“When it comes to raising capital, there are no guarantees…only degrees of probability. To ensure success, simply increase the probability to the highest degree possible by offering a security that benefits the investor first, while serving your company’s capitalization needs second.”

~Timothy Daniel Hogan, Founder & CEO: Commonwealth Capital Advisors, LLC

The contents of this book will teach you how to increase the probability of successfully raising capital in the United States to the highest degree possible. How can we (my senior management members and I) make such a claim? We can because these are the secrets of Wall Street in relation to funding start-up and early stage companies. We have simply brought the “Wall Street process” to “Main Street companies.”

This book was written as the precedent to a revolutionary change in the ability, not the way, to successfully raise capital. The fundamentals of the way to raise capital rarely change—if at all. The ability to perform the necessary tasks to ensure success has. However, as a treatise I will also introduce you to complex processes that have been substantially streamlined and simplified for the benefit of your understanding the way to raise capital successfully. I will also divulge numerous secrets, strategies, and techniques used to raise capital. Most importantly, to further your ability to successfully raise capital for your start-up, early stage, or later-stage company, I will introduce the practical applications used by Wall Street investment-banking firms

The most challenging part of writing this book was to take an enormously complex set of processes and simplify them as much as possible—without degrading them. The true value of what you are about to discover herein is your ability to make a qualified decision if the processes contained herein are right for you and your company. Only you and your team can make the qualified decision if your company is ready (or not) to take on this challenge. The process of selling securities to capitalize a company is not for everyone. This is not child’s play. I often humorously refer to this book as a tool we use to scare away the vast majority of entrepreneurs who simply are at the “dreamer stage” in their journey. From decades of experience, we know these processes will work for those who are ready. Many entrepreneurs come back to us within a few months—when reality sets in—and they are ready for the challenge and opportunity for long-term success. When the student is ready…the teacher appears.  

To be clear, the activation of the processes outlined, discussed, and clarified in this book is for serious entrepreneurs only. It is designed for those who need to raise substantial amounts of capital for start-up, early stage, or later-stage companies—or commercial projects—for which you want to maintain voting control and the vast majority of equity ownership. These processes are used by Wall Street investment banks to raise capital for their client companies. You can use them to capitalize your company as well! Once you are able to successfully raise capital in the private markets, opportunities will abound. At that juncture, you may decide to take the Company public, sell it outright to a strategic acquirer, or remain private as your own personal best investment. To raise capital, you do not have to take your Company public. These processes give you options, not restrictions.

When speaking of raising capital for developing companies, my primary focus lies in how to raise “passive” capital, as opposed to “active” capital.

“Passive” capital means attracting capital from investors who are not interested in any active management of a company but seek relative safety with a better-than-average rate of return on their investment. These investors are commonly known as “angels.”

“Active” capital means attracting capital from professional investors who seek active management, strategic support, or both—i.e., actual control of the company. These investors will structure the deal (e.g., offer terms of financing in a term sheet) to achieve relative safety while seeking a substantial return on their investment. In most professional circles, this type of capital is referred to as “high octane” capital because of the high-pressure demand for speed and performance often put on the recipient company’s management team. These investors are typically referred to as “institutional” or “professional” investors, and this type of funding is more commonly known as “venture capital.” Throughout this book I will address both types of investors aforementioned (e.g., angels and institutional/professional investors), as both sources of capital have their place. In the early stages, passive capital is generally better for most companies, especially for entrepreneurs who seek the freedom of control without having to answer to another type of boss (e.g., the institutional/professional investor). In other words, too many cooks in the kitchen can distract the entrepreneur from realizing his/her dream. 

In order to increase your Company’s chance of successfully raising capital, it will be to your advantage to know how other entrepreneurs are successfully raising capital in the marketplace. It is also important to know the current trends in the private, as well as the public capital markets, so that you are strategically positioned to take advantage of these trends and get ahead of them. More importantly, to increase your Company’s chance of raising capital correctly and legally, you must understand the nature of the regulatory environment for issuing securities to capitalize your Company. More information on the current compliance rules and regulations will be highlighted throughout this book (see Chapter 19: Compliance with Federal and State Securities Laws).

