Blue Moon Advisors Glossary of Business Finance Terms.

5 C’s of Credit. Generally speaking, when applying for a loan, lenders look for the five “C’s”:
• Capital – this is owner equity;
• Character/Credit – Experience, training, willingness to make the business a success – history in willingness to pay debt, commonly defined by a fico score;
• Collateral – Have a secondary source of repayment to cover potential loss;
• Capacity/Cash Flow – Does the revenue exceed the expenses, and if not, how long will it take;
• Conditions – How is the market? How is the industry, sector and sub sector doing?

Accounts Receivable Financing (Factoring & Receivables).
Another option for many small businesses is factoring, also known as receivables financing. Factoring is basically selling company invoices to a third party, finance or factoring company which assumes the risk and provides cash to a business during a time of short cash flow. Instead of waiting for customers to pay, the company can get the funds immediately – minus a small fee (three to five percent) due to the factoring company. Typically a business will receive 80% of the invoice value upfront and the remaining value once the client pays. The amount of money paid to the business varies based upon the age of the invoices or receivables. A more current item will pay more, while a less current item will pay less. Any accounts receivable that are older than 90 days are usually not financed. A business might be a good candidate for factoring if it has: (1) Fewer than three years in business; (2) Good growth prospects but less than stellar cash flow; (3) Active accounts but slow paying customers.

Accredited investor.
“Accredited investor” is a term used by the Securities and Exchange Commission (SEC) under Regulation D to refer to investors who are financially sophisticated and have a reduced need for the protection provided by certain government filings. In order for an individual to qualify as an accredited investor, he or she must accomplish at least one of the following: (1) Earn an individual income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to maintain the same level of income; (2) Have a net worth exceeding $1 million, either individually or jointly with a spouse; (3) Be a general partner, executive officer, director or a related combination thereof for the issuer of a security being offered.

Acquisition Loan.
A loan given to a company to purchase a specific asset or to be used for purposes that are laid out before the loan is granted. The acquisition loan is typically only used for a short window of time, and only for specific purposes. Once repaid, funds available through an acquisition loan cannot be re-borrowed as with a revolving line of credit at a bank. Acquisition loans are sought when a company wants to complete an acquisition for an asset but doesn’t have enough liquid capital to do so. The company may be able to get more favorable terms on an acquisition loan because the assets being purchased have a tangible value, as opposed to capital being used to fund daily operations or release a new product line.

There are two variations of the best-efforts underwriting: all-or-none or mini-max (discussed below). An all-or-none underwriting requires that the entire issue be sold within a specified time, or else the program is terminated. SEC Rule 15c2-4 requires that all money collected from any sales be deposited in a separate escrow account at an independent bank for the benefit of the investors. If the sale is canceled, then the money must be returned to the investors, and no more orders will be taken; if the underwriting is successful, then most of the money goes to the issuer minus the fees paid to the underwriters.

Alphabet Rounds.
The early rounds of funding for a startup company, which get their name because the first is known as “Series A” financing, followed by “Series B” financing, and so on. Alphabet rounds of financing are provided by early investors and venture capital (VC) firms, which are willing to invest in companies with limited operational histories on the hope of larger future gains. These investors will typically wait until the startup has shown some basic signs of maturity and has exhausted its initial seed capital.

Angel Investors.
This is a long-term growth plan which emphasizes long-term investments for research, product development and testing. Typically, the product/service(s) are still in the idea phase. For investing at such an early stage of development, Angel Investors have options to receive a large share of ownership in the company.

Asset Based Lending Loan. An asset based lending loan is a loan that is secured by either residential or commercial real estate, or both, at a fixed percentage of the properties’ appraised value. Such a loan is usually limited to a 50% or 65% loan-to-value ratio. For example, for a property valued at $100,000, a lender might provide between $50,000 and $65,000. Sometimes asset based lending programs even allow secondary financing. With asset based lending loans, lenders are assuming considerable risk. Borrowers are more likely to default with this type of loan. In the event of a default resulting in foreclosure, the lender is paid based upon the sale of the assets. If the sale of the asset does not cover the loan, the borrower will have to cover any additional expenses, including past due interest on the loan, past due property taxes, lawyer’s fees and other miscellaneous credit and collection fees associated with foreclosure.

Authorized Shares.
Authorized shares refer to the largest number of shares that a single corporation can issue. The number of authorized shares per company is assessed at the company’s creation and can only be increased and decreased through a vote by the shareholders. If at the time of incorporation the documents state that 100 shares are authorized, then only 100 shares can be issued.

Business Consumer Loan.
A character loan is a type of unsecured loan that is made on the basis of the borrower’s reputation and credit. Borrowers are typically able to obtain only small loans by this method, since, if the borrower is unable to repay the loan, the bank will most likely encounter considerable difficulty in recovering the loaned funds. Blue Moon Advisors processes such loans in 7-10 business days for up to $100,000.

Business Line of Credit.
A business line of credit is a line of credit used to finance temporary working capital needs of a borrower — usually accounts receivable and inventory. This type of loan is usually extended for one year and the terms are very flexible based upon the needs of the borrower and the requirements of the lender. The terms will be based upon the business’s cash flow, credit profiles and financial ratios. The line of credit will be secured by a lien on the assets of the company. It will be extended to companies with a proven earnings track record, adequate financial rations and moderate credit risk. There are three common types of business lines of credit. The first is a demand line of credit, in which the lender leaves the loan open until the lender calls it due. The second is a revolving line of credit, in which the loan is extended for a predetermined period of time. The third is an asset based line of credit, in which a revolving line of credit formula is used and the loan is secured by residential or commercial properties.

