David R. Evanson
Where’s the Money, Fall, 1999
RESUME: ELECTRONIC MATCHING SERVICES
Definition or Explanation: ACE-Net, as well as other electronic matching services are not a source per se, but more accurately, an efficient conduit to angel investors. Once these investors are located, deals can be structured in almost any fashion.
Appropriate For: Any company at any stage in its development.
Supply: There are several well established electronic matching services which are listed in Appendix A. In addition, more of them are popping up every day.
Best Use: Electronic matching services such as ACE-Net, can deliver significant value to entrepreneurs who, though savvy, perhaps do not know where to turn to find private, individual investors to make an investment in their company. The way most matching services operate, it is the investors who reach out to the company if they are interested in its line of business, stage of development, or offering. Therefore, matching services provide entrepreneurs with highly qualified leads. Even if none of these leads turn into investors, they provide a good starting point for referrals to other investors.
Cost: Most matching services are inexpensive. Fees to list a company range from free, to several hundred dollars. What can be really expensive however are the various debt and equity financings a company might structure with an investor who contacts them through a matching service.
Ease of Acquisition: Itzzs easy to list on any electronic matching service. What can be challenging is cutting a deal with an investor once they have found you. In addition, an investor might contact a company simply because they are looking for technical information to help them with one of their other [italicize other] investments. But even this can lead to something. Specifically, if you are genuinely helpful to an investor, they should to be gracious enough to supply referrals to at least three other investors who should have a interest in your deal. They wonzzt do this unsolicited however. Youzzll have to ask for the names.
Range of Funds Typically Available: $25,000 and up.
THE DAWNING OF A NEW ERA
To understand why private companies have such a difficult time raising equity capital from individual investors, or angels, it helps to understand the concept of efficiency [italicize efficiency] as it relates to raising capital.
This term is often applied to stock markets. Efficiency, in this context, refers to the speed and ease with which information is disseminated to investors. The theory goes the more efficient a market is, the more capital it will attract. One quick glance at a stock quote terminal, or the many investor oriented Web sites, proves beyond a shadow of a doubt that the U.S. stock markets are efficient with a capital “E.” Just a few mouse clicks produces quotes, historical quotes, news, comparative financial data, charts, graphs and Securities and Exchange Commission filings. Note that with the rise in efficiency has come a dramatic rise in trading volume on the U.S. markets.
By contrast the private capital markets for private companies are woefully inefficient. There is no centralized body of information. Whatever information there is about private companies, is not uniform, or created on a regular basis. The buyers do not know where all the sellers are, and the sellers do not know where the buyers are. Proof of this comes from the many small private companies that scour the U.S. to find investors, but never link up with the millionaire investor looking for deals in his or her own back yard.
So, the degree of difficulty associated with raising capital, is directly related to the inefficiency of the private capital market. Fortunately however, the rise of the Internet as a powerful new communications medium is ushering in a new era of efficiency and providing new opportunities to raise money that simply did not exist just a few years ago.
THE NETWORK REVOLUTION
One of the most visible signs of this new era is ACE-Net, which stands for the Angel Capital Electronic Network. In quick step, ACE-Net is a project sponsored by the Small Business Administration, which after years of public policy debate, lobbying and nurturing at universities and economic development organizations, went operational in 1996.
According to Terry Bibbens, with the Small Business Administration, and one of the many architects of the program, ACE-Net is an “Internet-based network that will provide new options to small companies looking for capital and new opportunities for so called zzaccredited investorszz looking for investment opportunities.” Bibbens says that ACE-Net removes many of the severe limitations entrepreneurs faced when trying to link up with angel investors on a nationwide basis.
HOW IT WORKS
The mechanics of the network are wonderfully straightforward. Listings of offerings on ACE-Net can be found though an on line search engine which will permit investors to find the kind of company, technology, investment size or geography they are looking for. Once found, the investor can review or download the forms filed by the listed companies. If the investor wishes to cut a deal, he or she can then contact the company directly. According to Bibbens, companies that want to list on ACE-Net, must do so through one of several nodes, which are listed below.
As for the investors, access to the deals listed on ACE-Net is limited to accredited [italicize accredited] investors. These are defined by the Securities and Exchange Commissionzzs Regulation D as, among other criteria, individuals who have a net worth or joint net worth with spouse in excess of $1 million or have net income in excess of $200,000 or joint income with spouse in excess of $300,000 in each of the last two years and who reasonably expect similar income in the current year.
