A 56-point inspection detailing
* Traction
* Market Opportunity
* Sustainable Competitive Advantage
* Investment Offering
* Management Team
* A quick look under the hood (financials)
--
Venture Capital Intl., Thomas Duffy, CEO
Office 860-350-4440
Cell: 203.775.9999
Fax: 203.648.4942
Funding & Advisory
If you are currently raising capital and need to do any of the following:
1) Go outside of your existing network of contacts to find investors
2) Schedule an expensive national road trip to meet capital sources
3) Pay to retain an investment banker or placement agent
4) Find a cost-effective proven venue to locate new investors
5) Accelerate the funding process to execute your business plan
Then you should consider applying to attend or present at this event. You're welcome to send a copy of your Executive Summary to me at VCAPINT@GMAIL.COM. I'll get back to you promptly as to whether or not your company would be good fit for the event. Also, feel free to call my office at 860-350-4440. I would be happy to discuss the visibility options, qualifications, costs to attend or present and answer any questions you may have about the format, audience composition, references, etc.
We have been hosting these exclusive “deal-oriented” venues for the last nine years. They are the best investor-attended events of their kind in the U.S. and are not compromised with a high population vendors or service providers. This will be our 29th consecutive venue.
If you believe that your company's potential is truly compelling and that management's vision can be effectively communicated, this private event will provide a unique NATIONAL platform to get your message across to active serious investors who want to see fundable deals. YOU CAN THINK OF IT AS A “ROAD SHOW” THAT COMES TO THE COMPANY.
Please keep in mind that most of our presenting companies at the point where they are ready to begin commercialization or have begun marketing their products, and are not usually "unfunded start-ups" with no sales. We will consider pre-revenue companies that have already had some meaningful outside funding and have a clear proprietary advantage in their science, technology or business method and can reach a large addressable market. Presenter qualifications are listed at http://www.privateequityforums.com/qualifications.html .
This prestigious venue can help you solve the three biggest problems in the fundraising process: 1) identifying qualified investors, 2) gaining credible entrée to them and 3) meeting them under favorable circumstances. Moreover, the event drives the single most essential factor in getting funded quickly, and that is the ability to create contemporaneous interest among investors - which also can serve to significantly improve deal terms.
More information about this established proven venue to meet investors and the possible benefits of presenting or attending are on our website at http://www.privateequityforums.com/message.html .
As we are not part of any non-profit group and our events are not primarily funded by vendors and service providers, companies are required to pay a Presenter Fee based upon a number of options. Our forum could be best described as a co-op for the 12 to 15 companies that present, such as a trade show would be. We underwrite the events and the featured companies share in the cost. They do so because our model ensures them an audience of nearly 100% qualified investors who have paid to attend and whom we disclose in advance.
To see a list of recent registrants along with other investment groups who regularly attend our events, please go to http://www.privateequityforums.com/guests.html .
Look forward to hearing from you if you feel that this event can help you to get funded.
1) Go outside of your existing network of contacts to find investors
2) Schedule an expensive national road trip to meet capital sources
3) Pay to retain an investment banker or placement agent
4) Find a cost-effective proven venue to locate new investors
5) Accelerate the funding process to execute your business plan
Then you should consider applying to attend or present at this event. You're welcome to send a copy of your Executive Summary to me at VCAPINT@GMAIL.COM. I'll get back to you promptly as to whether or not your company would be good fit for the event. Also, feel free to call my office at 860-350-4440. I would be happy to discuss the visibility options, qualifications, costs to attend or present and answer any questions you may have about the format, audience composition, references, etc.
We have been hosting these exclusive “deal-oriented” venues for the last nine years. They are the best investor-attended events of their kind in the U.S. and are not compromised with a high population vendors or service providers. This will be our 29th consecutive venue.
If you believe that your company's potential is truly compelling and that management's vision can be effectively communicated, this private event will provide a unique NATIONAL platform to get your message across to active serious investors who want to see fundable deals. YOU CAN THINK OF IT AS A “ROAD SHOW” THAT COMES TO THE COMPANY.
