65 Ways to Finance Your Business

Tuesday, October 11, 2005

JIAN, BizPlanBuilder, http://www.jian.com/software/business-plan/sample-small-business-plan.html

Better Business Management & Planning Practices

Raising capital can be a challange to any business Read this to get ideas on ways your business can find that all important ingredient -- money.

While navigating your new or existing business on its intended road to success, there are many varied funding paths you can take. This document will help you conduct informed evaluations of capital in the right places, and early on, before your funding needs jeopardize your business.

65 Ways to Finance Your Business
Here we present "65 Ways to Finance Your Business." The insights presented here can give you an advantage before becoming desperate for immediate financial assistance.

This document includes:
• Identifying Your Capital Needs
• Narrowing the Search for Funds
• Self Funding
• Locating Private Resources
• Tapping into Commercial Funding
• Parting Tips
• Identifying Your Capital Needs

Financing your business requires careful planning, research and logistics. Identifying your capital needs and seeking the right source of financing for filling those needs can get confusing and complicated at times. Even with pre-planning and diligent effort, the funding game can sometimes change in midstream, as economic climates shift causing the viability of various funding vehicles to vary over time.

You may have started in business as a specialist in a particular area of business-marketing, sales, R&D, or operations. Now as an owner or manager you need at least a general understanding of all aspects of business, especially appropriating and making efficient uses of funds.

The basis for your business may be a very sound concept, but funding new growth or maintaining existing growth can pose many challenges. Different types of capital requirements need different funding vehicles, all with different rules and steps similar in many ways to a game of monopoly or chess. Growing a business most often requires more capital than is readily available from existing cash flow or from the resources of the founder(s). Conversely, obtaining too much capital or raising it too soon can also cause other problems for the business.

The first step in this search is to learn and understand the pros and cons of the various types of capital needed by your enterprise. Capital comes into your business in two ways: as Equity capital or as Debt capital.

Equity financing is the investment of the owner(s) in the company. It stays in the company for the life of the business (unless replaced by other equity) and is repaid only when and if there is a surplus in the liquidation of the business-after all creditors are paid. Usually getting new equity is very difficult, especially during the early stages of the business.
Debt financing, on the other hand, can come into the business in a variety of ways. It comes for a defined period of time and is paid back with some form of interest.

The financing of your business can be further classified as start-up financing, which is usually equity, working capital financing and growth financing. Start-up financing is the financing to get the company to an operational level including the costs of getting the first product(s) to market. This is best done with equity and long term loans or leases.

Working capital is required to drive the day to day operations of the business. In most businesses the operational needs vary during the year (seasonality, inventory buildup, etc.) and the working capital tides over the fluctuating expenses involved with doing the base business. Refer to Chapter 9, Financial Plan, for more information.

Growth Capital is not tied to the yearly aspects of fueling the business. Rather, it is needed when the business is expanding or being changed in some significant and costly way that is expected to result in higher and increased cash flow. It is generally longer term than working capital and is paid back over a period of years from the profits of the business.
Knowing specifically what type of capital your business will be needing will put you in a stronger position when evaluating how and where to seek your financing.

Narrowing the Search for Funds
Next you need to become familiar with the pros and cons of the various sources of financing and how each might cater to your specific capital needs. Are you an established business needing to buy fixed assets such as a new building or new equipment? Or do you need to add a new line of inventory to your stock? Are your needs for short-term money to help you through a seasonal cash crunch? If so, the typical source of financing for these kinds of needs is a traditional commercial bank.

If you are starting a new business and have sufficient collateral but need additional capital funds, the SBA loan program might be for you.

Note: For loans under $100,000, the SBA has recently begun to ease documentation and collateral requirements to encourage and support small businesses. The SBA also is encouraging women and minority-owned businesses with their new quota system. (See sections on SBA Funding later in this chapter).