While lenders seek a balance of the five “Cs” of credit, capacity to repay is most often the most critical. The prospective lender will want to know exactly how the borrower intends to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment and the probability of successful repayment of the loan. Payment history on existing credit relationships – personal and commercial – is considered an indicator of future payment performance. Prospective lenders also will want to know contingent sources of repayment in the event of business failure. The business plan should address this through a well formulated assumption worksheets and pro forma profit and loss statements.

Capital is the money an owner personally has invested in the business and is an indication of how much the owner will lose should the business fail. Prospective lenders and investors will expect the owner to contribute his own assets and to undertake personal financial risk to establish the business before asking them to commit any funding. If an owner has a significant personal investment in the business he is more likely to do everything in his power to make the business successful. The latest qualifying standard from Wells Fargo, Citibank, Bank of America, Certified Federal and others is a request of up to 50% of the capital needed for the business comes from the owners, based on the business model, industry, collateral and an assessment of the other considerations. A rule of thumb is that as owner equity goes down, risk to the lender goes up, thereby requiring a higher qualification standard for borrowing.

“Character” is the technical term used by lenders about credit and history on the borrower such as employment, training and education. These are both objective and subjective decisions made by lenders and are constantly changing based on the market and the type of borrowing. The lender decides objectively subjectively whether or not the borrower is sufficiently trustworthy to repay the loan or generate a return on funds invested in the company. The quality of past successes, references, background and experience of the borrower, partners with more than 10% ownership, management and key employees may all be considered. Although the Small Business Administration’s (SBA) most important factor is the ability to repay, the character question tends to be the most important factor in today’s market. The combination of a strong business plan, five years of experience in the industry and a 620 or higher credit score are the keys to providing clear character.

We are finding that collateral values have dropped significantly. Only 25-70% of the current value of the collateral may be used. For instance, a home worth $500,000 with a current mortgage of $300,000, leaving $200,000 in equity may only have a collateralized value of $150,000 in the eyes of the lender because of dropping home values. In addition, equity and inventory assets have even lesser collateral value. Trucks, heavy equipment, fixtures and furniture assets will only have 50% of their value applied to the collateral value. Stocks and bonds only rate 50% of their value for collateral. Note that these numbers vary by the bank chosen, market conditions and other variables – but the point is that to the uninformed, the assumption that 100% of available equity in collateral is not a reasonable expectation when working with lenders. Perishable inventory has no value. Standard vehicles have little value. Generally, only certificates of deposit receive 100% of their fixed value for collateral.

Collateral or guarantees are additional forms of security a borrower can provide the lender. If the business cannot repay its loan, the bank wants to know there is a second source of repayment. Assets such as equipment, buildings, accounts receivable and in some cases, inventory, are considered possible sources of repayment if they are sold by the bank for cash. Both business and personal assets can be sources of collateral for a loan. A guarantee, on the other hand, is just that – someone else signs a guarantee document promising to repay the loan if the borrower can’t. Some lenders may require such a guarantee in addition to collateral as security for a loan.

Common Stock.
Common stock represents ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management. Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid.

Conditions include macroeconomics (global/national), micro (state/local) economics and the business itself. Conditions focus on the intended purpose of the loan. Will the money be used for working capital, additional equipment or inventory? The lender will also consider the economic climate and conditions both within the industry and in other industries that could affect the business. The strength of the business plan and use of funds is important in this regard. How the money is used and the strength of the return on investment argument is high.

Crowdfunding (General Solicitation Title III of the JOBS Act):
This newly formed federal exemption falls under the securities laws so that this type of funding method can be used to offer and sell securities.

Crowdfunding permit individuals to invest in securities-based crowdfunding transactions subject to certain investment limits. The rules also limit the amount of money an issuer can raise using the crowdfunding exemption, impose disclosure requirements on issuers for certain information about their business and securities offering, and create a regulatory framework for the broker-dealers and funding portals that facilitate the crowdfunding transactions. The new crowdfunding rules and forms will be effective 180 days after they are published in the Federal Register. The forms enabling funding portals to register with the Commission will be effective Jan. 29, 2016.

The recommended rules would, among other things, enable individuals to purchase securities in crowdfunding offerings subject to certain limits, require companies to disclose certain information about their business and securities offering, and create a regulatory framework for the intermediaries facilitating crowdfunding transactions. More specifically, the recommended rules would:

• Permit a company to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period;
• Permit individual investors, over a 12-month period, to invest in the aggregate across all crowdfunding offerings up to:
• If either their annual income or net worth is less than $100,000, than the greater of:
• $2,000 or
• 5 percent of the lesser of their annual income or net worth.
• If both their annual income and net worth are equal to or more than $100,000, 10 percent of the lesser of their annual income or net worth; and
• During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.


Commercial Loans.
This is the most common loan application through a traditional bank. This is a debt-based funding arrangement that a business can set up with a financial institution. Commercial loans may be used to fund large capital expenditures and/or operations that a business may otherwise be unable to afford. The challenge is that most businesses must have three years of positive growth and profit in the profit and loss statements with strong credit, collateral and proof of ability to repay.