Please keep in mind that most of our presenting companies at the point where they are ready to begin commercialization or have begun marketing their products, and are not usually "unfunded start-ups" with no sales. We will consider pre-revenue companies that have already had some meaningful outside funding and have a clear proprietary advantage in their science, technology or business method and can reach a large addressable market. Presenter qualifications are listed at http://www.privateequityforums.com/qualifications.html .
This prestigious venue can help you solve the three biggest problems in the fundraising process: 1) identifying qualified investors, 2) gaining credible entrée to them and 3) meeting them under favorable circumstances. Moreover, the event drives the single most essential factor in getting funded quickly, and that is the ability to create contemporaneous interest among investors - which also can serve to significantly improve deal terms.
More information about this established proven venue to meet investors and the possible benefits of presenting or attending are on our website at http://www.privateequityforums.com/message.html .
As we are not part of any non-profit group and our events are not primarily funded by vendors and service providers, companies are required to pay a Presenter Fee based upon a number of options. Our forum could be best described as a co-op for the 12 to 15 companies that present, such as a trade show would be. We underwrite the events and the featured companies share in the cost. They do so because our model ensures them an audience of nearly 100% qualified investors who have paid to attend and whom we disclose in advance.
To see a list of recent registrants along with other investment groups who regularly attend our events, please go to http://www.privateequityforums.com/guests.html .
Look forward to hearing from you if you feel that this event can help you to get funded.
Sunday, April 25, 2010
Generally, to raise capital a company must register its stock or securities with the federal Securities and Exchange Commission (SEC), and with each state. Registration typically involves providing and obtaining approval from the federal and state governments for complex information about a company and its financing. Registration is time consuming and expensive. Most registration "exemptions" limit the number of investors, the dollar amount of the offering, and the manner in which money may be raised.
The most common exemption from registration is the private offering. Private offerings are generally sold through a legal disclosure document known as a private placement memorandum. Although private offerings are exempt from federal and state registration requirements, complex "notice" filing requirements still exist and many states further qualify a private offering. Finally, private offerings may not be sold by means of general advertising or solicitation. Normally a preexisting relationship between the company and the investor is required. Most entrepreneurs do not know enough qualified investors to finance a private offering. It is therefore easy to inadvertently turn a private offering into a public one, which then defeats the exemption and requires registration and/or return of investors' money.
The SEC has created a "safe harbor" guideline to enable companies to stay within the private offering exemption. Regulation D (17 C.F.R. Sec. 230.500 et. seq.), Rule 506 allows a company to sell an unlimited dollar amount of securities to an unlimited number of "accredited" (generally wealthy investors and institutions, see Rule 501) investors, and to up to 35 nonaccredited investors. While Reg. D provides burdensome disclosure requirements for offerings over $7.5 million such as expensive and time consuming audited financial statements, these requirements are lessened if the offering is limited to accredited investors.
Reg. D offerings must still comply with state exemption filing and qualification requirements ("blue sky laws"). However, Rule 506 offerings are not subject to burdensome state qualifications, only to state notice filings and fee requirements. See 15 USC Sec. 77r.
For emerging as well as many established companies, the best way to raise capital is through a Reg. D, Rule 506, offering limited to accredited investors. The only remaining problem is Reg. D's prohibition (see Rule 502) on Rule 506 offerings utilizing any form of "general solicitation or advertising".
Of course, the questions are what is and what is not "general solicitation or advertising", and whether or not it is possible to raise capital on the internet without violating this prohibition. A review of relevant SEC opinions on these matters is in order.
In H.B. Shaine & Co., Inc., No Action Letter dated May 1, 1987, the SEC staff indicated that the distribution by a securities dealer of questionnaires to prospective accredited investors to determine their suitability to participate in private offerings would not be a "general solicitation or advertisement". This view was premised upon several factors, including the use of a generic questionnaire and upon the elapse of a sufficient period of time between the completion of the questionnaire and the contemplation or inception of any particular offering. 45 days has been held to be a "sufficient period of time". See E.F. Hutton, SEC No-Action Letter (Dec. 3, 1985).