However, if your proposed business is on the leading edge of technology, and there is a potential for substantial growth, venture capital might be the appropriate financing source. These types of funding are discussed later in this chapter. Knowing the specific needs of your business will help to significantly narrow the scope of your funding search.

The methods for keeping abreast of funding options available to your business include networking with industry colleagues and successful business leaders in your region, soliciting the advice of financial experts, and reading of financial publications. Many entrepreneurs and investors are now also turning to on-line financing services, which are appearing with greater regularity. Some of these services attempt to match small businesses with investors, while others electronically post lists of companies seeking investors and then allow investors to examine the lists for companies of interest. Usually both the businesses and the investors pay fees to have access to this service.

These activities will help keep you positioned for the right funding move at the right time. Keep a sharp eye out for creative ways in which other successful businesses, similar to yours, are handling their funding. Follow up any leads for funding ideas that hold promise for your type of business. Most of all, don’t get stuck in a rut of focusing on only one type of financing. Keep your options open. Hold several cards that can be played at the appropriate time for your business.

Yes, seek out and listen to the best advice you can find, but always closely check out the sources of potential funding. All financial sources seek, in various ways, return on investment in relation to the risk that they perceive they are taking. This is a "given". Find out what they want in return, and when they want it. In addition, check out the people you will potentially be dealing with. Determine if they are reliable and if they know enough about your industry to be viable funding associates of your business.

Is the funder’s style of business compatible with your vision and ethics? What kind of information about your business will they require to know? How far into your business will they pry? Your good questions will elicit appropriate funding information that will not only help your business’ present situation, but also avoid funding scenarios that could severely handicap your business in the future.
The following is a description of many of the options available for funding businesses in today’s economy. The most commonly used funding sources are described for you more fully than the less used, narrower in scope methods. For your convenience, the sources have been generally grouped into the following categories: Self Funding, Private Resources and Commercial Funding.

Self Funding
The vast majority of businesses (close to 90%) are begun with less than $100,000 and close to a third are begun with less than $10,000. This kind of money is usually available to the motivated entrepreneur by taking a close look at the personal resources at his or her disposal well in advance. Several of the most common self funding methods are described here.

Personal Savings and Equity
The vast majority of new businesses are started with the main source of funding coming from personal savings or various forms of personal equity of the founder(s). This capital reflects the degree of motivation, commitment and belief of the founder in the enterprise. This type of investment also takes the shape of sweat equity, where individuals either donate their time or provide it at below market value to help the business get established. Many times entrepreneurs use profits from previous endeavors to pour into their new enterprise.

Moonlighting
Many home-based businesses are begun while the founder is still working a regular job. The income from the job can both help support the owner during negative or low cash flow of the business set up phase and it can provide working capital to augment the business’s cash flow. Usually when the business begins paying as well or better than the regular job, the entrepreneur can jump ship from his job and devote full time to building his new business.

Home Equity Loans
This may be the fastest growing method of raising money for individuals. Banks generally are willing to lend up to 70% or more of a home’s appraised value, minus any existing mortgage(s).
Home equity loans are generally offered through commercial banks or savings and loan associations. 1994 interest rates for second mortgages are under 12%. In some instances an approved home equity loan can be structured like a bank line of credit at slightly lower interest rates.

For tax purposes, you can deduct interest on up to $100,000 of debt on home equity loans, regardless of how you use the money. This makes a home equity loan attractive when looking for your start up capital. Remember that since this money is secured by your home, the bank could foreclose if you fall behind in your payments.

Insurance Policies
This is a personal type of loan that is becoming more available and more popular as a method for obtaining early financing for a small individually owned business. Other entrepreneurs have been known to completely cash in their life insurance policies. Many insurance companies have, in recent years, liberalized their criteria for allowing policy holders to borrow against the value of their policy.

Tax Deferred Retirement Accounts
Dipping into your tax-deferred retirement account can be a last resort for funding your business. This works best if you are more than 59 1/2 years of age. While the money in your Individual Retirement Account or 401(k) plan is technically available to you, you’ll need to pay a 10% early withdrawal penalty plus regular income tax on money you withdraw. Obtaining funds with this method may still be worth it to you if no other financing avenues are available and you have the motivation.