Corporate Bond.
A debt security issued by a corporation and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the company’s physical assets may be used as collateral for bonds. Corporate bonds are considered higher risk than government bonds. As a result, interest rates are almost always higher, even for top-flight credit quality companies. Corporate bonds are issued in blocks of $1,000 in par value, and almost all have a standard coupon payment structure. Corporate bonds may also have call provisions to allow for early prepayment if prevailing rates change.

Crowdfunding Platforms:
A funding portal would be required to register with the Commission on new Form Funding Portal, and become a member of a national securities association (currently, FINRA). A company relying on the rules would be required to conduct its offering exclusively through one intermediary platform at a time. The recommended rules would require intermediaries to, among other things:

• Provide investors with educational materials that explain, among other things, the process for investing on the platform, the types of securities being offered and information a company must provide to investors, resale restrictions, and investment limits;
• Take certain measures to reduce the risk of fraud, including having a reasonable basis for believing that a company complies with Regulation Crowdfunding and that the company has established means to keep accurate records of securities holders;
• Make information that a company is required to disclose available to the public on its platform throughout the offering period and for a minimum of 21 days before any security may be sold in the offering;
• Provide communication channels to permit discussions about offerings on the platform;
• Provide disclosure to investors about the compensation the intermediary receives;
• Accept an investment commitment from an investor only after that investor has opened an account;
• Have a reasonable basis for believing an investor complies with the investment limitations;
• Provide investors notices once they have made investment commitments and confirmations at or before completion of a transaction;
• Comply with maintenance and transmission of funds requirements; and
• Comply with completion, cancellation and reconfirmation of offerings requirements.
• The rules also would prohibit intermediaries from engaging in certain activities, such as:
• Providing access to their platforms to companies that they have a reasonable basis for believing have the potential for fraud or other investor protection concerns;
• Having a financial interest in a company that is offering or selling securities on its platform unless the intermediary receives the financial interest as compensation for the services, subject to certain conditions; and
• Compensating any person for providing the intermediary with personally identifiable information of any investor or potential investor.

Dilution is a reduction in earnings per share of common stock that occurs through the issuance of additional shares or the conversion of convertible securities.

EB-5 (Employer-Based Financing): The EB-5 visa for Immigrant Investors is a United States visa created by the Immigration Act of 1990. This visa provides a method of obtaining a green card for foreign nationals who invest money in the United States. To obtain the visa, individuals must invest at least $1 million, creating at least 10 jobs. By investing in certain qualified investments or regional centers with high unemployment rates, the required investment amount is $500,000. The Immigrant Investor Pilot Program was created by Section 610 of Public Law 102-395 on October 6, 1992. This was in accordance to a Congressional mandate aimed at stimulating economic activity and job growth, while allowing eligible aliens the opportunity to become lawful permanent residents. This “Pilot Program” required only $500,000 of investment in exchange for permanent resident status. The investment could only be received by an economic unit defined as a Regional Center.

EB5 Regional Center: A Regional Center is defined by any economic unit, public or private, engaged in the promotion of economic growth, improved regional productivity, job creation and increased domestic capital investment. Prior law required the investment in the Regional Center to generate an increase in export sales, however statutory amendments in 2000 and 2002 no longer require this increase. The individual receiving the visa is not required to actively manage the business invested in. For investors who wish to invest in a new or existing business, have an active role in the management of the operation (although simply being a Limited partner in the organization that owns the business qualifies as “AN ACTIVE ROLE.”), and have at least one million US dollars to invest ($500,000 if the business is located in certain areas deemed as Rural or with very high unemployment), then the traditional EB-5 visa is the best option. Start Up visa Act Bill was introduced in Senate on February 24, 2010 by Senators Lugar and Kerry. It is in fact a modified EB-5 Visa to create more jobs in America and it may be called as EB-6 Visa.

Equipment Financing.
Equipment financing loans are used to purchase equipment, with the equipment used as the collateral on the loan. Equipment financing is generally easier to obtain than general lines of credit, simply because the equipment bought serves as direct collateral for the loan. It’s also less risky, in that if a company is unable to make payments, there is no lien against the entire business or the owner’s personal real estate: all that is lost is the equipment bought. Depending on the size of the business, equipment financing can cover huge expenses into the millions of dollars.

Another option is an equipment sale-lease back. If a business has existing equipment, it sells the owned equipment and then leases it back from the lender to the company. Essentially the business gets cash for the equipment and maintains use of the equipment. Equipment Leasing is an easier way to find financing for a company’s equipment needs and obtain tax benefits at the same time.

Firm Commitment.
If the investment bank and company reach an agreement to do an underwriting—also known as a firm commitment—then the investment bank will buy the new securities for an agreed price, and resell the securities to the public at a markup, bearing all of the expenses associated with the sale.

Funding Portals:
The Jumpstart Our Business Startups (JOBS) Act, enacted in 2012, amended the federal securities laws. Among other things, Title III of the JOBS Act contains key provisions relating to securities offered or sold through “crowdfunding.” Crowdfunding generally refers to the use of the Internet by small businesses to raise capital through limited investments from a large number of investors.
The JOBS Act directed the SEC to make rules to implement the Act’s crowdfunding provisions and requires FINRA to adopt rules written specifically for “funding portals,” a new kind of intermediary that would perform crowdfunding on behalf of issuers. Under the JOBS Act, funding portals must register with the SEC and must become members of a registered national securities association. FINRA is the only registered national securities association. On October 30, 2015, the SEC adopted Regulation Crowdfunding, which takes effect on May 16, 2016; however, the registration provisions under Regulation Crowdfunding, and the SEC’s Form Funding Portal, become effective on January 29, 2016.
FINRA has proposed rules and forms for funding portals. Once the SEC approves FINRA’s Funding Portal Rules and related forms, FINRA will issue a Regulatory Notice announcing the rules and providing information for prospective funding portal applicants. FINRA cannot accept applications for funding portal membership prior to that time. FINRA has established fee provisions that will apply to funding portals. The application fee for funding portal membership will be $2,700.