In IPONET, SEC No Action Letter (Division of Corporate Finance and Market Regulation Interpretive Letter dated July 26, 1996), the SEC staff indicated that a securities dealer and underwriter could distribute questionnaires to prospective accredited investors to determine their suitability to participate in private offerings, and that those investors may be invited to access a secured web-site to review private placement offerings not contemplated or commenced prior to the lapse of a sufficient period of time after completion of an investor's questionnaire.
In SEC Interpretation: Use of Electronic Media (Securities Act Release No. 7856; Exchange Act Release No. 4278; Investment Company Release No. 24426-4/28/00), the SEC staff noted that "third party service providers who are neither registered broker-dealers nor affiliated with registered broker-dealers have established web-sites that generally invite prospective investors to qualify as accredited or sophisticated as a prelude to participation, on an access-restricted basis, in limited or private offerings transmitted on those web-site." While the staff expressed some concern that certain sites have deviated from the format approved by IPONET, the staff went on to state that "the presence or absence of a general solicitation is always dependent on the facts and circumstances of each particular case" (citing and quoting Securities Act Rel. No. 6825-March 15, 1989, at n. 12 "the staff has never suggested, and it is not the case, that prior relationship is the only way to show the absence of a general solicitation"). The conclusion was that "a third party, other than a registered broker-dealer, could establish a 'pre-existing, substantive relationship' sufficient to avoid a 'general solicitation'". While it is permissible for these web-sites to accept a fee for their listing services, these sites may not act as broker-dealers by attempting to induce sales of the securities of others without being licensed to do so.
There are many web-sites purporting to match entrepreneurs with accredited investors. Some of these sites may be found at http://www..wall-street.com/vcpp.html. While it is legally permissible to sell securities to accredited investors through properly structured on-line services, most of these sites do not provide enough accredited investor leads to properly capitalize many private offerings. A conservative rule of thumb is to contact 1000 accredited investors to raise $25,000. Because most of these sites do not have 1000 accredited investors, it is difficult to raise the amount of money needed solely from these sites.
A more effective alternative involves the purchase or rental of voluminous "accredited investor lists". However, the mere fact that solicitations are directed solely to accredited investors may be insufficient to prove that solicitations are limited if no safeguards are taken to ensure that non-accredited offerees are not solicited. See In re CGI Capital Inc. Securities Act Release No. 33-7904 (9/29/00) ("CGI Capital"). In CGI Capital, the company sent e-mail messages to several thousand potential investors (some of whom the company did not have preexisting relationships with) regarding a private placement offering. Prospective investors were provided a "password" to a restricted web-site which contained the offering. However, offerees were not restricted from forwarding the password to others, nor otherwise advised that the password was restricted. Neither were offerees required to verify their accredited investor status prior to viewing the offering on the web-site. The SEC found CGI Capital had engaged in a general solicitation and advertisement because of a combination of three factors: (1) The e-mail was sent to thousands of offerees, many of whom lacked preexisting relationships with the company or its agents; (2) Offerees were not required to verify their accredited investor status prior to viewing the offering on the web-site; (3) There were inadequate restrictions on accessing the offering on the web-site-i.e., the password was not restricted from being forwarded and offerees were not advised the password was restricted to personal use. While it is important that the SEC found the lack of preexisting relationships a factor in finding CGI Capital had engaged in general advertising and solicitation, it is important to remember that the presence or absence of a general solicitation is always dependent upon the facts and circumstances of a particular case. As already mentioned, the SEC "staff has never suggested, and it is not the case, that prior relationship is the only way to show the absence of a general solicitation." See Securities Act Release No. 6825 (3/15/89 at n. 12.
Secured third party web-sites matching entrepreneurs with accredited investors, where the site has established preexisting relationships with accredited investors, is generally permissible. Use of large accredited investor lists, such as e-mails or direct mailings, would be appropriate if the list owner has established preexisting relationships with accredited investors. The stronger the relationships established the better. For example, buying or renting a list from a company of its existing accredited investor-shareholders is preferable to purchasing a list derived from public property records. However, preexisting relationships are not determinative. The other factors cited in CGI Capital should be heeded: (1) Prior to viewing the offering prospective investors should verify their accredited status; (2) Safeguards should be in place to ensure only those to whom the solicitation is sent are able to view the offering.