It might be possible to get an unsecured loan on the strength of your retirement accounts. Although these accounts would not directly be pledged as collateral, the money could be withdrawn at a later date to repay the loan if it was required.

Credit Cards
"Pulling out the plastic" for fast funding of your business is more viable now than ever before. MasterCard or Visa card holders with good credit now often receive credit limits of $10,000 and above. By being able to carry more than one credit card, as an entrepreneur you can considerably boost the total amount you can tap into at any one time.

Credit card interest rates on cash advances vary considerably, from as high as 21% to 15% or lower. Annual fees can also range from over $50 down to zero. This means it is wise to investigate getting the best deal you can when obtaining your credit cards. It may be advantageous to close out one or more of your high interest cards and transfer the balances to lower cost credit cards. The Bankcard Holders of America (Suite 120, 560 Herndon Parkway, Herndon, VA 22070-9958) is a resource for information on low rate credit cards and building good credit.

Remember that obtaining funds through credit cards costs much more than bank loans. If you do use your credit cards for business funding, pay them off as quickly as you can. Paying only the minimum payments can extend interest for years without making much progress toward paying off the principal. Also, if your enterprise should not pan out, the credit card payments you will be stuck with may place you in a personal financial squeeze.

Bootstrapping
Often the best money to go after is the money that can be saved from the current costs and overhead of your ongoing business. This is a commonly overlooked source when business owners and managers are looking for the elusive "pie-in-the-sky" financing. A penny so saved is literally more than a penny earned on the bottom line, and a penny less borrowed. The interest is saved on the now lower loan amount and the time and expenses associated with finding additional financing.

The process of thoroughly searching through your operation for opportunities of savings and improved efficiencies will also allow you to learn more about the intricacies of your company, which will put you in a position to manage it better-a double return on your invested time and effort. The upshot is that by becoming more efficient and cost conscious, you will be in a stronger position at all times to qualify for refinancing options as they become needed and available.

Customers
Certain types of businesses can require an advance deposit from customers, which quickly spurs cash flow. If you can encourage cash payment instead of giving the customer credit, you avoid financing him. Similarly, you can also facilitate receiving cash quickly by granting cash discounts for early payments by customers. In any case, the more quickly your success has an impact on your suppliers and customers, the more likely they are to offer such deals.
If you have a yearlong customer, but your work peaks heavily in one season, you may want to offer your customer equalized billing all year round to help even out both your cash flow and their cash flow.
If you consistently work to build an excellent reputation in your field, you will find that your customers can work with you to help finance or partially finance your enterprise. Actively working with your suppliers or customers on an indirect form of loan called trade credit can help generate quick cash flow and also minimize expenses. This method can take a wide variety of forms. We will examine several of these methods here to give you possible alternatives that may be workable in your business.

1. Some suppliers, seeing an opportunity to grow themselves, may advance goods to you too, in effect, prime the pump if your venture looks particularly promising. You may have a certain strength in being a debtor who pays back without abusing your creditors. As you generate the revenue from your sales you will have the funds to pay back the money owed and purchase additional goods. In a variation of obtaining goods advanced from suppliers, extended terms of 90 to 120 days or even longer can sometimes be pre-negotiated with suppliers during special circumstances or to assist with seasonal cash flow peaks and valleys.

2. If you use a manufacturer as part of your business, you may be able to utilize this manufacturer as an indirect investor, without having to borrow a penny. The manufacturer can "lend" you capital through use of their current raw materials, labor and technical know-how. They have wholesale leverage to assist or complete part of your design, set up, assembly, etc. for far less than you would have to spend. Give them a good faith cash payment up front plus a small stake in your enterprise or a return on investment percentage based on the success of the finished product. The manufacturer, as a specialist, will be able to complete the job in less time than if you took on the whole job yourself. By both parties having a stake and motivation in the project, you may well be able to be successful without having to call in third-party investors, like bankers, venture capitalists or angels.

