Unlicensed money finders face civil and criminal penalties for raising capital

This is part two in my artilce on the pitfalls facing unlicensed money finders who insist on raising capital for businesses. If the finder enters into a contract to raise capital and agrees to be compensated on a success-based fee arrangement as a percentage of the money raised this contract is void and unenforcable in any court. Only licensed broker/dealers may receive a success-based fee for raising capital. Unlicensed money finders go by many names, consultant, financial advisor, investment professional, money broker, etc. No matter what you call yourself if you are not a licensed broker/dealer you cannot receive a success-based commission for raising capital.

Cases in point Novelos Therapeutics, Inc. v. Kenmore Capital Partners, Ltd entered into a contract whereby Kenmore would serve as an “advisor” to assist Novelos in raising capital. Problems developed as they always do and Novelos filed a lawsuit against Kenmore and Kenmore responded with a breach of contract suit claiming Novelos owed Kenmore fees. The court ruled that Novelos was not required to compensate Kenmore because Kenmore was acting as an unlawful broker/dealer under Massachuseets law. The court reasoned that since the contract calling for ” advisory” services to be performed by Kenmore was in essence calling for the performance of unlawful broker/dealer services the contact was void in its entirety. Kenmore could not enforce payment for its services and the court stated Kenmore may still be held to other civil and criminal penalties under state law.

So all you clever unlicensed money finders(or whatever you call yourself) performing the services of a licensed broker/dealer your just asking for trouble.

Attorneys cannot act as “finders” when raising capital for their clients

The SEC  on May 17, 2010 denied a No-Action letter for a law firm seeking to receive transaction-based compensation if they were successful in introducing investors to their client.

The SEC ruled that if compensation is based on the successful funding from an investor introduced by the law firm then the law firm is required to register as a broker-dealer.  Only licensed broker-dealers are allowed to receive success-based commissions for raising capital. If you are not a licensed broker-dealer you cannot receive success-based compensation for raising capital for clients.

So for all you entrepreneurs seeking to raise capital for your business and you are using unlicensed money “finders” the SEC and State regulators are watching. Just because some people get away with it does not make it legal. They just have not been caught. Yet! Attorneys, CPA’s, Accountants, financial consultants, insurance salesman or anyone else that is not a licensed broker-dealer cannot raise capital and received success-based compensation. Period. There are no grey areas.

The only legal way to compensate an unlicensed money “finder” is with a monthly retainer whether or not they are successful in raising capital for you. If you are not prepared to follow the SEC security laws when raising capital then both you and the unlicensed money “finder” will be subject to both civil and criminal penalities. You either pay now to do it legally or you pay a great deal later on.

This is the second time I have written on this subject. I am doing it again because I am still getting requests from entrepreneurs to raise capital for them on a success-based fee. When I explain the realities and the law they just do not get it.

How to manage the “Going Public Process” to maximize your success.

There is only one reason to go public and that is to raise capital. In order to maximize your chances of success you need to plan the “going public process”  as follows:

1. Organize your process well in advance of taking the actual steps to go public. Timing is everything so do not wait until you need to raise capital and then rush the process.

2. Going public requires a team of  professionals such as:

      a. Legal counsel ( in-house and outside counsel)

      b. Media experts

      c. Investor Relations experts

      d. transfer agent

      e. An organized & professional internal staff to administer the process

      f. Financial professionals to raise capital

     g. Experienced officers & management

3. Prepare a business plan that addresses investors concerns, questions and expetations.

4.  Get your financial statements audited even if you are going to be listed on the Pink Sheet. Market Makers will require them in most cases to support your stock.

5.  Make connection with the investment community by attending conferences and roadshows.

6. Obtain Blue Sky/Manual Exemption privileges in 38 states so financial professionals, compliance officers, fund managers, registered reps and research analysts can recommend your securities. Why spend money on IR if brokers are not able to recommend your stock to their clients?

7. Hire professional media experts to get your free exposure.

Going public is an expensive and time consuming process and should only be accomplished with a professional team of advisors. Be prepared and be successful.