For most readers and entrepreneurs, the wealth of information contained in this text is a lot to digest. As a learning tool, many concepts have been repeated throughout to help you understand the full magnitude of the process. When referring to “raising capital,” we mean raising substantial amounts of capital for the traditional working capital needs of “for-profit companies.” Unless you have really wealthy relatives who like you an awful lot, for all practical purposes there are only two ways to legally raise capital in the United States. Although it is nice if you can get it, we also do not consider grant money from governmental or other organizations as a form of available working capital for a start-up, early stage, or even seasoned companies. The availability of grant money is always shifting—the amounts are always too small—and the probability of attainment is generally very low. Grant money often comes with too many strings attached; nevertheless, we encourage pursuing such available funding (under the right circumstances) once a company is properly capitalized through the means illustrated in this book.

In addition, crowd funding through donations really isn’t considered raising capital, and certainly not substantial amounts of capital, because that model is weak and fading fast. Furthermore, crowd funding through a securities offering under Title III of the JOBS Act of 2012 is essentially “dead on arrival,” due to the over-burdensome compliance protocols being developed by the various regulatory authorities. Yes, as of the writing of this text, crowd funding is becoming a legal reality, but mark my words—the burden of compliance will, at best, quickly make crowd funding cost prohibitive or, at worse, inadvertently create criminals out of entrepreneurs.

Furthermore, although it generally lessens the amount of working capital needed (a very good thing), franchise sales, pre-construction price sales, or the sale of other rights are not considered raising capital; these are booked as sales and are finite in nature. We do consider any commercial lending activity as part of a capitalization plan or deal structure, which would include bank loans and lines of credit—US Small Business Administration (“SBA”) guaranteed or not—factoring of receivables, and purchase order financing. We embrace reasonable amounts of debt as part of the overall capitalization mix—once a company has sufficient revenues to support the principal payments and accrued interest—because debt is the least expensive form of financing if one assumes success in the foreseeable future. Thus, before the entrepreneur obtains reasonable amounts of debt financing from banks, he or she is recommended to have substantial amounts of equity raised, retained earnings, or both from a sustained operating history. This step often eliminates most start-up and early stage companies. It is important to keep in mind that financial structures need balance.

To legally raise capital in the United States, you must engage in one of the two activities listed below:

1. Produce a business plan and submit it to institutional sources of capital.

These sources of equity and/or debt capital would include venture-capital firms, commercial banks, private-equity firms, family offices, broker-dealers, pension funds, and other similar financial institutions. Allow these institutions to offer the terms of the financing. Note that although securities may be involved in the transaction, when these institutions make the “offering of terms” by issuing a term sheet to your company, it is not considered a securities offering because your company is not making the offer.  

1. Conduct a securities offering.

What does a securities offering entail? First, we need to define what constitutes a security. The courts have generally interpreted the statutory definition of a security to include both traditional and nontraditional forms of investment. In Section 2(1) of the Securities Act of 1933, as amended, the SEC defines the term “security” to mean “any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest, or participation in any profit-sharing agreement, collateral trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interests in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing” (1-2)[1] (also see SEC v. W. J. Howey & Co. US 293 (1946)).

In Landreth Timber Co. v. Landreth, the US Supreme Court adopted a two-tier analysis that basically further elaborates as follows: “For purposes of securities laws, a security in an investment of money, property or other valuable consideration made in the expectation of receiving a financial return from the efforts of others.”[2]

To summarize, anything you trade an investor in exchange for an investment in your company—where the investor expects a return on the investment—constitutes a security.

Now that we have made clear what constitutes a security, we need to define what constitutes an “offer” or “offering” of a security. Presenting a business plan (without a specific deal structure) to an institution (i.e., venture-capital firm) to obtain capital will not constitute a securities offering—as long as the financial institution offers the terms of financing. The offer must come from the source of capital to avoid your Company inadvertently making an offering of securities. Even before the issuing entity is formed, the regulatory authorities may still consider the distribution of equity or debt before, at, or shortly after the original meeting of incorporators (in the case of a corporate entity being formed) or a meeting of organizers (in the case where an LLC or a Partnership is the entity to be formed) as an offering of securities.