3. In certain situations, it may be beneficial for you to give a supplier, or even a landlord, equity for favorable long-term arrangements. This can free up some immediate cash to help grow your business.

4. You may be able to lessen your required cash outlay to suppliers by negotiating to obtain a cash discount for your early payment. As an example, "2 percent-10" means that a discount of 2 percent is granted if you pay for goods or services in full within 10 days.
For small businesses the variety of trade financing mentioned here are all usually easier to negotiate than is obtaining bank financing. One reason for this is the amount of cash as risk. If your supplier’s variable costs represent 45% of the selling costs, then for $100,000 of financing the supplier has $45,000 cash as risk. The bank would have $100,000 cash at risk.

In any situation of this sort, creative ideas and clear communication and agreements can help you get over many funding humps in your business. You’ll learn what trade credit opportunities like these are available with your suppliers and customers if you are willing to ask.

Trade or Barter
The need for capital can be lessened, especially in early stages of a business, through trading or bartering of your products or services with your suppliers. There are also associations that are formed to provide a network of barter opportunities among members.
This type of activity reduces needs for cash in the business. Caution should be taken to follow IRS regulations regarding this practice. Also, clear agreement is needed among the parties to assure proper value is granted for the traded goods.

Stock Purchases and Options to Employees
Your employees can be your partners in solving needs for capital at your company in a variety of ways. You can offer certain senior and trusted employees to become common stockholders by investing in a purchase of your company stock. Employees usually have limited discretionary funds for stock purchases, but every dollar counts, and employee dollars usually come with the motivation to help improve the results of the company, thus the value of their investment. Common shareholders also have the right to have a say in the management of the company. Another possibility is to offer these employees nonvoting preferred shares of stock in return for their investment.

Many companies in their early phases of growth offer key employees or business partners options to purchase certain amounts of stock at later dates, often at a discount price or on very generous terms. The stock options help supplement the employee’s salary, which may be agreed to be below industry standards so that the company can retain this salary saving as capital for help in becoming successful.
By being part owners and participators in the profits, these desired employees will more likely choose to remain with your company instead of looking elsewhere for work. As with any individual investor, always document this investment relationship with your employees. With employee stock options you can legally maintain a right of first refusal, holding the first right to buy back the shares if the employee leaves or is terminated.

While there are many advantages to a company offering stock options, be careful not to give out options too easily, too quickly, or to persons whose true expertise and loyalty has not been fully demonstrated. What may not seem to be costing you much early on in the business could cost you dearly in terms of money and time later on, should your relationship with stock option holders deteriorate.
The lure of stock options is often a major lure for attracting talent to start-up companies in new technology industries.

Employees Stock Ownership Plans
Companies can formally set up ESOPs (as they are called) to not only raise capital, but also raise employee morale and productivity. In a typical ESOP the employee is allowed, as determined by management, to purchase up to a certain amount of stock during a certain period of time. There are generally regulations about cashing in (redeeming) the stock if the employee should leave the company. An example might see an employee being able to have five percent or more of his or her weekly salary deducted for stock purchase after one year of employment. Software to create your own Employee Stock Option Plan.

The usual benefits to the company include a steady flow of additional capital without having to put up collateral and without needing to pay a set amount of interest. As stockholders, employees see a possible additional source of income that they will have influence over through the quality and productivity of their work.
ESOPs should be handled by an attorney to insure the documentation and communication are done properly, insuring employee confidence in the ESOP and in the company.

Locating Private Resources
Just as it has in the past, reality suggests that the world of private investors, including friends, relatives, coworkers, wealthy acquaintances (angels) and various sophisticated individual investors, is a likely place to go to raise capital for your business. The total pool of all types of private investments in business is vast. For example, in 1992 in the U.S. the venture capital industry invested approximately $2 billion, while a variety of private investors invested perhaps 20 times that—$40,000,000,0001. As huge as this pool of money is, the forms that individual private business investments take are diverse, as is the creativity of the people making the deals.

