Author Archives: judson

FoundersGuide: Advertise Your Securities in the Newspaper

If you ever raised money for your business through the sale of securities, you probably are at least somewhat familiar with United States federal and state laws governing the sale of private securities.  Specifically, these laws provide for exemptions from the general rule that all securities must be registered (i.e., publicly-traded) before they are sold to investors.

Historically, Rule 506 under Regulation D (of the United States federal Securities Act of 1933, as amended) has been the most commonly used exemption from the U.S. federal securities registration requirements.  Nearly all states have an exemption that corresponds to this federal-level exemption.

Recent changes to Rule 506 have added a new exemption, Rule 506(c), that is very similar to the old exemption with a key distinction: an offering of securities under Rule 506(c) may employ advertising and general solicitation.

Previously, no advertising or general solicitation was allowed in connection with sales of private securities.  Consequently, it was not permissible to buy advertising space in a newspaper or magazine to notify the world that you were attempting to raise money through the sale of interests in your business.  Importantly, this prohibition against print advertisement meant that companies also were not allowed to use the internet and their websites to sell their private securities.

While Rule 506(c) allows for general solicitation and advertising, it imposes an additional requirement from the old Rule 506 exemption that ALL investors participating in the offering must be “accredited investors”.  Whether an investor is accredited differs for individual investors and investors that are business entities.  Individual investors may qualify as accredited investors either by having a net worth of at least $1 million (excluding the value of their principal residence) or an annual income of at least $200,000 (or $300,000 together with their spouse) and a reasonable expectation of earning at least those amounts in subsequent years.  Business entities generally qualify by satisfying a $5 million minimum net worth requirement.

Under the old Rule 506 exemption (and continued under the Rule 506(b) exemption in effect now), an issuer may rely on self-certification that an investor was accredited.  This typically was obtained by asking the investor to complete and sign a questionnaire. The SEC specifies now that under Rule 506(c), the reasonable steps the issuer must take to verify that its investors are accredited include reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, and credit reports.  For individual investors, tax returns, pay stubs and W-2s readily document that the investor satisfies the accredited investor minimum income requirement.  If an investor is not willing to provide this type of information (and many are understandably reluctant to, particularly because self-certification has been the standard for so long), the issuer should rely on self-certification and not use advertising or general solicitation in connection with the offering.

Advertising and general solicitation can be powerful tools for your fundraising efforts.  Please let us know if you are considering using advertising in connection with your securities offering.

Written by: Roland Wiederaenders

FoundersGuide: Make the Most of Your Time

Communication is key to most successful interactions. It is especially important when your attorney is charging hourly rates, or more importantly, trying to distill all necessary information from you in order to best represent you and your interests. Face to face meetings are a rewarding and essential part of the attorney client relationship. In person interaction develops the bond that breeds the trust necessary for open and clear communication to take place and move a founder or business owner toward their goals.

As attorneys, we are counselors, but we are constrained by time when meeting with our clients. First and foremost, we respect our client’s time, but even if we spent an entire afternoon with a client, effective communication requires both time and thought. Unclear communication can cloud the attorney client relationship and impede our efforts. The best thing we can do, and our clients can do, to prepare for any meeting is to think about the meeting and what we want from it.

So how do we prepare? How should you prepare? Beforehand, dedicate time to thinking about the upcoming meeting. Clarity around the following questions helps us, your attorneys, zero in on what we need in order to better understand your needs.

  1. What do you care about most? Write down what you really value.
  2. What is your goal? Do not try to create a laundry list, but try and clearly describe the goal that you need help on from the person you are meeting.
  3. What are your biggest threats around that goal? Again, no laundry list needed, just try and narrow it down to the key threats and try to identify what is keeping you from accomplishing your goal.

Answering these 3 simple questions will not only help you prepare the development of your better communication in any meeting, but also helps us, as your advisors, focus on where and how to guide our strategy. Taking quiet time and space to prepare for meetings is important because communication is the foundation of relationships. It not only gives you clarity, but helps us better understand your needs, and better cue in on what questions to ask, and information to seek. Through these efforts we aim to understand your needs, and best serve you.

Written by:  Santiago Diaz

FoundersGuide: Oil is Too Cheap!

Oil is too cheap! While some may cheer, in reality this is a concern for the world, not just those of us with direct skin in the game. At least that’s the conclusion I come to when looking at the global tealeaves. Taking one measure, global capital expenditures, we can see indications of how this works. Generally, increasing investment is critical for sustainable growth in global GDP. Standard & Poors prepares a report on yearly global capital expenditures. Their August 2015 report indicated that capital expenditures by the largest 2,000 corporations in the world would decline by 4% in 2016, after falling 1% in 2015, making 2016 the third year in a row for dropping investment. S&P clearly notes the reason: “…this year’s decline would be mainly due to the energy and materials industry, which is set to cut spending by 14 percent as it fights a loss of confidence in commodities amid fears over demand from China.” Or low oil prices as well as low prices for basic materials are causing new investment to dry up.