A grant is an amount of money given, usually by a government or nonprofit organization, to fund certain projects. One may receive a grant for academic or scientific research, or to further one’s education, or to engage in charity work. The United States government makes many grants, often of an educational or scientific nature. Grants are also a key part of many philanthropic foundations’ activities. In some instances grants are applicable if a business existence will benefit and/or support an organization or group. Typically, grant requests are specific in nature and require a particular format determined by the grantor.

Hedge Funds.
Hedge funds are often unregistered because of exemptions related to the Investment Company Act of 1940. Most notably is the rule that a hedge fund must have fewer than one hundred investors who are all considered “accredited investors.” Additionally, a hedge fund is exempted from registration if all of the fund’s investors (no limit to the number) are considered “qualified” investors. To stay “compliant,” hedge funds are often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. While mutual funds and hedge funds generally perform the same functions, mutual funds are registered with the SEC and hedge funds (generally) are not.

Initial Public Offering – (IPO).
An IPO is the first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market. IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future because there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, which are subject to additional uncertainty regarding their future values.

Line of Credit.
Lines of credit are more general business loans that are often set up to insure against cash flow problems. Instead of getting a check for the full amount of the loan, the financial institution allows a company to borrow up to a certain amount per year – it takes out the money in increments as needed. The flexibility comes at a cost, though: if the loan balances is not repaid fairly quickly, lines of credit can quickly become more expensive than other types of loans. A line of credit should be avoided for significant business improvements. They’re designed for temporary cash shortfalls.

There are three basic types of lines of credit including “committed” and “revocable” and “Stand-by.” Committed Credit Lines are a monetary spending loan balance offered by a financial institution that cannot be suspended without notifying the borrower. A committed credit line is a legal agreement between the financial institution and the borrower outlining the conditions of the credit line. Once signed, the agreement requires the financial institution to lend money to the borrower, provided that the borrower does not break the conditions. Lenders may require the borrower to pay a fee based on the amount that can be borrowed. Committed credit lines differ from uncommitted credit lines in that they legally bind the lender to provide the funds, rather than giving the lender the option of suspending or canceling the credit line based on market conditions.

In this type of offering, a minimum goal and a maximum goal of funds is set to be raised. This gives investors an idea of what will happen if the company does not hit its maximum goal. A mini-max fundraiser will normally have an offering that looks like this: the idea of the mini-max fundraiser is that the company can get started as long as it achieves its minimum fund raising goal. The company may not spend any of the cash invested until the minimum is achieved (this is often money put into an escrow account until the minimum is raised). In the event the company does not achieve its minimum, the funds are refunded to the investors.

Outstanding Shares.
Not to be confused with authorized shares, outstanding shares refer to the number of stocks that a company actually has issued. This number represents all the shares that can be bought and sold by the public as well as all the restricted shares that require special permission before being transacted.

A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase “over-the-counter” (OTC) (also known as “unlisted stock”) can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network. In general, the reason a stock is traded over-the-counter is usually because the company is small, making it unable to meet exchange listing requirements. Be very wary of some OTC stocks, however. The OTCBB stocks are either penny stocks or are offered by companies with bad credit records.
Although NASDAQ operates as a dealer network, NASDAQ stocks are generally not classified as OTC because the NASDAQ is considered a stock exchange. As such, OTC stocks are generally unlisted stocks which trade on the Over the Counter Bulletin Board (OTCBB) or on the pink sheets.

Instruments such as bonds do not trade on a formal exchange and are, therefore, also considered OTC securities. Most debt instruments are traded by investment banks making markets for specific issues. If an investor wants to buy or sell a bond, he or she must call the bank that makes the market in that bond and ask for quotes.

Owner Equity.
Almost any access to capital provider will require owner equity. Put simply, owner equity is personally sourced cash invested in the business. It can also be sourced as collateral against personally owned assets such as:
• Cash saving;
• Retirement accounts;
• Whole life insurance policies;
• Home equity;
• Certificates of deposit;
• Money market accounts;
• Checking accounts;
• and personal lines of credit.

Coming from the capital sources perspective, owner equity is all about mitigation of risk and ensuring that the founders and owners have a fair balance of risk as compared to the capital provider. The phrase most often referred to in describing owner equity is having, “skin in the game.”

As a consulting firm, we find owner equity to be one of the biggest challenges in working with entrepreneurs because sometimes they do not have enough equity to justify the amount of money being sought. There are objective equity requirements established for most debt sources. For equity capital there tends be more of a subjective, case by case requirement of owner equity.