Choosing this private path leads to questions of how to find and inform a sufficient pool of potential investors about your need for private funding. Then, in exchange for the investors’ money, what mechanism should be used to issue to them the documentation or securities that represent some equity or debt interest in your business? The key is knowing what aspects of deals are critical to your business and having multiple options available as you search for and enter into your funding negotiations.

Investment from Friends & Family
Next to personal savings, the second most popular source for start-up capital is friends and family. Often, they may not be as worried about quick returns as other outside investors would be. There have been many success stories from investments of friends and family. There is also a high incidence of problems associated with this source.

To illustrate this point, suppose that from the start of your business you had access to only the best and most sophisticated investors. Through this process both the investors and you would develop an understanding of the risks involved with investing in your business. It would be in both your and the investor’s best interest for you to disclose fully in writing the risks associated with the investment.

Because this process of due diligence is often not carried out with family and friends, problems sometimes ensue. Thus, receiving capital from such a consenting, informed investor is often better than from a rich, unsophisticated relative or friend. Your relative or friend may not investigate your deal carefully and, should problems occur with the business and investment, your relationship with them may suffer.

A wise policy is to provide the same disclosure to a friend or relative that you would provide to most sophisticated investors. Resist the temptation to keep things loose and undocumented. Draw up the terms, conditions and payment schedule in writing for their signature and yours. Even if you receive a "friendship loan" at no or low interest, provide documentation in return. This is the smart, professional business approach that minimizes the potential down side of unstated assumptions and their implications. As a result of formalizing your deal, your relationship with your friends and family will have a much better chance of remaining intact.
In many ethnic communities and foreign countries private loan clubs are a variation on obtaining funds from friends and family. Often a group of trusted friends pools money monthly to be awarded to a group member who needs and deserves it.

Angels
If you are a small business and you only need limited amounts of capital, seeking the type of private investor called an "angel" might be the best alternative. Over 700,000 angels invest over $30 billion of equity in small businesses each year. These people generally invest in the $25,000 to $50,000 range, but sometimes you can get more by dealing with several "angels" at once, since they sometimes prefer to invest as a group.

Be sure to check out their resumes and two or three references, especially the names of other entrepreneurs the angel has previously financed. Your "angel" could be your lawyer, doctor, accountant, or an interested individual in your community or industry. They are often executives who have been successful in an industry and now look to fund other companies in that area. Generally it is best to offer an angel straight equity, part ownership in your business in the form of common stock. Keep it simple and completely spelled out.
Angels have sometimes been called the "invisible" segment of the venture capital industry. Networking through trade associations, civic organizations and your business community may lead you on the path to an interested angel. With individuals you have a tremendous amount of leeway in structuring the investment. You can structure it as debt or equity and vary the terms and repayment. Sources of personal investors go beyond family and friends.

Previous or Present Employer
Your employer may not want to lose your abilities and contributions, should you decide to start your own business. There are situations where this employer can become your first major customer. This can be solidified with a purchase order if you are going to be providing manufactured goods, and also a specifically worded work for hire agreement if you are to provide services to your past employer.
In another situation, your employer may agree with you that it would be wise to spin off an idea of yours into a new company. Providing funds in this type of venture of yours may be a sound investment for the employer, who should already know the market, the competition and your abilities and motivation.

Should this setting unfold, have the appropriate agreements drawn up and signed to protect both sides with regards to resource requirements, payment and delivery. Make sure the employer is made aware of any negative impact the new venture could have on their existing business.

