Financing Window for Middle Market Private Companies

GettingMoneyThe window is open for smaller middle market private companies to obtain capital from private equity funds.  The former cutoff of $5 million EBITDA to get interest from private equity firms seems no longer in place.  Smaller firms with less than $5 million of EBITDA are attracting interest.

If your smaller middle market company would benefit from additional equity capital, now may be the time.

Click here to go to my article on the new site, Growth Capital.
 By Dennis McCarthy
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Life Sciences IPOs Surge

There were 8 life science IPOs reported in May this year, according to “The Deal” and my colleague, David Feldman of Richardson & Patel.

We’ve just completed the best quarter for IPOs since 2000, reports these sources.

If your company is considering raising capital, now may be the time.

Public companies may find my Public Equity Series of videos helpful in learning the options available to them and the pro’s and con’s of each alternative.

Click here to go to David Feldman’s blog.

Post by Dennis McCarthy
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Ban Lifted on Soliciting Private Offerings

Finally, we’re seeing some progress on implementation of JOBS Act provisions.

The SEC, on July 10th, voted to lift the ban on general solicitation of accredited investors in private offerings.  This has been in the works for some time as initially covered in my September post.

Additional information is available on David Feldman’s blog.

 

Post by Dennis McCarthy
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Crowdfunding Update from Rick Citron

My friend and colleague, Rick Citron of Citron and Deutsch, provides an update on the type of crowdfunding currently available and the expectation for equity crowdfunding.

Rick has a Youtube channel on which he offers a series of educational videos on raising capital for early stage companies (link).

PIPE Investor Trend

Dennis McCarthy – (213) 222-8260 – dennis@monarchbayassociates.com

Today, a small cap public company considering raising equity may find the alternative of using a PIPE, a private investment in a public entity, to be a more attractive option.

That’s my conclusion from the 2012 tally of PIPE investors by Placement Tracker, the well-regarded source of this data.

So, here’s the background.  When I created my Equity Series of videos to help small cap public company executives to better understand the options available to them when raising equity, I created a video on PIPEs.

In my video, I said that because a PIPE is a private investment, historically, hedge funds have been the primary investors, not the larger universe of traditional institutional investors which typically invest in public securities.

Hedge funds invest in PIPEs but negotiate terms that are expensive for the issuing company.

PIPEs, therefore, have come to be considered a relatively more expensive method for a small cap public company to raise equity vs other offering alternatives.

This year, 2012, however, reveals an interesting development.  In the 2012 PIPE investor tally, produced by Placement Tracker, 10 of the top 25 PIPE investors were not hedge funds but more traditional institutional investors.

In fact, the number one PIPE investor is a traditional institutional investor, Fidelity Investments.

So today, a small cap public company’s PIPE may be sold to a larger universe of investors including those traditional institutional investors which purchase stocks on more favorable terms, such as investing at the market price without a discount and without other sweeteners such as warrants.

This is a positive development and makes the option to raise equity through a PIPE offering more attractive.  I hope this trend continues.

I’ve included a link to the online magazine, Growth Capitalist, which first tipped me to this development.  Also, I’ve provided the 2012 PIPE Investor tally from Placement Tracker as well as the link to all its 2012 tables.

As always, please contact me to help your company to raise equity or to complete any capital market project.  

2012 US PIPE Mkt Institutional Investor League Table

Growth Capitalist Article: http://www.growthcapitalist.com/?utm_source=Growth+Capitalist&utm_campaign=a7c6c3845e-RSS_EMAIL_CAMPAIGN&utm_medium=email

Placement Tracker Article: http://www.globenewswire.com/news-release/2013/01/09/515496/10017525/en/PlacementTracker-Publishes-2012-PIPE-Market-League-Tables.html

Beat the Tax Law Change

Dennis McCarthy – (213) 222-8260 – dennis@monarchbayassociates.com

We’re seeing a surge in inquiries by significant shareholders at small cap public companies who are considering a sale of their shares before their tax rates rise at year end.

In 2013, the capital gains tax rate along with the Medicare element is expected to result in an effective tax rate of 23.8% for higher income individuals from 15% today, almost a 60% increase.

We can assist your shareholders in completing stock sales yet this year before the tax law changes.

Monarch Bay’s experienced professionals can assist your shareholders with registered secondaries, block trades or dribble out programs to fit your shareholders’ goals and the situation.

We’re also pleased to announce the addition of several highly experienced institutional salesmen to the Monarch Bay team.  Our expanded team will help complete these year-end stock sales plus help increase institutional awareness well into the new year.

It’s important to get on this right away.  There’s not much time left this year.

Please contact me to discuss your shareholders’ stock sales or any capital market projects.

 

 

Raising Equity for Small Cap Public Companies Series

Dennis McCarthy – (213) 222-8260 – dennis@monarchbayassociates.com

See “Equity Series” above on navigation bar.

Today, Wall Street investors are receptive to buying public company stock, even IPOs, initial public offerings, which is a sure sign of investor appetite. 

So, in this receptive Wall Street environment, many small cap public companies are considering raising equity capital.

Now, small cap public companies have many more options for the mechanics of raising equity.  That’s a good thing but requires company management to make some choices, preferably good choices.

To help companies to better understand what options are available as well as some of the tricks and traps, I created a series of videos on raising equity for small cap public companies.

In this equity series, I’ll address topics including:

  • How to get the best deal.
  • What are key regulatory rules.
  • What are the available mechanisms for raising equity and
  • What are the pro’s and con’s of each mechanism.