All capital providers will require transparency regarding the owner’s financial situation, clear understanding of the need for capital and that the type of capital is suitable. One of the biggest mistakes we often see is that an owner has exhausted all of his resources, then starts seeking capital. Due to pride or lack of knowledge, the owner thinks that by going broke he is sharing his enthusiasm, risk, belief in the business and commitment; in other words, it’s a badge of honor. However, capital providers see it as irresponsible, a lack of planning and a lack of balance between optimism and realism. The point is: seek capital before it is needed to show a high level of business acumen and responsibility. Desperation does not look good on anyone! Here are some examples of personal debt options:

Personal Line of Credit and Credit Cards.
Credit card advances – in lending, this phrase does not mean taking out cash through a business credit card, although many businesses do that. Instead, it’s a loan based on a company’s track record and its expected future business. It’s a good choice if a business has at least a three-year history of accepting credit cards. Because credit card sales are such a good estimation of future earnings a company will be able to get a fairly good rate on a loan against its expected income. Blue Moon Advisors processes such loans in 7-10 business days for up to $100,000. Click here to apply now.

Personal Loans.
This is often the case when raising seed (early) stage capital for a company. Family and friends loan money to the founders. Typically, the loan terms are flexible, based on a repayment of the loan after the company is in full operation. Unfortunately, this form of financing is used often, but rarely organized well. It is important that all loans, regardless of the source be well documented and the terms clearly identified. This is true for a couple of reasons: (1) it maintains the family relationship; and (2) future capital providers will need to review all previous financing including personal loans provided by family and friends. As the saying goes, “debt is cheaper than equity.” The thought behind that popular statement is that if the business is going to achieve the success expected by the founders, then the cost of paying back investors is greater than the cost of interest paid on debt. For that reason, we will start by discussing debt as the primary source of capital.

Pink Sheets.
A daily publication compiled by the National Quotation Bureau with bid and asks prices of over-the-counter (OTC) stocks, including the market makers who trade them. Unlike companies on a stock exchange, companies quoted on the pink sheets system do not need to meet minimum requirements or file with the SEC. Pink sheets also refers to OTC trading. The pink sheets got their name because they were actually printed on pink paper. Whether a company trades on the pink sheets can be identified by the stock symbol ending in “.PK”.

Preferred Stock.
Preferred stock represents some degree of ownership in a company but usually doesn’t come with the same voting rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at any time for any reason (usually for a premium).

Private Equity.
Private equity is equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet.

The size of the private equity market has grown steadily since the 1970s. The majority of private equity consists of institutional investors and accredited investors who can commit large sums of money for long periods of time. Private equity investments often demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company.

Private equity firms will sometimes pool funds together to take very large public companies private. Many private equity firms conduct what are known as leveraged buyouts (LBOs), where large amounts of debt are issued to fund a large purchase. Private equity firms will then try to improve the financial results and prospects of the company in the hope of reselling the company to another firm or cashing out via an IPO.

Private Investment in Public Equity (PIPE).
A PIPE is a private investment firm’s, mutual fund’s or other qualified investors’ purchase of stock in a company at a discount to the current market value per share for the purpose of raising capital. There are two main types of PIPEs – traditional and structured. A traditional PIPE is one in which stock, either common or preferred, is issued at a set price to raise capital for the issuer. A structured PIPE, on the other hand, issues convertible debt (common or preferred shares). This financing technique is popular due to the relative efficiency in time and cost of PIPEs, compared to more traditional forms of financing such as secondary offerings. In a PIPE offering there are less regulatory issues with the SEC and there is also no need for an expensive road show, lowering both the costs and time it takes to receive capital. PIPEs are great for small- to medium-sized public companies, which have a hard time accessing more traditional forms of equity financing.

Private Placement Memorandum.
In preparing for a private placement, the company prepares offering materials containing information about the company and the securities being offered. A Private Placement Memorandum (PPM) is most often created with multiple sections including the offering, risks and disclosures, a business description or business plan, subscription agreements and company operating agreements. In order to sell unregistered securities, the company must produce a PPM which describes the company’s intentions (use of funds) and declare its status as an unregistered security. A PPM typically includes: (1) Executive Summary; (2) The Offering (Terms of the offering); (3) Risks & Disclosures; (4) Business Description (Business Plan); (5) Operating Agreement; (6) Subscription Agreement.

Private Securities.
Private equity is money invested in firms which have not ‘gone public’ and therefore are not listed on any stock exchange such as “Over the Counter”, “Pink Slips”, NASDAQ or the NYSE. Private equity is illiquid because sellers of private stocks (called private securities) must first locate willing buyers. Investors in private equity are generally compensated when: (1) the firm goes public, (2) it is sold or merges with another firm, or (3) it is recapitalized. Before deciding to seek investors, know the type of investor needed and then research the individuals or investment groups to find those interested in the industry or business. Then include their requirements in opportunity presentation. In general, equity investors require a much more detailed business plan than a plan designed for debt. Depending on several factors, the Securities Exchange Commission (SEC) may require documentation, circulars, disclosures, and other forms and documents such as a Private Placement Memorandum (PPM).

Before securities, like stocks, bonds and notes can be offered for sale to the public, they first must be registered with the Securities and Exchange Commission (SEC). Any stock that does not have an effective registration statement on file with the SEC is considered “unregistered.” To sell or attempt to sell a financial security before it is registered is considered a felony. However, certain exemptions apply. For example, a privately-owned corporation may issue shares of stock to its executives and board members, but the new stockholders must notify the SEC before selling the stock to someone else. In addition, companies can raise capital by soliciting investments from individuals outside the company who are considered to be “qualified investors.” The SEC defines a qualified investor as someone who has a net worth of at least one million dollars or an annual income in excess of $200,000. Individuals who meet “qualified investor” status also can become victims of “private offering” unregistered securities scams.

