Excited by the prospects of investment capital, many entrepreneurs rush headlong into trying to raise the money as quickly as possible. Often, such an approach produces disappointing results. This usually happens because the entrepreneur doesn't fully understand what will be involved to make it all work. Imagine that you were told of an enormous gold mine lying unclaimed in the middle of a desert wasteland. Even though you want the gold, it would be foolish of you to load your pickup truck and race off into the desert without knowing a few things: how far away is the gold, how hot will it get, how much water will you need, etc.
Similarly, before you can raise money from investors, you need a thorough understanding of the steps involved in the process and the resources to allocate. Even simple investment offerings require careful coordination of management, personnel, and financial resources. Often, timing issues place additional pressures on the team charged with completing the offering.
The planning stage of your offering allows you to make assumptions, change your mind, and start over again. You can test various conclusions without having committed major resources and thereby avoid mistakes later. By thinking through the details, you will gain clarity and develop realistic expectations.
In the planning phase, you will decide the type of offering exemption(s) you intend to use, budgets, personnel, and so forth. These decisions should reflect the practical realities attendant with your individual circumstances.
The steps of the offering process
In theory, all securities offerings should have the same basic steps and management procedures. However, the differences of scale between a direct public offering ("DPO") and a small private offering make comparisons difficult. A DPO may require coordination with broker-dealers, consultants, attorneys, financial advisors, auditors, government agencies, and others. A DPO also has substantial marketing activities associated with the offering. A private offering, on the other hand, might simply require the services of a competent securities attorney, CPA, and perhaps an adviser to help manage the process.
The following list includes the major tasks associated with managing a moderately sized direct public offering of securities (perhaps $1 - $5 million in proceeds). These tasks would be advisable for an issuing company that has been in business for several years, has a stable management team, is profitable, with gross annual revenues in the range of approximately one to ten million dollars. The steps for a smaller private offering would be similar although smaller in scope.
1. Project Planning and Scheduling - Project planning and scheduling require a careful analysis of the personnel, financial, and timing resources necessary to successfully complete the offering. The action should include decisions on the different tasks to complete, delegation of responsibilities, and timelines to completion.
2. Corporate Review - Corporate review should include an analysis of the company from a management, operations, and financial standpoint. This is the point in the process where the company should bolster up its management team if key positions are unoccupied, improve the management systems to eliminate arbitrary policies and procedures, and develop (or affirm) the company's financial management policies. You also need to get any corporate or partnership paperwork such as Director’s notes in place if you have allowed these to slide. The goal of this step is to make certain that the company is well run, with a structure that can support public investors.
3. Due Diligence - This is the legal side of the review process. The company will need to provide corporate minutes, details on legal actions, investor transactions, and a host of other points. Legal counsel will then review the assembled package.
4. Blind Market Test - A blind market test is an optional step, and can occur at any time. An outside agency (consultant, advisor, etc.) conducts a market survey of potential investors to determine the amount of interest in the project. The test can research differing messages, price ranges, advertising media, and potential investment groups. The test is conducted "blind", meaning the respondents do not learn the identity of the company planning the offering; the company also does not learn the names of the respondents. This helps to prevent potential securities laws violations. With this information, company management can make informed decisions regarding how to proceed with the offering.
5. Document Preparation - Document preparation primarily revolves around the development of the offering memorandum for legal review. As part of this step, occasionally the entrepreneur needs to prepare additional information (addendums, appendixes) to help complete the package.
6. Financial Statements Audit - If not already available, a qualified CPA must audit the company's financial statements for the last three years. These statements are required by law to be incorporated into the offering package submitted to investors and regulators.
7. Legal Review - A securities attorney should review the offering package prior to obtaining permits from government agencies.
8. Qualification and Registration - The securities attorney represents the company in obtaining required federal and state permits to conduct a public offering. Upon completion of this step, the company may begin selling securities to the public.
9. Investor Marketing Campaign - This step is one of the most important in the process, as the entire effort will have come to little if the company fails to sell the securities. Management should develop the basic plan for the marketing campaign earlier, either in the original project scheduling process (Step 1.), or as an outgrowth of the blind market test. Depending on the exemption chosen, the sophistication of the company, and the marketing approach, this stage can include many marketing techniques. These can include direct mail pieces, online marketing, videos, commercials, roadshows, and others. The entrepreneur may also consider a public relations campaign along with special programs to involve the investment banking community and other distribution outlets.
10. Ongoing Investor Relations - After the company sells securities to the public, it should continue to supply information to and answer questions from investors. If the company sold securities to a large number of individuals (in the hundreds), senior management may wish to delegate investor relations as a full time task.
Robert Coleman is the President of the Pacific Venture Club, www.pacificventureclub.com. You can reach him via email at
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Copyright 1996-2009 Robert Coleman., ALL RIGHTS RESERVED
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