506D offerings have the advantages of allowing a company to raise an unlimited amount of funds without the headaches of registration or burdensome blue sky compliances (beyond notice filings and fees). By limiting investors to those who are "accredited", burdensome disclosure requirements are greatly lessened. The problem has been compliance with the ban on "general solicitation and advertising". In light of recent SEC releases, it is possible to target large accredited investor databases provided those databases were properly generated, prospective investors verify their accreditation prior to viewing the offering, and safeguards are in place to ensure those not solicited do not view the offering. Legal counsel is advisable not only to ensure compliance with 506D offering requirements, but to assist in maximizing the number of investors to whom an offering may legally be targeted. For more information specific to this article, please contact:
The most common exemption from registration is the private offering. Private offerings are generally sold through a legal disclosure document known as a private placement memorandum. Although private offerings are exempt from federal and state registration requirements, complex "notice" filing requirements still exist and many states further qualify a private offering. Finally, private offerings may not be sold by means of general advertising or solicitation. Normally a preexisting relationship between the company and the investor is required. Most entrepreneurs do not know enough qualified investors to finance a private offering. It is therefore easy to inadvertently turn a private offering into a public one, which then defeats the exemption and requires registration and/or return of investors' money.
The SEC has created a "safe harbor" guideline to enable companies to stay within the private offering exemption. Regulation D (17 C.F.R. Sec. 230.500 et. seq.), Rule 506 allows a company to sell an unlimited dollar amount of securities to an unlimited number of "accredited" (generally wealthy investors and institutions, see Rule 501) investors, and to up to 35 nonaccredited investors. While Reg. D provides burdensome disclosure requirements for offerings over $7.5 million such as expensive and time consuming audited financial statements, these requirements are lessened if the offering is limited to accredited investors.
Reg. D offerings must still comply with state exemption filing and qualification requirements ("blue sky laws"). However, Rule 506 offerings are not subject to burdensome state qualifications, only to state notice filings and fee requirements. See 15 USC Sec. 77r.
For emerging as well as many established companies, the best way to raise capital is through a Reg. D, Rule 506, offering limited to accredited investors. The only remaining problem is Reg. D's prohibition (see Rule 502) on Rule 506 offerings utilizing any form of "general solicitation or advertising".
Of course, the questions are what is and what is not "general solicitation or advertising", and whether or not it is possible to raise capital on the internet without violating this prohibition. A review of relevant SEC opinions on these matters is in order.
In H.B. Shaine & Co., Inc., No Action Letter dated May 1, 1987, the SEC staff indicated that the distribution by a securities dealer of questionnaires to prospective accredited investors to determine their suitability to participate in private offerings would not be a "general solicitation or advertisement". This view was premised upon several factors, including the use of a generic questionnaire and upon the elapse of a sufficient period of time between the completion of the questionnaire and the contemplation or inception of any particular offering. 45 days has been held to be a "sufficient period of time". See E.F. Hutton, SEC No-Action Letter (Dec. 3, 1985).
In IPONET, SEC No Action Letter (Division of Corporate Finance and Market Regulation Interpretive Letter dated July 26, 1996), the SEC staff indicated that a securities dealer and underwriter could distribute questionnaires to prospective accredited investors to determine their suitability to participate in private offerings, and that those investors may be invited to access a secured web-site to review private placement offerings not contemplated or commenced prior to the lapse of a sufficient period of time after completion of an investor's questionnaire.