Some additional words of caution: don’t become too dependent on your past employer and don’t expect them to do all that it takes to set up your business. You need to start, run and be financially responsible for your own company. Also, should your employer not express the interest to help start, fund or continue funding your new business, ask for a signed statement to that effect. At the same time, to be safe, be able to prove that you developed the concept for your business on your own time and with your own resources.
Employer funded start-ups have worked in many specialized industries, most notably high-tech.

Individual Partners
This is a way to join forces with one or more individuals to expand the capabilities of the business. Like a marriage, the partners bring different and hopefully complementary resources to the business. For example, one may bring technical expertise, while the other may bring the primary financial resources. Another desirable match may be to team a person who has administrative abilities with a person who has strategic vision.

Know your potential partner well before committing to such a business relationship. Ask hard questions. Make sure the agreement is documented clearly and reviewed or drafted by a competent partnership attorney. Exit strategies and procedures for either partner should be detailed in writing early on to avoid conflicts or confusion later on. Communication between partners is crucial for defining the specific roles each partner is to provide to the business, preventing wasteful overlap of activities or gaps in the execution of functions. Honesty and openness with both good and bad news will allow the business to have the best chance at a healthy life.

A partnership can be a way to get a business up and running while one or both partners still have other work or business commitments. It may also be effective in the early stages of business growth or in turnaround situations.

Corporate Partners
A growing trend in the `90s sees small businesses forming partnerships with larger corporations. Most Fortune 500 companies are now involved with these arrangements as a part of their corporate strategy. In this model, the larger corporation becomes a minority owner of the smaller company.

As a small business you receive the advantage of access to capital. You may also receive, as you grow, access to some of the resources of the larger company, such as distribution capabilities and product development opportunities that could act as formidable barriers to entry for potential competitors of yours. Your partner company gets into attractive markets and will share in your profits.
The place to start looking for such potential corporate partners is with your larger suppliers or customers. Industry journals can also point you in the direction of an interested corporate partner.

Strategic Alliances
In an effort to quickly put together a profitable project, it is becoming more commonplace to have two or more enterprises join forces for collaborative work. A popular book, The Virtual Corporation, by William H. Davidow and Michael S. Malone, touches upon this concept in detail. With businesses becoming more complex and global every day, and with increased emphasis on specialized knowledge and on fast new product development, partnerships are increasingly emerging among companies and entrepreneurs. The movie industry has modeled the concept of strategic alliances for decades. Diverse talent is sought and brought together for a common, defined project. After the movie is completed, many contributing elements to the production are quickly disbanded.

For this type of shared resource alliance to work consistently, the participating companies must build a high level of trust in each other. Strategic alliances and partnerships are often difficult to coordinate and even harder to control. Should you or any of your strategic partners miss a significant milestone, you may lose your market lead, or even your company or significant parts of it. The relationships between the allied companies need a strong foundation and the goals and values of the companies need to be compatible.
Financial strategic partners with a synergistic interest in investing in your business may seek your business out as often as you seek them. Strategic alliances need to be spelled out clearly in written agreements.

The importance of cooperative management (rather than insistence on doing it alone) and detailed coordination of activities is magnified in this business model.

New high-speed communication channels and information databases are making it easier for companies to locate and coordinate with strategic partners. The strategic partnership can work if the situation is right and the frame of mind of the participants is conducive to cooperative success.

Private Foundations
With determination and the ability to prove that a "charitable" investment in your enterprise will have positive social impact, benefiting more than just you, finding funding from a private, nonprofit foundation is possible. While some foundations fund entrepreneurs directly, most foundations give money and support services to nonprofit organizations, which seek to accomplish the foundation’s mission by coordinating and supervising the distribution of these resources in exchange for the specialized work needed.

According to IRS requirements, foundations with tax exempt status can provide "Program-Related Investment" (PRI) to a recipient enterprise that is also working toward the foundation’s charitable mission. PRIs can be grants of low interest loans to entrepreneurs that might be reconstructing areas after a disaster, rebuilding or beautifying disadvantaged communities, or training people in disadvantaged areas in job skills.