The Art of Raising Capital for Your Business

Raising capital is a profession and should be done with the assistance of a professional who has spent years developing relationships with capital sources. Investors do not invest with strangers or in deals sent to them unsolicited. VC firms reveive 2,000 business plans per year. The look at 10 and fund 2. The 2 they fund are usually referred to them by people they know and have worked with in the past. Raising capital is a closed circle. If you want to get in you need to retain the services of someone who has spent years developing these contacts. Listen to their advise on what their investors want to see, hear and read and  prepare your presentation along the lines they suggest. Then let them arrange a meeting with their investors.

Investors do not have time to read 50 page business plans that is what their trusted advisors do. Once an investor knows his attorney, CPA or financial consultant has reviewed the deal and completed Due Diligence he is more likely to take a meeting and consider an investment. This process is not a guarantee you will get funded (there are no guarantees) but it will increases your chances of success.

For some reason people seeking to raise capital fail to realize there are State and Federal security laws that must be followed. One such regulation is you cannot hire an unlicensed money “finder” and pay him a commission or some other success-based compensation if he is successful in raising capital. Only a licensed broker/dealer can receive a commission or success-based compensation for raising capital. Period. That’s the law. There are no grey areas. I know people violate this law but that does not make it legal. It just means they have not been caught.

The only legal method is to pay a retainer for the consultant to source capital for you whether he is successful or not. I know this runs counter to the way most people think. There are no guarantees in raising capital. Only BEST EFFORTS. If you not willing to play by the rules you have no business trying to raise capital. Why do you think they have security laws and security lawyers?

If you violate this specific law your whole offering is tainted and you as the issuer and the “finder” are subject to civil and criminal penalities. The investors is allowed to rescind his investment and demand his money back at any time even if it is several years after the fact,

This is just one reason you need to work with a professional when it comes to raising capital. You either pay now to do it right or you pay later when the SEC and State regulators knock on your door and they will.

Most investor relations programs are a waste of time & money if your OTCBB/Pink Sheet company is not Blue Skyed or has a Manual Exemption

I receive 100′s of email blasts from “IR” companies touting OTCBB/Pink Sheet companies as the next “google” . The stock is going to run so get it now while you can. Stuff like that. I am sure you receive the same junk. The main problem with this type of “IR” is the OTCBB/Pink Sheet companies that hire these firms to tout their stock are wasting their time and money.

Unless the OTCBB/Pink Sheet company is Blue Skyed or has a Manual Exemption privilege in 38 states stock broker and investment bankers cannot recommend their stock to their clients. So the company never really gets real buyers for their stock. Just day traders getting in and out spiking the price/volume of the stock. Then once the “IR” contract is over usually in 30-90 days and $100,000.00 or more later the stock comes crashing down below where it started.

A Manual Exemption in up to 38 states exempts companies from costly filing requirements provided current information is published in a recognized securities manual. Brokers rely on this exemption to provide secondary trading in OTCBB/Pink Sheet companies. Stock brokers can solicit orders for over-the-counter stock in these states. This creates real buying from long term holders of your stock and provides access to millions of investors with online brokerages account. This is how you build new shareholders in your stock.

Online investors have access to your company profile, corporate information. Stock brokers can offer your stock to their client base. You get traffic to your website and a real story is born. Not hype!

So forget “IR” hype, $35,000.00 for one day blast, day traders setting up late at night buying $500.00 of your stock and selling at $550.00 for that quick “profit”. Do your company and your shareholders a favor and showcase your OTCBB/Pink Sheet company to 1000′s of financial professional, registered reps, fund managers and research analysts by getting your company Blue Skyed with a Manual Exemption and build real shareholder value.

Clean Balance Sheets help public companies survive in good times & bad.

A clean, debt-free ( almost) balance sheet is a good thing but how do public companies achieve this holy grail of financial freedom.

Public companies usually take on large amounts of debt in good times with convertible debt and issuing a lot of stock when capital is cheap and investors throw cash around as if it were play money. Then reality hits and the company is forced is look the real world  square in the eye and realize they do not have sufficient cash flow to service the debt.  What’s a company to do?

First, start cleaning up their balance sheet by buying back a lot of the debt at a discount, sometimes pennies on the dollar. Next swap the convertible debt for bank debt secured with hard liquid assets of the company. Third, renegotiate longer maturity dates for the remaining debt carried on the books.