Registered Securities. Per the Securities Acts of 1933 and 1934, all securities should be “registered” unless they are deemed “exempt.” Not only do the securities need to be registered but the agents selling them and the broker/dealers representing the sale should be licensed as well. Any security that does not have an effective registration statement on file with the SEC is considered “unregistered.” To sell or attempt to sell a financial security before it is registered is considered a felony. As stated however, provisions have been made over the years to allow for these “exceptions.”

Regulation A:
An exemption from the registration requirements mandated by the Securities Act, applicable to small public offerings of securities that do not exceed $5 million in any 12-month period. A company that uses the Regulation A exemption for a securities offering must still file an offering statement with the Securities and Exchange Commission. While Regulation A offerings share some characteristics with registered offerings, they have some distinct advantages over full registration.

Regulation A+ (Also known as Title IV of the JOBS Act):
A newly revamped securities regulation that companies can rely on to raise up to $50 million from accredited and non-accredited investors alike. In traditional funding (Regulation D, Rule 506 (b) / (c) offerings) companies are either limited to having up to 35 non-accredited investors in their round or completely banned from onboarding non-accredited investors altogether. Accredited investors make up less than 1% of the US population, meaning 99% of people previously couldn’t invest in startups even if they understood the risk and had the liquid capital to deploy. Regulation A has been around for years, but has not been widely used mainly because of the way the rules were written, making raising capital quite inefficient. In fact, the Securities and Exchange Commission (SEC) estimated only 26 offerings were conducted annually and they were capped at an upper funding limit of $5 million. Whereas now, with Regulation A+, companies can raise up to $20 million on Tier 1 and up to $50 million on Tier 2, which changes the game.

Regulation D.
Regulation D contains three rules providing exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the securities with the SEC. While companies using a Regulation D exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what’s known as a “Form D” after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s executive officers and stock promoters, but contains little other information about the company. There are three types of Regulation D Exemptions, 504, 505 and 506.

Rule 504 of Regulation D:
(1) Provides an exemption from the registration requirements of the federal securities laws for some companies; (2) Offer and sell up to $1,000,000 of their securities in any 12-month period; (3) Sells exclusively according to state law exemptions that permit general solicitation and advertising; (4) Sells to an unlimited number of “accredited investors” and allows purchases by non-accredited investors; (5) Any information a company provides to investors must be free from false or misleading statements. Similarly, a company should not exclude any information if the omission makes what is provided to investors false or misleading.

A 504 Reg D filing has many “slang terms“ within the industry including: (1) “Family & Friends” round; (2) or a “Seed;” or (3) a “Series A;” or (4) a first, “Tranche” Round as it is the first of possibly other “rounds.” Seed capital often comes from the company founders’ personal assets or from friends and family. The amount of money is usually relatively small because the business is still in the idea or conceptual stage. Such a venture is generally at a pre-revenue stage and seed capital is needed for research and development, to cover initial operating expenses until a product or service can start generating revenue, and to attract the attention of venture capitalists.

Rule 505 of Regulation D:
(1) Can only offer and sell up to $5 million of its securities in any 12-month period; (2) May sell to an unlimited number of “accredited investors” and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions; (3) Must inform purchasers that they receive “restricted” securities, meaning that the securities cannot be sold for six months or longer without registering them; and (4) Cannot use general solicitation or advertising to sell the securities.

Rule 506 of Regulation D:
(1) Rule 506 of Regulation D is considered a “safe harbor” for the private offering exemption of Section 4(2) of the Securities Act; (2) Companies using the Rule 506 exemption can raise an unlimited amount of money; (3) May sell its securities to an unlimited number of “accredited investors” and up to 35 other purchases; (4) Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment; (5) Purchasers receive “restricted” securities, meaning that the securities cannot be sold for at least a year without registering them.

Enacted in 2012, the Jumpstart Our Business Startups Act, or JOBS Act, is intended, among other things, to reduce barriers to capital formation, particularly for smaller companies. The JOBS Act requires the SEC to adopt rules amending existing exemptions from registration under the Securities Act of 1933 and creating new exemptions that permit issuers of securities to raise capital without SEC registration. On July 10, 2013, the SEC adopted amendments to Rule 506 of Regulation D and Rule 144A under the Securities Act to implement the requirements of Section 201(a) of the JOBS Act. The amendments are effective on September 23, 2013.

Rule 506(b) of Regulation D:
Section 4(a)(2) of the Securities Act exempts from registration “transactions by an issuer not involving any public offering.” Rule 506(b) is a rule under Regulation D that provides conditions that an issuer may rely on to meet the requirements of the Section 4(a)(2) exemption. One of these conditions is that an issuer must not use general solicitation to market the securities. “General solicitation” includes advertisements published in newspapers and magazines, public websites, communications broadcasted over television and radio, and seminars where attendees have been invited by general solicitation or general advertising. In addition, the use of an unrestricted, and therefore publicly available, website constitutes general solicitation. The solicitation must be an “offer” of securities, but solicitations that condition the market for an offering of securities may be considered to be offers.

Rule 506(c) of Regulation D:
Section 201(a) of the JOBS Act requires the SEC to eliminate the prohibition on using general solicitation under Rule 506 where all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that the purchasers are accredited investors. To implement Section 201(a), the SEC adopted paragraph (c) of Rule 506. Under Rule 506(c), issuers can offer securities through means of general solicitation, provided that:

• all purchasers in the offering are accredited investors,
• the issuer takes reasonable steps to verify their accredited investor status, and
• certain other conditions in Regulation D are satisfied.

