Offering Types - Debt or Equity

There are 2 basic types of Regulation D Offerings that can be structured; and "equity" offering where the company is selling partial ownership in the company (via the sale of stock or a membership unit) to raise capital-or a "debt" offering where the company raises debt financing by the selling a note instrument to investors with a set annual rate of return and a maturity date that dictates when the funds will be paid back to investors in full.

An equity offering is where the subject company sells an ownership stake in the company to investors. Equity is usually preferred by early stage companies that need flexibility regarding capitalization. In an equity situation investors profit as the company profits since they are partial owners. Investors typically profit in two ways from an equity deal; via their proportionate "per share" percentage of company profit (called a dividend) and via the final sale of the security through an exit strategy (example: the company buying the securities being bought out by another company, going public and selling on the open market, etc.)

A debt offering functions much like a private business loan where the company sells a promissory note to investors. The note sets forth the terms and conditions of the loan arrangement between the company and the investor. Thus a note would provide a certain interest rate typically paid annually to investors with a maturity date that dictates when the principal is paid back in full to investors. The notes are sold in fractional amounts providing flexibility for accommodating investors- thus a typical debt offering for $ 100,000 would get two notes. If the interest rate was 12% then he would get $ 1,200 paid to him annually based on the $ 10,000 investment. If the maturity date was 36 months then at the end of the 36 months the company would pay back the $ 10,000 to the investor.

Many early stage companies that lack the required equity or operating history for conventional bank financing will use private debt from investors for a short period of time (12-36 months) to establish a credit and operating history. They then have the capability to take out the private debt loan from the investors with a standard bank business loan at a lower interest rate.

Return to Library of Business Information