When the regulatory authorities consider the distribution of equity or debt a securities offering (even before the issuing entity actually exists), simple intrastate exemptions from registration of those securities are available. This is the reason why most start-up companies do not necessarily violate securities laws. Some states allow for as little as six and up to fifteen entities—consisting of either individuals organizations or combinations of both that reside in that state—to form the issuing entity and distribute securities to the founders, without the need to register the securities or qualify for the exemptions from registration.

Every state has its own uniform offering exemption(s), and you must comply with each state's stipulations to qualify for claiming those exemptions. However, you cannot rely on the intrastate exemption if one founder is from another state. In this case, the issuing entity must qualify for federal exemptions from registration under Regulation D or the Accredited Investor Exemption 4(6)—if all founders are accredited—to rely on the Accredited Investor Exemption from registration. 

The production of securities-offering documents generally takes a great deal of time, cost, and effort. No matter who produces the securities-offering document(s), it will take some time and effort for you and your management team to create an attractive business plan and to accurately respond to questions regarding disclosures and disclaimers included in the securities-offering document(s); however, Financial Architect® enables anyone to produce the required securities-offering documentation for a fraction of the time, cost, and effort otherwise typically involved.

Even when soliciting and selling exclusively to accredited investors, where technically no documentation is required to conduct a securities offering, according to the Accredited Investor Exemption—Section 4(6) of the Securities Act of 1933, as amended—your offering may still be subject to the No General Solicitation rules and provide no protection from the anti-fraud provisions of the Securities Act of 1933 (and amendments thereto), irrespective of the degree of disclosure your documentation contains (or lack thereof).

Currently, there are only two ways to legally conduct a securities offering in the United States:

1. Register the securities on the federal and/or state level (a very expensive procedure).
2. Qualify for an exemption from registration, with the ability to advertise the offering with the use of the general media (e.g., Small Company Offering Registration (“SCOR”), California Corporation Code Section 25102(n), or SEC Regulation A). (A fairly expensive procedure.)
3. Claim an exemption from federal and/or state registration, (e.g., SEC Regulation D). (A relatively inexpensive procedure.)

Furthermore, there are only three ways to effectively sell securities:

1. Engage SEC-registered broker-dealers to sell your Company’s securities (note: they will not engage start-up or early stage companies).
2. Sell securities privately to your management team’s pre-existing relationships.
3. Sell securities to investors, using public media sources under Regulation D, Rule 506(c) for accredited investors only or Regulation A for interstate offerings. Intrastate offerings would include SCOR Offerings or other intrastate registrations that allow for general solicitation.

Submitting business plans for substantial amounts of funding to institutions—i.e., venture-capital firms, commercial banks, investment banks, and private equity groups—simply does not work for most start-up, early stage, or later-stage companies (under $10 million in annual revenues). When it does work for the unique few, it often requires sacrificing too much equity ownership and control to make the funding worth it. Nonetheless, the following three basic issues arise when it comes to the alternative—raising capital through the solicitation, sale, and issuing of securities:

1. Affordability of the high cost of securities-offering-document production.
2. Marketability of the proper deal structure to investors.
3. Deliverability of the securities offering, in compliance with federal and state(s) securities laws, to many investors. 

We will review the practical applications and processes that solve all three basic problem issues and enable your Company to compete directly with qualified institutions for individual-investor capital through an offering of securities that is affordable and effective. Once you build your Company in the style proposed throughout this book, you will be able to negotiate from a “relative position of strength,” which allows you to dictate the terms of future rounds of financing using a [recommended] series of securities offerings.

If you would like to read more you are welcome to visit our website to download your Complimentary Copy of the e-book that our CEO wrote entitled, "The Secrets of Wall Street - Raising Capital for Start-Up and Early Stage Companies" (Abridged Edition) 

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