In SEC Interpretation: Use of Electronic Media (Securities Act Release No. 7856; Exchange Act Release No. 4278; Investment Company Release No. 24426-4/28/00), the SEC staff noted that "third party service providers who are neither registered broker-dealers nor affiliated with registered broker-dealers have established web-sites that generally invite prospective investors to qualify as accredited or sophisticated as a prelude to participation, on an access-restricted basis, in limited or private offerings transmitted on those web-site." While the staff expressed some concern that certain sites have deviated from the format approved by IPONET, the staff went on to state that "the presence or absence of a general solicitation is always dependent on the facts and circumstances of each particular case" (citing and quoting Securities Act Rel. No. 6825-March 15, 1989, at n. 12 "the staff has never suggested, and it is not the case, that prior relationship is the only way to show the absence of a general solicitation"). The conclusion was that "a third party, other than a registered broker-dealer, could establish a 'pre-existing, substantive relationship' sufficient to avoid a 'general solicitation'". While it is permissible for these web-sites to accept a fee for their listing services, these sites may not act as broker-dealers by attempting to induce sales of the securities of others without being licensed to do so.
There are many web-sites purporting to match entrepreneurs with accredited investors. Some of these sites may be found at http://www..wall-street.com/vcpp.html. While it is legally permissible to sell securities to accredited investors through properly structured on-line services, most of these sites do not provide enough accredited investor leads to properly capitalize many private offerings. A conservative rule of thumb is to contact 1000 accredited investors to raise $25,000. Because most of these sites do not have 1000 accredited investors, it is difficult to raise the amount of money needed solely from these sites.
A more effective alternative involves the purchase or rental of voluminous "accredited investor lists". However, the mere fact that solicitations are directed solely to accredited investors may be insufficient to prove that solicitations are limited if no safeguards are taken to ensure that non-accredited offerees are not solicited. See In re CGI Capital Inc. Securities Act Release No. 33-7904 (9/29/00) ("CGI Capital"). In CGI Capital, the company sent e-mail messages to several thousand potential investors (some of whom the company did not have preexisting relationships with) regarding a private placement offering. Prospective investors were provided a "password" to a restricted web-site which contained the offering. However, offerees were not restricted from forwarding the password to others, nor otherwise advised that the password was restricted. Neither were offerees required to verify their accredited investor status prior to viewing the offering on the web-site. The SEC found CGI Capital had engaged in a general solicitation and advertisement because of a combination of three factors: (1) The e-mail was sent to thousands of offerees, many of whom lacked preexisting relationships with the company or its agents; (2) Offerees were not required to verify their accredited investor status prior to viewing the offering on the web-site; (3) There were inadequate restrictions on accessing the offering on the web-site-i.e., the password was not restricted from being forwarded and offerees were not advised the password was restricted to personal use. While it is important that the SEC found the lack of preexisting relationships a factor in finding CGI Capital had engaged in general advertising and solicitation, it is important to remember that the presence or absence of a general solicitation is always dependent upon the facts and circumstances of a particular case. As already mentioned, the SEC "staff has never suggested, and it is not the case, that prior relationship is the only way to show the absence of a general solicitation." See Securities Act Release No. 6825 (3/15/89 at n. 12.
Secured third party web-sites matching entrepreneurs with accredited investors, where the site has established preexisting relationships with accredited investors, is generally permissible. Use of large accredited investor lists, such as e-mails or direct mailings, would be appropriate if the list owner has established preexisting relationships with accredited investors. The stronger the relationships established the better. For example, buying or renting a list from a company of its existing accredited investor-shareholders is preferable to purchasing a list derived from public property records. However, preexisting relationships are not determinative. The other factors cited in CGI Capital should be heeded: (1) Prior to viewing the offering prospective investors should verify their accredited status; (2) Safeguards should be in place to ensure only those to whom the solicitation is sent are able to view the offering.
506D offerings have the advantages of allowing a company to raise an unlimited amount of funds without the headaches of registration or burdensome blue sky compliances (beyond notice filings and fees). By limiting investors to those who are "accredited", burdensome disclosure requirements are greatly lessened. The problem has been compliance with the ban on "general solicitation and advertising". In light of recent SEC releases, it is possible to target large accredited investor databases provided those databases were properly generated, prospective investors verify their accreditation prior to viewing the offering, and safeguards are in place to ensure those not solicited do not view the offering. Legal counsel is advisable not only to ensure compliance with 506D offering requirements, but to assist in maximizing the number of investors to whom an offering may legally be targeted. For more information specific to this article, please contact:
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