Exploring Alternative Capital-Raising Strategies

Have you been unsuccessful in raising capital for your company? Certainly, depending on the profitability of and prospects for a company, raising capital can be a difficult challenge. However, some industries find it easier to raise capital than others. Much of it depends on which industries are in vogue on Wall Street.

A company has more options than one might imagine. There are alternatives such as an IPO (initial public offering), a reverse merger, a PIPE (private investment in public equity), a PPM (private placement memorandum), SPAC (specific purpose acquisition company) and a DPO (direct public offering).

To make matters somewhat more confusing, certain capital markets have become quite active of late, thus holding great promise for specific types of companies. These capital markets are in England, China and India. In fact, England has a unique way for a smaller company to do an IPO and to become public at a reasonable cost: through its AIM market (Alternative Investment Market). In England, through the AIM, NOMADS (nominated advisers) will assist a company through the entire process. NOMADS have to go through a vetting process before the AIM will allow them to assist and advise a company.

I will briefly go through some of the alternative capital raising strategies. Then I will tell you about a conference — or summit — called “The Investors’ and Issuers’ Summit on Alternative Capital Raising Strategies,” that will be held in New York March 31-April 1. Financial Research Associates is sponsoring and presenting the summit.

Analyzing the IPO

An initial public offering is the traditional way by which a company goes public and gets its stock publicly trading. It is a rather long and expensive process that culminates in the underwriter (the investment banking firm) presenting an underwritten offering through its broker-dealer network. The duties of the underwriter are to determine the opening price and the number of shares that the market will support.

Major investment banking firms normally handle large IPOs. It is not uncommon for them to enter into a consortium with other firms in order to secure as broad a market as possible for the company’s stock. It is obvious that a fully underwritten IPO is usually not possible for the smaller company. Not only is it cost-prohibitive, but also finding an investment banking firm that will take a smaller company public can be a challenge.

Reverse Merger

Normally, this type of transaction — which culminates in bringing a company public — is reserved for the smaller business that cannot attract a satisfactory investment banking firm. Through this process, a company merges with a corporate shell in order to quickly become public and to ease the difficulty of getting a company’s stock publicly traded.

This process is much less expensive when compared to a fully underwritten IPO. Please see my E-Commerce Times article “Bringing Your Company Public” for additional details on this process.

A Look at the PIPE

This method, private investment in public equity, can be perfect under the right circumstances. In this case, I’ll rely on what Investopedia has to say on the subject:

“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 fewer regulatory issues with the Securities and Exchange Commission, and there is also no need for an expensive roadshow, 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.”

Understanding PPM

The private placement memorandum is used by a company that wants to offer its securities to a select group of individuals or investors without having to go through the hassle of an offering statement with the SEC.

The obvious challenge, besides paying for someone to draw up the PPM, is to find a select group of investors who will be interested in the company. My experience is that the PPM can really be effective if the company can identify likely investors. It’s an inexpensive and relatively quick way to raise capital.

Reviewing SPAC

A SPAC (special purpose acquisition company) is a buyout company that raises money to pursue the acquisition of an existing company. A SPAC is sometimes referred to as a TAC (targeted acquisition company).

A SPAC is somewhat of a reverse IPO in that the SPAC raises money to go public first, then looks for a private company to buy. Of late, many SPACs have focused on the high-tech sector.


The direct public offering (or registered direct offering) is ideal for the company that can identify a select group of buyers for its stock, such as customers and suppliers of the company, or even the employees themselves. This can be a good alternative to an underwritten public offering.

Additionally, this type of public offering is much less costly than traditionally underwritten IPOs. However, DPOs usually do not raise as much money as a traditionally underwritten IPO.

The Investors’ and Issuers’ Summit

It’s obvious from the breadth of choices that this article can in no way go into any real depth even on just one of the topics. Financial Research Associates’ summit will address the above topics, as well as additional topics, in much greater depth.

I am happy to say that I’ve accepted an invitation to speak at two of the sessions. My sessions will focus on the reverse merger process as a way of raising capital. I hope to see you there March 31-April 1, 2008. Good luck!

Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which provides a wide range of investment banking services to the small and medium-sized business. He is also a frequent speaker to business groups on financial and corporate governance matters. He can be contacted at [email protected].

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