In a previous article, we discussed the complexity of structuring many private funding transactions for projects that are in the millions to hundreds of millions of dollars. In most cases, it is not just a simple decision where a wealthy individual cuts a check because he or she likes a principal and his or her project.
What wealthy private investors as well as hedge fund managers must take into consideration are far beyond whether the project and the principals are legitimate.
They must take into consideration several complexities we discussed such as:
- Proper structuring
- SEC Regulations for Private Funding
- Anti Money Laundering laws
- Forensic Accounting measures
- Tax implications for the investor, fund and business
- True Financial Operations modeling
- Governance of the project
- Viability of Exit Strategies
- Proper Corporate Structure for present and future of the project
- Banking, SEC, Tax, International and other Compliance issues
While this list covers many of the general complexities of “structuring” and due diligence that needs to be addressed with many projects, there are many other structuring considerations that could apply, thereby increasing the complexity and costs of structuring and due diligence.
Incentives for Minorities
For example, sometimes there are benefits for the project to be owned in major part by a woman or minority. Incentives can be found for the investor through some of these variables. The tax incentives may be more attractive to the investor than the business model itself.
Regulation S
For foreign projects and investments, Regulation “S” might be a consideration for some investors when structuring the project funding. In essence, Regulation S represents a “safe harbor”, when an offering of securities is executed on foreign soil and therefore the security instrument being used is not subject to the same domestic registration requirements under section 5 of The Act (Securities Act of 1933).
144a Bond Funding
144a Bond Funding might be another consideration for funding international projects as well. Rule 144a of the Securities Act was created originally in 1990 by the SEC to make it easier for foreign companies to trade securities in the US Capital Markets. Although it was originally established for this purpose, it has become a very popular way to fund major projects in many industries while reducing the regulatory restrictions to trade the securities backing these projects between the institutions that are qualified to trade (buy and sell) them.
Regulation D
Another Regulation “D” (AKA Reg D) contains the specific rules providing exemptions from SEC registration requirements, allowing some companies to trade their securities without having to register the specific securities with the SEC.
Territorial, Foreign and Citizenship Acts
In some cases, it might make sense to structure a business and the funding through different Acts or incentives through territories or Commonwealths such as Puerto Rico. Act 20, the “Export Services Act” provides for attractive tax incentives for a company that expands its exportation services when it establishes and expands these services on the island of Puerto Rico.
Act 22 gives total tax exemption status to individuals who develop or accrue passive income after they become bona fide residents of Puerto Rico. Other foreign territories, commonwealths, and islands often have other incentives for doing business on or through their established areas similar to these Acts.
Act 73 and Act 273 are set up to incentivize and to provide tax exemptions for investors and businesses to conduct business in and from Puerto Rico, quite certainly as ways to help continue to grow and stimulate the Puerto Rican economy by providing jobs and other opportunities to the island through industry.
Although these concepts may not apply to many projects, private investors are always seeking and learning new ways to structure projects, private funding, as well as capital gains to maximize their investable funds, business and private income, while also minimizing their risk and tax liabilities.
Structuring for Success
In all private funding deals, the source of funds wants to do what is possible and legal to optimize the chances of success while mitigating risks and un-necessary loss from improper or ignorant funding and corporate structuring. It is imperative to understand that in the world of private funding, there are many things that are considered in terms of properly structuring the funding for every project to maximize the returns and minimize the risk and liabilities for all involved.
Every business plan that is submitted to Hedge Funds and Private Investors is just a model, and they almost always have to be fine-tuned or financially engineered to suit the investor or source of funds so that funding can be completed within the best possible, legal structuring in order to create a platform of success for all parties involved.
5th Avenue Capital’s private investor partners and investment banking sources can help properly structure your project funding for optimal success. To being the process of structuring your private project funding, contact us.