Revocable Lines Of Credit:
A source of credit provided to an individual or business by a bank or financial institution, which can be revoked or annulled at the lender’s discretion or under specific circumstances. A bank or financial institution may revoke a line of credit if the customer’s financial circumstances deteriorate markedly, or if market conditions turn so adverse as to warrant revocation, such as in the aftermath of the 2008 global credit crisis. A revocable line of credit can be unsecured or secured, with the former generally carrying a higher rate of interest than the latter.

Royalty Financing.
Royalty financing is a relatively new concept that offers an alternative to regular debt financing (loans and trade credit) and equity financing (venture capital and stock sales). In a royalty financing arrangement, a small business would receive a specific amount of funds from an investor or group of investors. This money might be put toward launching a new product or expanding the company’s marketing efforts. In exchange, the investors would receive a percentage of the company’s future revenues over a certain period of time, up to a specific amount. The investment can be considered an “advance” to the company, and the periodic percentage payments can be considered “royalties” to the investors.

Rule 144. Privately Held Company Rule 144:
Per the SEC, “Rule 144 provides an exemption and permits the public resale of restricted or control securities if a number of conditions are met, including how long the securities are held, the way in which they are sold, and the amount that can be sold at any one time. But even if you’ve met the conditions of the rule, you can’t sell your restricted securities to the public until you’ve gotten a transfer agent to remove the legend.” The rules pertaining to #144 should be thoroughly read and examined prior to taking action. This rule mostly pertains to insiders who have gained access to stock and wish to resell it to the public.

SBA Additional Programs.
The SBA offers other programs as well. They include the Patriot Express which has a maximum loan amount of $500,000. In order to be eligible, the business must be owned (at least 51 percent) by a Veteran, Active Duty Military potential retiree within 24 months of separation and discharging Active Duty member within 12 months of discharge (TAP eligible), Reservist and National Guard Current spouse of above or spouse of service member or veteran who died of a service-connected disability. The SBA also offers what’s called a “SBA Express” and SBA Community loans. The maximum loan amounts are small but with less paperwork.

SBA Business Loan.
These are loans to small businesses from private-sector lenders which are guaranteed by the SBA. The SBA has no funds for direct lending. The Certified Development Corporations (CDC’s) work with the SBA and private-sector lenders to provide the financing. Because there are many types of SBA loans, knowing which to apply for is vital. The SBA has a strict format for business plans. Five sections are a must, with heavy emphasis on the financials and marketing plan. The ability to repay the loan is also a major focus, along with the credit worthiness of the requestor. SBA loans are most often approved when there is significant collateral available and the requestor has a long term exit strategy. If the requestor’s business will make a large positive impact on community development, job creation and construction, the loan is more likely to be approved.

SBA (7(a) Small Business Loan.
The basic 7(a) loan is the SBA’s most flexible business loan program. Loans can be approved for a variety of general business purposes, including working capital, machinery and equipment, furniture and fixtures, land and building, leasehold improvements, and in some cases debt refinancing. Loan terms are available for up to ten years for working capital and up to 25 years for fixed assets. Its name comes from Section 7(a) of the Small Business Act, which authorizes the Agency to provide business loans to American small businesses. The SBA does not fully guaranty 7(a) loans. The lender and SBA share the risk that a borrower will not be able to repay the loan in full. The guaranty is a guaranty against payment default. It does not cover imprudent decisions by the lender or misrepresentation by the borrower. A key concept of the 7(a) guaranty loan program is that the loan actually comes from a commercial lender, not the government. The SBA’s 7(a) loan program’s maximum loan amounts change from time to time. As of this writing, the maximum is $2 million dollars. The SBA’s maximum exposure is $1.5 million. Therefore, if a business receives an SBA guaranteed loan for $2 million, the maximum guaranty to the lender will be $1.5 million or 75 percent. There are guarantee fees to be paid, pre-payment penalties and other issues to consider when speaking with an SBA lender.

SBA CDC/504 Program.
The CDC/504 loan program is a long-term financing tool, designed to encourage economic development within a community. The 504 program accomplishes this by providing small businesses with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization. A Certified Development Company (CDC) is a private, nonprofit corporation which is set up to contribute to economic development within its community. CDCs work with SBA and private sector lenders to provide financing to small businesses, which accomplishes the goal of community economic development. Typically, a CDC/504 project includes: (1) A loan secured from a private sector lender with a senior lien covering up to 50 percent of the project cost; (2) A loan secured from a CDC (backed by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the project cost; (3) A contribution from the borrower of at least 10 percent of the project cost (equity); (4) This type of setup means that 100% of the project cost is covered either by contribution of equity by the borrower, or the senior or junior lien. Proceeds from 504 loans must be used for fixed asset projects, such as: (1) The purchase of land, including existing buildings; (2) The purchase of improvements, including grading, street improvements, utilities, parking lots and landscaping; (3) The construction of new facilities or modernizing, renovating or converting existing facilities; (4) The purchase of long-term machinery and equipment.

To be eligible for a CDC/504 loan, the business must be operated for profit and fall within the size standards set by the SBA. Under the 504 Program, a business qualifies as small if it does not have a tangible net worth in excess of $7.5 million and does not have an average net income in excess of $2.5 million after taxes for the preceding two years. Loans cannot be made to businesses engaged in speculation or investment in rental real estate. The maximum SBA debenture is $1.5 million when meeting the job creation criteria or a community development goal. Generally, the business must create or retain one job for every $65,000 provided by the SBA, except for small manufacturers which have a $100,000 job creation or retention goal.