INFO BOX
A Good Deal: ACE-Net excels over other matching services because it offers access to accredited investors. That means if you do come into contact with an investor through ACE-Net, they probably have the financial wherewithal to make a deal with you.
END INFO BOX
Since it went operational in 1996, ACE-Net has ironed out many of the wrinkles inherent in any project of this scope. Chief among these changes is a shortened filing form which increases the ease with which a company can post its offering on ACE-Net (See Sidebar). Previously, companies had to file what is known as Form U-7 or a SCOR form which stands for Small Company Offering Registration. The 50 questions which comprise the U-7 are challenging, and when complete, look suspiciously like a full-blown prospectus.
According to Greg Dean, director of the Small Business Administrationzzs Office of Advocacy, the new filing, known as the ACE-Net Short Form, makes the use of ACE-Net a feasible alternative for any company raising money. “With the short form, and the nominal fee to post an offering, entrepreneurs have absolutely nothing to lose through ACE-Net, but perhaps very much to gain,” said Dean.
SIDEBAR: THE ACE-NET SHORT FORM
Below is the ACE-Net Short Form. If you intend to try ACE-Net DO NOT fill out this form. To register for ACE-Net you must fill out this form online. See your ACE-Net node listed in Appendix A for more information.
1. The federal and state small business exemptions under which the securities are being offered/sold:
________________________________________________________________________
2. The state(s) where the securities may be offered/sold:_______________________
3. Whether the sale of securities is restricted solely to “accredited investors.”_______
4. Whether there are any “restrictions” to be placed on secondary sales of the securities, (i.e., under NASAAzzs Model Accredited Investor Exemption stock must be “purchased for investment” and not for immediate resale):_________________________
With respect to the business of the Company and its properties:
Describe in detail what business the Company does and proposes to do, including what products or goods are or will be produced or services that are or will be rendered.
It is expected that you will copy and paste your executive summary or your business plan at this point in the document when you are filling it out online. The executive summary is the minimum required. The business plan is preferable for the amount of information it provides the investor.
Exact name of Company as set forth in Articles of Incorporation or Charter:
Type of securities offered:
Maximum number of securities offered:
Minimum number of securities offered:
Price per security: $
Total proceeds: If maximum sold: $__________ If minimum sold: $__________
(For use of proceeds and offering expenses, see Question Nos. 9 and 10)
State and date of incorporation:
Street address of principal office:
Company Telephone Number: (____)
Fiscal year:___________ _______
(month) (day)
Person(s) to contact at Company with respects to offering:
Telephone Number (if different from above): (____)
The following table sets forth the use of the proceeds from this offering:
If Minimum Sold If Maximum Sold
Amount % Amount %
Total Proceeds $_______ 100% $_______ 100%
Less: Offering Price ________ ___ _______ ___
Commissions and Finder Fees ________ ___ _______ ___
Legal & Accounting ________ ___ _______ ___
Copying & Advertising ________ ___ _______ ___
Other (Specify):________ ________ ___ _______ ___
Net Proceeds from Offering $_______ ___ $______ ___
Use of Net Proceeds
_______________ ________ ___% ________ ___%
_______________ ________ ___ ________ ___
_______________ ________ ___ ________ ___
_______________ ________ ___ ________ ___
_______________ ________ ___ ________ ___
_______________ ________ ___ ________ ___
_______________ ________ ___ ________ ___
Total Use of Net Proceeds $_______ 100% $_______ 100%
Indicate the capitalization of the Company as of the most recent balance sheet (adjusted to reflect any subsequent stock splits, dividends, recapitalizations or refinancings) and as adjusted to reflect the sale of the minimum and maximum amount of securities in this offering and the use of the net proceeds therefrom:
Amount Outstanding
Debt: As of: / / date As Adjusted Minimum
Maximum
Short-term debt (average interest rate _____%)
$______
$______
$______
Long-term debt (average interest rate _____%)
$______
$______
$______
Total Debt $______ $______ $______
Stockholders equity (deficit):
-Preferred stock – par or stated
-value (by class of preferred in order of preferences)
________________
$______
$______
$______
________________
$______
$______
$______
________________
$______
$______
$______
Common stock–par or stated value
$______
$______
$______
Additional paid in capital
$______
$______
$______
Retained earnings (deficit)
$______
$______
$______
Total stockholders equity (deficit)
$______
$______
$______
Total Capitalization $______ $______ $______
Number of preferred shares authorized to be outstanding:
Class of Preferred Number of
Shares Authorized Par Value
Per Share
________________
________________
________________
________________
________________
________________
________________
________________
________________
Number of common shares authorized: ____________ shares. Par or stated value per share, if any: $_______________.
