Equity vs. Debt When Raising Capital From Accredited Investors
Growing companies have the option to raise capital through either an equity offering or a debt offering. Prospectus.com assists companies worldwide with debt and equity document creation.
Usually newer businesses or those seeking to become established procure equity financing under various exemption (for instance in the U.S. via Regulation D, or Reg D). This means that a limited offer and sale of securities can be undertaken without registration under the Federal Securities Act of 1933. Complying with Reg D offers protection to officers and directors of a company by disclosing relevant investor information via a private placement memorandum.
Types of Securities: Equity vs. Debt
Raising capital gives the company the option to either sell ownership or debt securities and sell stocks, shares, or units – or debt securities – bonds or promissory notes.
Equity securities usually refers to common stock in a corporation, or, in the case of a limited liability company or partnership, interest or units. Equity securities represent an ownership interest in the company or fund. The holders of the security – called stockholders, shareholders, or unit holders – are entitled to receive dividends from the company’s profits at the discretion of the company’s board and directors. Security holders also participate in corporate decision-making by voting and are represented by the board. The company must keep them updated with relevant information about the company by issuing regular financial statements and updates on company performance.
Another type of security that companies may issue consists of bonds, debentures, or other promissory notes, called a debt offering. Debt securities represent obligations of the company to pay back bondholders at a specified interest rate at regular intervals over a set period of time. The duration of a debt securities payback period is known as its maturity date. With a debt offering, the repayment amount to the investor(s) is determined ahead of time and not affected by the company’s performance or profitability. With registered securities offerings (which may require a private placement memorandum), companies issue bonds or other debt securities only when they demonstrate the ability to repay the debt based on past performance (at PPM, we call this “the position of power”). Companies with an operating history have a better chance of securing debt financing for their company.
If you need assistance or guidance with the type of issue your company should conduct, either or debt, our team can assist.
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