Securities and Exchange Commission (SEC).
The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets and facilitate capital formation. The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security. (

Small Business Development Centers (SBDC).
The SBDC provides multiple programs and is usually in business to support businesses by providing resources and access to capital. Most centers work with banks and other lenders to supplement loan applications. Many also provide business owners and operators with the management, marketing and financial skills necessary for their companies to survive and flourish in today’s challenging business environment. For example, the Southeast Los Angeles Small Business Development Center is a non-profit agency dedicated to providing resources, knowledge and technical assistance to help the seasoned business owners and/or entrepreneurs succeed in today’s challenging business environment.

Small Business Investment Company (SBIC).
SBIC is a private lending company which is licensed and regulated by the Small Business Administration (SBA). SBICs offer venture capital financing to higher-risk small businesses, and SBIC loans are guaranteed by the SBA. SBICs use a combination of funds raised from private sources and money raised through the use of SBA guarantees to make equity and mezzanine capital investments in small businesses. There are approximately 338 SBICs with $17.4 billion in capital in the United States.

Standby Lines of Credit:
A sum of money, not to exceed a predetermined amount, that can be borrowed in part or in full from a credit granting institution if the borrower needs it. In contrast, an outright loan would be a lump sum of money that the borrower intended to use for certain. A business might establish a standby line of credit with a financial institution in situations where the business needed to guarantee its ability to pay a certain amount of money to a client if the business fails to fully perform on a contract. In this situation, the standby line of credit would act as a performance bond. The standby line of credit might be used as a backup source of funding in case the primary source fails

Standby Commitment.
When the investment bank also has a standby commitment with its client, then the investment bank agrees to purchase any subsequent new issues of stock shares at the subscription price that are not purchased by current stockholders in a rights offering, which it will then sell to the general public as a dealer in the stock. The investment bank takes a risk, however, in that the price of the stock could decline during the two to four weeks of a rights offering.

State Board of Equalization.
The mission of the State Board of Equalization is to serve the public through fair, effective and efficient tax administration. Created in California in 1879 by a constitutional amendment, the Board of Equalization was initially charged with responsibility for ensuring that county property tax assessment practices were equal and uniform throughout the state. Currently the tax programs administered by the Board are concentrated in four general areas: sales and use taxes, property taxes, special taxes and the tax appellate program. ( Please be sure to contact your own state’s Board of Equalization or similar state governing body regarding business taxes.

Tranches (Also known as a “Capital stack” under certain circumstances).
“Tranche” is the French word for “slice”. In finance, “tranche” is the technical term for series rounds of the same offerings. The definition is that of a piece, portion or slice of a deal or structured financing. This portion is one of several related securities that are offered at the same time but have different risks, rewards and/or maturities. A Capital stack differs in that it may be a combination of debt and/or equity with varying types of financing supporting the same company or project. For example, a seed capital round through Equity Crowd Funding for the first $1 Million for proof of concept, Venture Capital for Round two financing of $5 Million to launch the enterprise and pay for marketing, with a third round from Investment Bankers for a pre-IPO plan.

Unregistered Securities.
The cost of registering a security when going public is enormous. When a company goes public it must file applications, legal and accounting forms, certifications and other costs that can be in the hundreds of thousands of dollars. The Securities and Exchange Commission (SEC) created exemptions for private companies in order to raise capital with unregistered securities. The most common of the programs is called a Regulation “D” filing – sometimes called “Blue-Sky” filing.

U.S. Bureau of Labor & Statistics.
Per their mission: “The Bureau of Labor Statistics of the U.S. Department of Labor is the principal Federal agency responsible for measuring labor market activity, working conditions, and price changes in the economy.” (

U.S. Census Bureau.
The mission of the US Census bureau is, “…

[we] serve as the leading source of quality data about the nation’s people and economy. We honor privacy, protect confidentiality, share our expertise globally, and conduct our work openly. We are guided on this mission by our strong and capable workforce, our readiness to innovate, and our abiding commitment to our customers.” (

U.S. Department of Commerce.
The historic mission of the Department is “to foster, promote, and develop the foreign and domestic commerce” of the United States. This has evolved, as a result of legislative and administrative additions, to encompass broadly the responsibility to foster, serve, and promote the nation’s economic development and technological advancement. (

U.S. Citizenship & Immigration Service (USCIS).
The INS requires that all hired staff complete Form I-9, Employment Eligibility Verification. Those completing the form must show specified documentation to confirm their eligibility to live and work in the U.S. There is recorded information that reviews relevant topics of interest. (

U.S. Small Business Administration (SBA).
The U.S. Small Business Administration was created in 1953 as an independent agency of the federal government to aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation. Although the SBA has grown and evolved in the years since it was established in 1953, the bottom line mission remains the same. The SBA helps Americans start, build and grow businesses. (

Venture Capital.
Once a product/service is researched, the target market identified and a business plan written, Venture Capital investment may be more appropriate. Not to be confused with an early development project, Venture Capital is typically used for the actual manufacturing, distribution or marketing. Venture Capitalists tend to expect a faster return on investment than an Angel Investor. A venture capitalist is an investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to equities markets. Venture capitalists are willing to invest in such companies because they can earn a massive return on their investments if these companies are a success. Venture capitalists also experience major losses when their picks fail, but these investors are typically wealthy enough that they can afford to take the risks associated with funding young, unproven companies that appear to have a great idea and a great management team.