IPO Financing – The Foster

Problematic:

An essential attribute of a growing and dynamic economy is the methodology for pooling funds to finance new, innovative and promising enterprises. One of the most powerful tools to pool funds is a public offering of shares by either a RegA+ or S-1. But it is difficult, if not even impossible, to raise the budget of an IPO (Initial Public Offering). There are three types of costs involved:

1. “Upfront” or “Pre- Cash” costs that must be borne by the company before the effective date of the IPO (attorneys, accountants, etc.)
2. “Post-Cash” costs such as commissions to Brokers, Investment Banks, and again lawyers and accountants…).
3. In addition, there is usually a less obvious cost: the IPO process monopolizes a significant portion of the company’s resources and generally consumes management’s attention. That is why it is not uncommon that during the IPO process, the performance of the company is negatively impacted, engendering yet another need for funding if only to offset the Pre-IPO poor sales performance.

From other perspectives, there are hurdles to overcome in pooling funds from investors:

1. From the investor’s standpoint: how to invest for a short period of time and make a significant profit.
2. From the entrepreneur’s or company’s point of view: how to finance a large transaction and manage the investors’ expectations and shareholder rights, especially in relation to management control and remuneration.

Solving the Problem: the same as rescuing a stray puppy: Get control of the stray (create a key term sheet signed by all partie), provide it with care and attention (assist management in the IPO process), foster it (provide needed funding), find it a permanent home (see it through to listing on a public exchange). The following details the solution without the strained metaphors.

When acquiring or merging a company, it is possible to use the cash of the target company to pay off investors. Developing a financing plan that turns the IPO process into a merger can satisfy the investors’ desire for a quick turn of profit, and enables the entrepreneur to keep control.

Definition

A Fundraising Incubator Company is incorporated in the State of Delaware in the United States of America. For our purposes, we will call it the “Incubator.” It is a traditional financial company that, depending on its structure, may or may not be required to register with the SEC (Securities & Exchange Commission) under the 1940 Investment Company Act. This Company finances corporate transactions such as an Initial Public Offering (“IPO”) in return for an equity participation and a put option for an equity participation in the company to be financed.

The Incubator could also finance other types of transactions such as a merger, an acquisition, a securities private placement or any other kind, as long as in the end, there is a sure liquid market, able to absorb the purchase of the Incubator’s equity participation.

The put option, issued by the same issuer as the equity participation, ensures the investor that, in case of success of the transaction, in casu the IPO, it can resell this participation to the issuer immediately after or upon.

Of course, this assumes that the cost of repurchase is anticipated and included in the amount of financing obtained by the corporation in the transaction.

Today, transaction financing is not only rare, but exceptional. It remains the exclusive privilege and apanage of large investment banks that reap huge profits therefrom.

FOSTER

That’s why I invented the combination called “FOSTER”.

The principle is simple:
A special vehicle company is incorporated in Delaware / USA. For our purposes, we will call it “SPV” (Special Purpose Vehicle). In the SPV, all assets of the company or group seeking IPO financing are consolidated so long as name recognition is not sacrificed. This credibility issue must be studied case by case.

1. Incubator’s team of lawyers prepares a “Regulation A +” disclosure document for the Incubator. This disclosure document states to the investor that Incubator is an investment company that finances IPOs of any size, against a share of the capital prior to the IPO and a pro rata share of the raised funds payable after the IPO.
2. This document offers the investor three ways out of investment:
   a. Either s/he sells his Incubator shares at the time of the IPO;
   b. Either s/he converts (its) her/his Incubator actions into SPV actions after the Incubator IPO and before the start of the SPV IPO process;
   c. Incubator buys back her/his shares after (its) Incubator IPO.
3. Incubator files with the SEC for registration and listing on a US stock market.
4. The SEC reviews the file and sends its comments, questions and possible objections to Incubator.
5. Meanwhile, Incubator and the investment bank or investment bank syndicate that distributes its shares are holding roadshows to promote the stock on the market and to collect Incubator’s shares “orders”. During this period, legally, each market player is not allowed to buy the shares, s/he can only express her/his interest and quantify the amount s/he is willing to invest. In practical terms, a buyer who expresses an interest in a quantity of shares and then withdraws would lose any credibility on the market and would be unable to continue trading in other IPOs.
6. At the end of this process (points 5 to 8 above), the SEC gives the Incubator the quotation authorization.
7. Incubator can therefore register with a US stock market, such as the NASDAQ. Incubator may also register with foreign stock exchanges.
8. Incubator rings the NASDAQ bell and makes his IPO.
9. Once the funds are raised, in accordance with the use of the product stipulated by the Reg A + Disclosure Document, Incubator makes at least the following payments:
   a. A payment to the investment bank’s account to pay the brokerage commission if it has not been deducted before the funds were sent to Incubator.
   b. A payment to the SPV account to secure SPV funding.
   c. A Payment of SPV’s IPO fees and expenses to the lawyers’ account.
   d. A payment of a success bonus on the account of the lawyers according to the prescribed procedures.
   e. A payment to the Incubator for the IPO.
10. SPV receives from Incubator the budget necessary to carry out its IPO.
11. SPV’s team of lawyers drafts a “Regulation S-1” disclosure document for the SPV.
12. SPV’s team of lawyers prepares the SPV registration file with the SEC in Form S-1 and the due diligence file. This is much longer than the Reg A + form. It should be noted that the Reg A + form is a short form because it seeks a partial exemption from registration, while the S-1 form is a complete record including all significant transactions carried out by the issuer in the last five or ten years, according to the case. The issuer cannot begin this full registration process until it has two full accounting years and a number of financial conditions completed.
13. This document offers the investor three ways out of investment:
    a. Either s/he sells her/his SPV shares at the time of the IPO;
    b. Either SPV buys back her/his shares after Incubator’s IPO.
    c. Finally, s/he does not wish to leave and remains a shareholder of SPV by focusing on her/his activity.
14. SPV files its prospectus with the SEC in order to register and obtain the listing of its shares on a US public stock market.
15. The SEC reviews the SPV’s file and sends its comments, questions and possible objections to SPV.
16. Meanwhile, SPV and the investment bank or investment bank syndicate that distributes its shares organize roadshows to promote the security on the market and to collect SPV’s “orders” for shares. During this period, legally, each market player is not allowed to buy the shares, s/he can only express her/his interest and quantify the amount s/he is willing to invest. In practical terms, a buyer who expresses an interest in a quantity of shares and then withdraws would lose any credibility on the market and would be unable to continue trading in other IPOs.
17. At the end of this process (points 17 to 19 above), the SEC gives the SPV the quotation authorization.
18. SPV may then register with a US stock market, such as NASDAQ.
19. SPV may also register with foreign stock exchanges.
20. SPV rings the NASDAQ bell and makes its IPO.
21. Once the funds have been raised, in accordance with the use of the product stipulated by the Reg A + Disclosure Document, SPV will make at least the following payments:
    a. A payment to the investment bank’s account to pay the brokerage commission if it has not been deducted before remitting the funds to SPV.
    b. A payment to SPV’s operations account to secure SPV funding.
    c. Payment of SPV’s IPO fees and expenses to the lawyers’ account.
    d. The payment of a success bonus on the account of the lawyers according to the prescribed procedures.
    e. A payment to the financier of the IPO of SPV, Incubator.