ENTREPRENEURSHIP Lecture No: 36 BY CH. SHAHZAD ANSAR

Sources of Capital Contd…

PRIVATE PLACEMENT It includes the investors from family, friends or wealthy individuals An investor usually takes an equity position and can influence the nature of the business to an extent. The investors’ degree of involvement is important for the entrepreneur to consider. Some investors want to be actively involved in the business, and others are more passive.

Public vs. Private Offerings Public Offerings Public offerings involve much time and expense. Registering the securities with the Securities and Exchange Commission (SEC) requires a number of reporting procedures once the firm has gone public. This public process was established to protect unsophisticated investors. Private Offering It is faster and less costly than other funding. These sophisticated investors still need access to material information about the company. 4

Regulation D Regulation D contains: A number of broad provisions designed to simplify private offerings. General definitions of what constitutes a private offering. Specific operating rules-Rule 504, Rule 505, and Rule 506.

Regulation D Contd… Rule 504 Under Rule 504 a company can sell up to $500,000 of securities to any number of investors in any 12-month period. Rule 505 Rule 505 permits the sale of $5 million of unregistered securities in the private offering in any 12-month period. These can be sold to any 35 investors, and an unlimited number of accredited investors Rule 506 Rule 506 allows an issuing company to sell an unlimited amount of securities to 35 investors and an unlimited number of accredited investors

Regulation D Contd… It includes: Accredited Investors (I) Institutional investors (ii) Investors who purchase over $150,000 of the issuer’s securities. (iii) Investors whose net worth is $1 million. (iv) Investors with incomes in excess of $200,000 in the last two years. (v) Directors, officers, and general partners of the issuing company.

BOOTSTRAP FINANCING It is important when capital is very expensive Cost of Outside Capital It takes time to rise outside capital when the company can least afford the time. Outside capital often decreases a firm’s drive to make money. The availability of capital increases the impulse to spend. Outside capital can decrease the company’s flexibility and hamper the creativity of the entrepreneur.