Following these steps to financial freedom and staying in the game is far more desirable for creditors and  shareholders alike than filing bankruptcy.

Asset-Based lending is a creative way for small businesses to raise working capital.

According to an article in the Wall Street Journal February 8,2010 assest-based lending was $600 billion in 2008. The figures for 2009 are not available yet but are expected to be higher.

Asset-based lending allows small businessowners to access working capital even if their credit has taken a hit recently.  Credit is not important as collateral for asset-based loans. Businesses pledge equipment, accounts receivable, inventory and other liquid asset for the loan. In the event of a default the lender takes the collateral as payment for the loan.

One other liquid asset usually overlooked by small businesses is publicly traded stock. Shares of public stock can be pledge for a stock loan. There are no credit checks, no tax returns, no personal guarantees and no margin calls. If the price of the stock increases in value the borrowers has the option to capture some of this appreciation. If the price drops the borrower has the option to walk away from the loan without any negative impact on his credit. Stock loans are a source of working capital and a way to manage the risk of owning stock.

In any event if your business needs to raise capital try looking at asset-based loans.

Family Offices provide capital to hedge funds with the assistance of third-party marketing firms.

If you are starting a new hedge fund or trying to raise additional assests for your existing hedge fund third-party marketing firms work to your advantage. These firms prepare marketing materials tailored to Famliy Offices, the gatekeepers of capital for hedge funds, assist in contacting the proper individual decision makers and save you countless hours of trying to figure out who has the capital and how to access it.

Third-party marketing firms charge a monthly retainer, commissions and sometimes a percentage of assets under management. If you are serious about adding assets to your hedge fund you will be wise to consider a third-party marketing firm.

I want to go public. Raise millions of dollars. But I do not want to pay anything.

It’s a new year and I am still getting email request from start ups and seasoned companies wanting to go public with a reverse merger or APO but want this to happen FREE. 

They know there are legal fees, accounting fees, listing fees, transfer agent fees, cost for the shell, etc. but they expect someone else to front all the cost because they have a great idea.

The cost to take a company public will range from $100,000.00 to $500,000.00 or more. There is no guarantee  once you are public  you will be successful. There is no guarantee  brokers, market makers and retail investors will want to purchase your stock, support your stock or even buy your products or service. There is no guarantee  once you are trading you will be able to raise capital. There are no guarantees no matter how great your idea is. It’s all a crap shoot.

Entrepreneurs some how got the idea  just because some one else was successful in raising capital and going public they will also be successful so investors should take a chance and front the money and let them run with it.

The process of taking a company public is very costly in both time and money. If entrepreneurs are not willing to supply both why then should investors put in their time, money and connections with some one they do not konw and roll the dice. The answer most entrepreneurs give is “well we are giving the investor 10% equity.” Let me tell you 10% of nothing is still nothing. Unless you have money on the table there is no incentive for you to stick it out when things start going wrong and believe me they will.

The old saying there is no free lunch holds true in taking a company public.  If you want to increase your chances of being successful as a public company you need to retain the services of qualified professionals ( attorneys, CPA’s, financial consultants) who have the knowledge, connections and resources to assist you. These professionals do not come free.

In addition to the cost of going public there is also the cost of staying public. You have ongoing monthly, quarterly and yearly cost for legal and account that can easliy run $150,000.00 or more to say current with the SEC. If you do not have the capital to pay for the cost of going public and staying current as a public company you have no business being a public company.

Stock Loans provide cash to officers, directors and shareholders even in this market.

If you are an officer, director or shareholder of a public company you can obtain cash using your stock as collateral. Stock loans offer a method to monetize your stock holdings without selling your stock.

Stock loans take the risk out of owning stock. If the price of the stock appreciates in value during the stock loan you can access this increase in value. If the price of the stock drops in value  you have the option of walking away from the loan without any negative impact on your credit.

Stock loans do not require personal guarantees, credit checks, tax returns and there are no margin calls. LTV can be as high as 85%. Funding can be in 1 week or less. You can use the proceeds to start a business, pay down personal or corporate debt, purchase real estate, college expenses etc.

Banks are not making loans. If you need cash and have equity in public companies stock loans are worth checking out.