What is it?

1. What is it? • Private Placements • A private placement occurs when new securities are sold directly to a single buyer, or a small group of buyers, without going through a public offering • Buyers of these issues include banks, mutual funds, insurance companies, pension funds, foundations, hedge funds, and other institutional investors. • Lower costs for issuer • Do not have to meet SEC’s normal standard of disclosure • Advantages for buyers • They can earn a return that is 50 to 75 basis points higher from a private issue than from a public offering • “Lettered Stock” • Subject to certain restrictions • Flexibility to fully negotiate the issue

2. What is it? • Venture Capital • Venture capital is a source of funding typically made available to startup firms and small businesses with strong growth potential • Usually provided in stock investments provided by venture capital funds • Convertible debt may be used • Venture capital firms obtain capital from a variety of sources: • Private and public pension funds • Endowment funds • Foundations • Corporations • Wealthy individuals • Foreign investors • High degree of risk associated with venture capital investing

3. What is it? • Venture Capital • Venture capital firms are rarely passive investors. • They normally take an active role in the businesses they finance, performing some or all of the following activities: • Assisting in the development of new products and services • Contributing management expertise • Sharing experiences from other venture capital investments • Venture firms generally do not see their investments as being permanent in nature. • Most seek to exit their investment in 3 to 7 years.

4. When is the use of this tool indicated? • Attractive to investors who: • Are willing to commit relatively large amounts of capital for a significant period of time • Generally have no need for current income from their investments • Are able to accept a relatively high degree of risk in anticipation of substantial capital gain potential • May be able to contribute significant managerial or business expertise to the new venture • Desire the relative secrecy and flexibility of negotiating the sale and purchase of securities privately

5. Advantages • A private placement does not have to be registered with SEC. • It is not a public offering. • The securities must be purchased for investment purposes rather than resale. • Privately-placed debt issues normally offer a higher yield than publicly offered debt. • Buyers can negotiate a higher rate of return in exchange for the cost savings and convenience of a non-public offering. • A venture capital investment may offer the opportunity to actively participate in running one or more business organizations. • Particularly for individuals with specific business expertise in areas like management, marketing, engineering, or finance

6. Disadvantages • Lack of Investment Liquidity • Both types of investments should be considered long-term in nature. • Lack of Current Income • Startup firms and small businesses need to retain most if not all of their earnings to reinvest in the business. • Dividends cannot often be paid out early on • High Degree of Investment Risk • A very large percentage of new businesses fail for many different reasons • A debt (bond) issue with a well-established firm can be a fairly conservative private placement investment.

7. Disadvantages • Lack of Management Control • Many venture capital and private placement investments are structured as limited partnerships. • General partner has control over the day-to-day activities • Uncertainty of Investment Timing • Investor subject to “capital calls” • Occur when the fund actually begins to invest in various businesses and collects the needed funds from its partners • The timing of these requests may be somewhat uncertain and extend over a substantial period of time • Size of Required Investment • Minimum investment is quite large • Not unusual to be $1,000,000 or more

8. Tax Implications • Private Placements • Similar to tax consequences on sales of stock or of corporate bonds • Venture Capital • Similar to tax consequences of limited partners • May seek to exit through an: • Initial Public Offering (IPO) • Receives stock in the company but Venture capital firm restricted in how that stock can be sold • Merger or acquisition • Receives stock or cash for ownership • Distribution to owners • Tax deferred reorganization (tax is deferred until sale of shares)

9. Alternatives • Private placements and venture capital funds (partnerships) are somewhat unique in nature. • They do not have many comparable alternative investments • Mutual funds • REITs

10. Where and How do I get it? • Private placements • Available to institutional investors and “accredited” individual investors • Venture capital funds • Sometimes marketed through major brokerage firms and investment bankers • The minimum initial investment is usually very large and not really practical for the average investor.

11. What fees or other costs are involved? • A participant in a venture capital operation should expect to pay a sales commission as well as various legal and management fees. • Should be carefully spelled out in the partnership agreement • Investor should examine them carefully • Some venture capital limited partnerships are structured so that a large proportion of their gains go to the management and the general partner(s), rather than to the limited partner.

12. How do I select the best of its type? • Private Placements • Very wealthy individuals who are solicited for this type of investment should consider: • The nature of the investment • The terms of the particular offering • The risk factors associated with the specific investment

13. How do I select the best of its type? • Venture Capital • Nature of the Investment • Established to invest in a wide range of business areas with varying degrees of risk • Partnership Terms and Conditions • A careful reading of the partnership agreement is essential • An investor may require legal and accounting consultants • Payments and fees to limited partners • Track Record of the General Partner • General partner’s background • Prior experience in the business • His (its) ability to engage in the proposed business activities

14. Where can I find out more about it? • There is generally little information available to individual investors. • The National Venture Capital Association (NVCA) • Industry overview • NVCA members • NVCA publications • Calendar of NVCA events • The Investment Company Institute • A Guide to Closed-End Funds