Equity Financing

Adequate equity is critical to the successful development of an algae biofuels project.  Often the equity component is difficult to raise because the equity capital is generally the most at risk capital in the project.  This high risk, particularly in a project that utilizes unproven technology, usually requires a higher reward to make the investment worthwhile to the potential investors.  Federal and state securities laws further complicate the process of finding public or private equity investments for an algae biofuels project.  Algae companies like Sapphire Energy
have received significant equity infusions from investors to fund early stage development activities.

Securities Laws 

To raise equity, a project must offer and sell securities either after registering under the Securities Act of 1933, as amended (the “Securities Act”), and applicable state laws or pursuant to exemptions from such registration. 

Registered Public Offering 

Registration requires a project to prepare and file a detailed registration statement with the Securities and Exchange Commission http://www.sec.gov/ for its review and approval.  Unless the securities are going to be traded on a national securities exchange, such as Nasdaq®, the securities must also be registered under the applicable state securities laws.  Once the registration statement is effective, the project can publicly offer its securities.  

Private Offering 

One of the most common offering exemptions is pursuant to Rule 506 of Regulation D of the Securities Act for transactions not involving a public offering.  In general, sales can be made to an unlimited number of accredited investors (as defined in Regulation D) and up to 35 nonaccredited investors.  There can be no general or public solicitation or general advertising, the securities cannot be resold unless registered or otherwise exempt, and the company must satisfy certain disclosure requirements.  Securities sold in accordance with Rule 506 are exempt from state registration requirements. 

Intrastate Offering 

Another potential exemption is the intrastate exemption, which exempts from federal securities regulation offers and sales of securities that are offered and sold only to persons in one state.  In general, to qualify for the intrastate exemption safe harbor, the company must be organized, doing business, and making offers and sales of its securities in the same state; the offers and sales can only be made in that state and cannot be made to any resident of another state within six months of the offering; and any transfers of the securities within nine months of the offering must be made only to residents of that state.  The securities must be registered or exempt under the applicable state securities laws. 

 Types of Investors 

There are many types of potential investors that might be interested in investing in your algae biofuels project.  Individuals, institutional investors, and corporations all invest in projects for different reasons.  Individual investors are generally best suited for the early stages of a project because of the high risk involved in such investments and because of the lower dollar amounts being invested.  Some of the most common types of equity investor categories are:

Self Financiers – individuals developing or owning the project put up their own capital.

Friends and Family – individuals investing based on personal relationships with the owner or developer.

Angels – individuals investing for an investment return or other reasons other than a personal relationship with the owner or developer.

Community Members – individuals in the same general location as the project investing for an investment return and the benefits the project will bring to the community. 

Institutional Investors – financial institutions investing in the project for investment returns. 

Corporate Investors – corporations investing for investment returns or for other strategic reasons.

Finding Equity Sources 

The best way to attract investors is by doing your homework and making sure that you understand who you are talking to and what motivates them.  Things to consider when determining how to focus your equity fundraising efforts are: 

Project Development – early stage investors typically require higher rates of return because the earlier an investment is made in a project, usually the higher the risk. 

Project Cost – generally, individual investors fund smaller projects and feasibility-stage developments whereas public offerings, large institutions, or corporations fund larger projects.

Liquidity – possible exit strategies and realizing a return on investment is very important to investors. 

Industry Experience – industry experience and connections of investors can be valuable to a project and should be considered in fundraising efforts.

    Post a comment

    Your Name or E-mail ID (mandatory)

    Note: Your comment will be published after approval of the owner.

     RSS of this page

    STOEL RIVES LLP © 2010