1. Law 514 Corporations Instructor: Dwight Drake Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Future Public offering: Big pay day; liquidity. Not a viable hope for most. Strategic Sale: Establish envied position – then cash in on sale. Natural Liquidation: Return generated through asset liquidation. Example: real estate development; movie venture. Inside Buy-Out: Once established, inside management will secure debt financing to take out seed-money investors at profit. Inside Triggered Buy-Out: Event triggers buy-out under shareholder buy-sell agreement - right of first refusal, showdown clause, death, etc. Cash Flow Vehicle: Business perpetually throws off cash to shareholders. How Does the Investment Pay

2. Law 514 Corporations Instructor: Dwight Drake Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Common Funding Sources Closest people - Family and real friends Acquaintances - Those you know Private Investors - Angels Strategic Corporate Partners Funds – Venture and Vulture The SMA – No free lunch Banks and financial institutions – Lousy up front; gold once established, up and running.

3. Law 514 Corporations Instructor: Dwight Drake Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com The fewer the better. The smarter the better. The wealthier the better. Money loss reactions – prepare for the worse; assume the worse. Your risk avoidance can be very expensive. Never count the other guys money. Never forget the “deal moment”. Some Truisms

4. Law 514 Corporations Instructor: Dwight Drake Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 1. Exemption from Registration 2. Re-sales of Securities 3. Anti-fraud Securities Laws: The Three Big Ones

5. Law 514 Corporations Instructor: Dwight Drake Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com - No particular form - Two factors: 1. Some one puts up money, and 2. Looks to the efforts of another for a return on the money What is a Security?

6. Law 514 Corporations Instructor: Dwight Drake Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Section 5 of ’33 Act: Securities offering require registration. Section 4 of ’33 Act: Securities sold by issuers, underwriters and dealers are subject to Section 5. Two big exemptions:  Section 4(2) non-public offering exemption (private placement)  Section 3(a)(11) “intrastate offering exemption Registration Game

7. Law 514 Corporations Instructor: Dwight Drake Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Section 5 of ’33 Act: Securities offering require registration. Section 4 of ’33 Act: Securities sold by issuers, underwriters and dealers are subject to Section 5. Two big exemptions:  Section 4(2) non-public offering exemption (private placement)  Section 3(a)(11) “intrastate offering exemption Registration Game

8. Law 514 Corporations Instructor: Dwight Drake Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. Antifraud – 10b-5

9. Law 514 Corporations Instructor: Dwight Drake Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Accredited Investors: - Issuer insiders (promoters, officers, directors) - Corps, partnerships and trust with over 5 mill assets - Natural persons with over 1 mill net worth or over 200k (300k if married) of income in prior two years. Sophisticated, Non-Accredited: Knowledge or experience in financial and business matters, capable of evaluating the merits and risks of investment. (Rep may qualify person) All-Others: The dumb, poor crowd Legal Investor Types

10. Law 514 Corporations Instructor: Dwight Drake Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com $1 mill limit within 12 months Any number of any type of investor – for own account, not for resale. Must comply with state security laws. Required disclosures a must. General solicitation usually prohibited or limited by state laws. Purchasers must give signed proof of investment intent. Rule 504 Exemption

11. Law 514 Corporations Instructor: Dwight Drake Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Rule 505 Exemption $5 mill limit within 12 months 35 non-accredited (both types) and any number of accredited. Must comply with state security laws. Required disclosures mandated for non-accredited. General solicitation and advertising prohibited. Purchasers must give signed proof of investment intent. Securities restricted, not subject to resale

12. Law 514 Corporations Instructor: Dwight Drake Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Rule 506 Exemption No limit. 35 non-accredited sophisticated and any number of accredited. Need not comply with state security laws. Required disclosures mandated for non-accredited. General solicitation and advertising prohibited. Purchasers must give signed proof of investment intent. Securities restricted, not subject to resale

13. Law 514 Corporations Instructor: Dwight Drake Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Intrastate Offering Exemption Issuer must be resident and doing business in state Tough three prong 80% tests for issuer - revenues, assets, and use of net proceeds in state Securities sold only to state residents Need comply with state security laws Required precautions against interstate offers or sales Resale restrictions Proof of residence precautions and purchaser representations

14. Law 514 Corporations Instructor: Dwight Drake Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 1. Place “no resale” legends on certificates 2. Signed purchaser letter than says - Verify “accredited” status (backed up by numbers) - Can afford complete loss - Been given all disclosures - Understands risks and potential of complete loss - Been given full opportunity to ask questions - Purchase for investment, with no intent to resale - State of residency 3. Comprehensive, smart disclosure document (PPM or accredited investor disclosure document) Protective Precautions

15. Law 514 Corporations Instructor: Dwight Drake Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Tailored risk factors - Lay them all out. You are protecting here, not selling. Complete market discussion and analysis – nothing overstated. Stay clear of bold adjectives. Make sure financials are accurate – fair reserves if needed. Avoid projections. If required, use appropriate “forward looking” disclaimer and lay out specific and general risk factors. Do not overstate background, expertise or qualifications of key people. Make sure all deals, understandings, and conflicts are thoroughly disclosed. Disclosure Precautions