Each of my videos will be short and focused on one element of the topic.

I plan to supplement my videos with contributions from other professionals who will add their special expertise to the series.

I hope you’ll enjoy this series.  Give me your feedback to make it even better.

 

JOBS Act Progress on General Solicitation

Dennis McCarthy – (213) 222-8260 – dennis@monarchbayassociates.com

Well, I’m calling it progress.

The SEC has submitted for comment some revised rules under the recently enacted JOBS Act.

The proposed rules would permit offerings of securities which are exempt from registration, commonly known as private placements,  to be marketed more widely than is currently possible.

The current rules limit the number of potential investors that can receive the offer.  Under the proposed rules, those limits are removed.

What remains generally the same are the rules defining who can invest.  They must meet tests to qualify as accredited investors.

That’s why I call it progress as long as something like the proposed rule gets adopted.

Today, companies and their agents raising capital have the technology to reach out to just about every potential investor on the planet, so why not?

At the same time, restricting investors to those who are accredited maintains some protection for unsuitable investors.

There’s more progress needed but this is a step.  The SEC press release is available at the link below.

As always, please contact me to help your company raise equity or debt or complete M&A deals.

SEC Press Release: http://www.sec.gov/news/press/2012/2012-170.htm

 

 

Microcap Funding Twist

Dennis McCarthy – (213) 222-8260 – dennis@monarchbayassociates.com

Raising equity capital for smallcap companies, defined as companies with market values $2 billion or under, has gotten easier because of techniques like shelf registrations which permit overnight offerings and ATMs or at the market dribble out financings.

However, raising capital for the microcap end of the public market, defined as companies with market values of $100 million or less, hasn’t gotten much easier, in my opinion. 

It could be several factors, fewer microcap investors, generally lower liquidity or other causes.

This is a problem because many microcap companies need capital to grow.  If capital is too expensive or not readily available, it stifles their growth.

Therefore, when my firm helps microcap companies to raise equity, we often include less conventional sources of capital in the mix.

In addition to the hedge funds which have been the main source of capital for microcaps, we often approach three additional sources:

(i)                strategic investors,

(ii)             private equity crossover funds and

(iii)           wealthy individual investors.

These sources may not be as speedy but they may offer better terms.

First, strategic investors.  Many large companies have lots of cheap capital available but need growth.  This has opened the door for microcap companies to obtain capital from strategic investors.

What strategic investors want from the investment will vary, maybe it’s a co-marketing arrangement or a technology license, but they typically don’t want to consolidate the microcap’s performance in their financials.   

The key point here is that the strategic investor is expecting to get a return in ways other than those of traditional financial investors.  This creates some interesting opportunities.  For example, I’ve seen several recent strategic investments made at a significant premium to market.

The second group of investors are called private equity crossover funds.  Because the competition among private equity groups is so intense, some private equity funds have taken to making investments in public companies.

It’s important to distinguish these private equity crossover funds from classic hedge funds.  These crossover funds look at different metrics.  They look at IP position, capital efficiency and size of addressable market, and less at current profitability and liquidity.

Private equity crossover funds take a longer term view more in sync with corporate management.

The third group is wealthy individual investors.  These are the ones who survived the Great Depression with capital so they’re savvy investors, survivors.

They seem to come in two types, passive or active. 

The passive investors know they don’t have time to closely monitor their investment so they may appoint or hire someone to help them.  In a recent example, individual investors selected a representative to review documents and serve as their eyes and ears.

The other type of individual investor, the active investor, may serve as a board member and company mentor.  The active investor’s perspective is that he provides capital and advice, combined.

I suppose I should mention that we may see a return of the old style passive individual investor, investing very small amounts of capital in higher risk situations.  The recent crowd-funding legislation may spark the return of that style where an individual investor’s stake is so small in relation to his net worth that the complete loss is not too painful.  We’ll see how the new rules are drawn and what develops here.

In summary, we think it pays to include these less conventional capital sources to get your capital on the best terms.

Please contact me to help your company raise equity or debt or complete an M&A project.

The JOBS Act – Update

Dennis McCarthy – (213) 222-8260 – dennis@monarchbayassociates.com

The new JOBS Act, intended to make it easier for smaller companies to raise capital, was signed into law by the President on April 5th.

First, let me say that I welcome the reduction in the regulatory burden on smaller companies.  I hope this spirit of deregulation will be extended to existing small cap public companies which continue to operate under the old burdens.

However, some needed changes to encourage capital formation by smaller companies aren’t as easily handled through legislation.  For example, thin liquidity in many small cap stocks has several causes and would require several fixes.  Lack of liquidity, therefore, will likely continue to plague smaller cap stocks.

Also, we can’t legislate good judgment.  Even under the former, so-called stricter rules, investors shoveled money into Chinese stocks, many of which proved to be unwise investments.  The new JOBS Act places even greater responsibility on investors to exert good judgment.

Experience tells me that companies considering raising capital should take advantage of these relaxed rules as soon as possible before some visible blow-ups or disasters trigger re-tightening of the rules.

The following links provide helpful summaries and analyses of the JOBS Act.  Thank you.

Sheppard Mullin: http://www.corporatesecuritieslawblog.com/capital-markets-president-obama-signs-jobs-act-landmark-reform-for-small-and-emerging-growth-companies-now-law.html

TroyGould: http://troygould.com/index.cfm?fuseaction=content.contentDetail&ID=9187&tID=303

Latham & Watkins:http://w.on24.com/r.htm?e=445288&s=1&k=17FD77D843F6EAE8A36641AD5AE93257