Private equity, debt financing fill financing void for entrepreneurs
With financing from banks frozen, northern Nevada companies are raising capital in private deals with groups of investors.
At least 15 companies in the region have filed notices this year with the Securities and Exchange Commission that they are raising money through sale of equity or debt offerings to private investors.
Comparisons with previous years are difficult because the SEC this year began requiring electronic filing of the notices of private financings, which show up on searches of its online database. Previously, filings often were made in a paper format.
The companies that have turned this year to private investors through so-called “Regulation D” offerings the name comes from the applicable SEC regulation cover a wide range of industries. A few examples:
* Myothercountryclub.com, a Reno company that arranges play at private golf clubs, filed a statement that it’s raising $1 million through the sale of equity.
* Pinyon Technologies of Reno said it’s selling $1.625 million in debt and warrants to further finance development of its antenna systems for wireless applications.
* DT 1 LLC, a real estate development in Reno, said it raised $8 million through a private equity offering.
* Tahoe Ridge Winery said it’s raising $625,000 in private sales of equity.
The number of private equity and debt offerings appears to result almost entirely from the reduction of lending by banks.
“Entrepreneurs are still entrepreneurs,” says Tom Powell, chief executive officer of ELP Capital in Reno. “When capital is cheap and easy from banks, you don’t see a lot of private placements. But now private capital has to be raised to get anything done.”
Powell’s company has raised private money to finance several real estate deals in the region in recent years.
“It’s a marvelous way to raise funds,” he says. “It’s a way to match capital with entrepreneurial ideas.”
But private capital is neither cheap nor easy.
Mike Bosma, managing shareholder of The Bosma Group, a Reno accounting firm that works extensively with entrepreneurs, notes that investors in private equity deals expect to be compensated for the risks they are taking.
“There can be sticker shock at the cost,” he says. Entrepreneurs may need to pay 15 to 20 percent interest on debt offerings, Bosma says, and investors also may want warrants to buy a slice of equity if the borrower is successful.
But even though private financing may be expensive, it beats no financing at all while traditional credit markets are frozen, Bosma says.
Although the paperwork required by the SEC is a fairly simple five-page document, the private financing deals can be devilishly complex.
Fritz Battcher, a partner at the law firm of Holland & Hart who handles many of the private financing deals, says federal securities law is filled with potential pitfalls for entrepreneurs.
The SEC, for instance, forbids promotion or advertising of the private offerings. That can raise questions if a newspaper reporter spots the documents on the SEC Web site and calls the company for comment.
A carefully developed private offering of stock or debt, Battcher says, also may serve to meet the needs of state securities regulators as well as the SEC.
The advice of a skilled securities attorney throughout the process will help reduce the potential for regulatory difficulties, Battcher says.
Both Powell and Battcher says offering documents need to be prepared carefully to reduce the likelihood of disputes later.
“It never works out the way it’s planned,” Powell says.
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