Number of common shares reserved to meet conversion requirements or for the issuance upon exercise of options, warrants or rights: ________ shares.
Chief Executive Officer: Title: ____________________
Name: ____________________ Age: _____________________
Name of employers titles and dates of positions held during the past five years with indication of job responsibilities:
Education (degrees, schools, and dates):
Also a Director of the Company [ ] Yes [ ] No
Indicate amount of time to be spent on Company matters if less than full time:
Number of Directors: __________. If Directors are not elected annually, or elected under a voting trust or other arrangement explain:
END SIDEBAR
INFO BOX
Shop Talk. ACE-Net zznodeszz are organizations that feed deals into the ACE-Net machine. Many of the nodes are well-established, well-organized regional or local electronic matching services with a wide array of services for entrepreneurs.
END INFO BOX
Why is ACE-Net so vitally important? It increases the efficiency of information distribution — dramatically. In fact, within the strictest constructs of the discipline, ACE-Net mirrors the mechanisms of any stock market or bourse by matching buyers and sellers with uniform information flowing between them. When this happens capital moves more freely, which is precisely what cash hungry entrepreneurs need.
HOW TO GET STARTED
Getting your offering onto ACE-Net starts by contacting any one of the organizations listed in Appendix A. These so-called “nodes” are electronic investor networks in their own right, but also act as feeders for ACE-Net. The organizations which operate these nodes can assist you with the completion of the ACE-Net Short Form, and other details associated with using the system.
The federal government certainly doesnzzt have a lock on electronic matching services. In fact, they are popping up all over the place. See Appendix A for a sampling of networks with a national focus, as well as some with a regional focus.
THE LIMITATIONS OF CYBERSPACE
Entrepreneurs seeking to raise capital should cast a wary eye on the Internet. Oh, it can help. But it is not a turnkey solution. In fact, the words zzraising money on the Internetzz are at best a misnomer, and at worst downright inaccurate.
Having made such a bold and declarative statement, itzzs only fair to say that at least one company has [italicize has] raised money on the Internet. This company was Spring Street Brewery. Spring Street was able to do this largely because it was the first [italicize first] company in history which tried to do so. The sheer volume of publicity which Spring Street generated with itzzs zzInternet IPOzz made its $1.6 financing a self fulfilling prophecy.
Today however, a company posting a prospectus or offering circular on the Internet is not news at all. In fact, because all the hype has gone out of this tactic, the only thing left for entrepreneurs to bank on is hope. Hope that investors find the posting of their deal, hope that investors are interested, hope that investors read and download all of the information which will be required for them to make an investment, hope investors will be excited enough about what they read that, unsolicited, they will send a check to the company, hope that the check doesnzzt bounce, hope that enough investors do this so that the company raises the amount of capital it is looking for.
The upshot is the Internet is a powerful communications medium but it is a very weak selling medium. That is, it cannot provide an acceptably powerful selling mechanism to convert leads into buyers.
INFO BOX:
Donzzt Forget: The old Wall Street dictum goes that stocks are not bought but sold. The same applies to early stage companies raising money. Deals are not bought, but more accurately, they are sold to investors. You will need more than the Internet to sell your idea to investors.
END INFO BOX
The networks mentioned above escape some of these pitfalls. After all, many are small intra-nets that represent investors who have made a conscious decision to list on the network, and in some instances, such as ACE-Net, have had to actually to qualify to be accepted by the network. The underlying assumption then is that these investors are actually looking [italicize looking] for deals, and may call upon companies which interest them.
However many Web sites which simply post deals, with access open to any browser, offer little hope for the kind of reaction which will be required to raise a material amount of capital. Likewise, the simple act of posting an offering on your own Web site, though very inexpensive, will generally not create the kind of buzz which will carry the day.
When shopping among electronic matching services, be sure to find out the kinds of investors who have access to the network, and what if any net worth or suitability requirements they meet.