The S&P report suggested capital spending by the 2000 companies polled peaked at $3.4 trillion in 2013 and subsequently dropped to $3.1 trillion in 2014. Energy and materials companies’ CAPEX reached $1.4 TRILLION dollars in 2013, 41% of total global investment. Yes, trillion! Estimates show this figure has declined by some $400 BILLION by 2015 and is poised to decline from 10-20% AGAIN in 2016. In 2013, North America accounted for 39% of total global energy and materials investments.

This is a global issue, impacting nearly every sector of the economy. Take for example just one region not generally thought of as energy focused. S&P examined capital spending for the largest 20 non-financial corporations in the Asia Pacific region excluding Japan. This group showed combined spending of just over $300 billion of which $146 billion or 48% was energy related. This group’s CAPEX decreased by 6% in 2014 and likely dropped by greater than 10% in 2015 and is poised to drop again in 2016. So nearly 50% of investment by this region’s largest corporations was energy related, and this is falling sharply. If you factor in that a slowdown in energy investment translates into decreased revenue for industrial, IT and other sectors of the economy, the broader impact of what some view as just an energy slowdown becomes obvious. Expanding this thought to the secondary and tertiary impacts, it is not surprising that we have seen a material weakness in macro measures such as negative PMIs and lower GDP outlooks. Throw in China’s industrial overcapacity and highly levered banks, it’s no wonder markets are nervous. QE to infinity!

Since that report, companies have largely announced fourth quarter results and updated capital spending plans.  A group of 47 U.S. centric producers tracked by investment bank Scotia Howard Weil, have reported plans to reduce upstream capital spending from $131 billion in 2015 to $80 billion in 2016, a massive 39% drop. Once again, this incredible change equates to a massive drop in top line revenue for a myriad of other companies, who will then make their own adjustments – thus the ripple effect.

Back to the U.S., many analysts point to the positive impact of lower oil prices bringing lower gasoline prices and thus increasing personal income and disposable cash for consumers. However, many note this “windfall” has not resulted in an increase in consumer spending. In fact, many retailers have guided down 2016 revenue estimates. While it’s true that consumers are receiving the benefit of cheaper prices at the pump, as well as in lower airfares and such, if their employers are seeing slowing sales, layoffs and stagnating wages negate any short-term benefit of low energy prices.

How large is the impact? In the U.S. alone, just looking at gasoline, we used something on the order of 140.5 billion gallons in 2015. Annual U.S. retail gasoline prices as reported by the EIA were $3.44/gallon in 2014, $2.52/gal in 2015 and $1.70 today. Assuming this price for the year, this $1.74/gal drop over two years equates to nearly a $500 billion savings spread over two years. However, the slowing economy and layoffs erase some of the net positive benefit. In 2015, US retail spending ex autos totaled $4.2 trillion. A $250 billion retail gasoline price savings looks like a 6% discount. However consumer spending is some company’s top line revenue.

In a broader context, massive YEARLY investment is required to replace oil production that declines constantly given the nature of reservoir pressures. It is estimated that global oil, condensate and natural gas liquids production, currently 95 million barrel per day, would decline by around 5% per year without incremental investment. That means the industry must develop nearly 5 million barrels per day per year of NEW oil and gas production. (Note: typical shale wells decline 80% in their first year and something on the order of 20% per year for the next three years.) Further, at the beginning of 2015 it was estimated that world was overproducing by 1.5 million barrels per day. In other words, if investment were ZERO, by the end of 2015, the market would be undersupplied by nearly 3.5 million barrels per day. While investment never goes to zero, any pullback in spending threatens a future slice of the required oil supply stack. In other words, a classic commodity boom- bust cycle. In 1998, oil prices reached lows of $14 per barrel. Capital spending slowed and OPEC reduced production. By 1999, oil prices exceeded $20 per barrel and didn’t stop until hitting $147 per barrel in 2008. It is almost certain that changes in supply will exceed that required to balance the market, sparking a corresponding price rally. The availability of abundant shale resources should dampen peak cycle prices. Nevertheless, adding material supplies takes time and capital, it’s literally like steering a $1 trillion super tanker and mistakes are costly. It’s only a matter time before we see the next leg of the oil price cycle. It’s been happening since the dawn of the oil age and it will happen again.

One would be forgiven for reminiscing about that golden age when a certain large organization (cartel) would adjust oil output in order to help balance global oil supply and demand. So, the next time someone cheers low oil prices, just like a good party, beware of the hangover.


Written by: Brad L. Beago, CFA, Agave Investment Partners, LLC