State or national charitable organizations channel funding from private foundations, as do churches, school groups, art societies and other community organizations. Check your local library for reference books on funding research resources. Once you have identified appropriate foundations or nonprofit organizations request their application guidelines and their annual reports. Then be prepared to spend time and effort filling out paperwork, writing a proposal and business plan and pitching the right people.
Laurie Blum, a successful fundraiser has written two books that shed light on this subject: The Complete Guide to Getting a Grant (Poseidon Press) and Free Money for Small Business and Enterprise (John Wiley & Sons).

Private Placements
In the United States, there are only two ways to legally offer (sell) the securities of your company to investors. 1) The transaction must either be registered with the Securities and Exchange Commission, as is done when a company "goes public" in the traditional sense (see Going Public below), or 2) it must be exempt from SEC registration, often referred to as a private placement or limited stock offering. Due to the considerable legal requirements and the large commitment of time and money involved with a registered Wall Street public offering, many companies may not be ready to go public, and others may not ever want or need to do it. In recent times exempt offerings are becoming more viable alternatives for companies in search of early funding.
Below we will examine the overall process of private placement, the different types of exempt offerings currently available, and generally evaluate which of these may be most appropriate to your situation.

Making the Offering
As a first step in this process you will need to determine whether or not your company is a viable candidate for offering securities to private investors via private placement. Once your company’s suitability has been determined and the proper vehicle is selected, you must have prepared the proper documents you need to comply with federal and state securities laws and regulations. Upon completion of paperwork and proper filing, you’ll need to identify potential investors, market your offering to them and, most importantly, track your results. By going through this process you will (1) be equipped to generally evaluate your fund-raising situation, (2) determine where you may need help, (3) become knowledgeable of current exempt offering issues and regulations, (4) perform the necessary preparatory steps and (5) generate proper documents to effect a Private Placement for your company.

There are Federal laws which the Securities and Exchange Commission governs and State or "Blue Sky" laws that affect securities transactions. If an offering of securities is made outside (interstate) of the issuers domicile state, then Federal securities laws must be coordinated with all States in which investors will be solicited. Regulation D and Rules 504, 505, and 506, as well as Regulation A are all Federal regulations governing interstate offerings.

If an offering is made intrastate, or all within the issuers domicile state, then the State securities laws regarding the sale of securities must be followed. Coordinating an offering to investors in multiple states, is usually a very complex task and often results in much confusion that needs assistance from brokers experienced in these activities.

In March, 1982, under Sections 4(2) and 3(b) of the Securities Act, the Securities and Exchange Commission (SEC), adopted Regulation D to coordinate the various limited offering exemptions and to streamline the existing requirements applicable to private offers and sales of securities. Regulation D establishes three broad exemptions from registration in Rules 504, 505, and 506.

Regulation D, Rule 504
Rule 504 provides a small issuer a federal exemption from registration for offers of securities of up to $1 million in any 12 month period. Although Rule 504 does not mandate that a disclosure document be provided to investors, it is still a good idea to inform a prospective purchaser of the risks associated with a private investment and, that it will be illiquid for a period.
Under Federal Rule 504, an issuer may advertise and otherwise generally solicit to attract virtually unlimited numbers and types of investors. However, most states restrict this under Regulation D. A filing of Form D is required within 15 days of receipt of first funds from the offering.

Regulation D, Rule 505
Rule 505 provides issuers a limited offering exemption for sales of private securities totaling up to $5 million in any 12 month period. Rule 505 has certain restrictions regarding "accredited investors" and "nonaccredited" persons. The term "accredited investors" includes banks, insurance companies, small business investment companies, trusts, etc., and sophisticated investors with at least $1 million in net worth, or $200,000 in income with certain restrictions.

Rule 505 is restrictive in the number of nonaccredited investors (35) and if the issuer is an operating company, audited financial statements are required. There cannot be general advertising under Rule 505. A filing of Form D is required within 15 days of receipt of first funds from the offering.

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