The Art of the Minimum Offering
By: Ryan Hoult & Gordon Ragan
There is perhaps no other part of a financing that must reconcile as many competing interests as the minimum offering amount. Issuers, investors and dealers all have different views on what the ‘right’ minimum offering amount is for a given deal, based on their own needs and desires.
For many issuers, the initial position of management is simple: there is no minimum offering amount. After all, any money must be better than none. However, this simplistic view is often incorrect, so as advisors, we try to foster discussion within the issuers to settle on an amount.
The first point of such discussion should always be: how much money does the corporation need to complete a given goal? For instance, in a real estate deal, the minimum offering may be the amount required to secure bank financing. In resource companies, it may be the amount required to complete a specified drilling program. There is no real use setting the minimum below this level, for doing so risks that the corporation is going to have to go back to the well a second time to complete something investors expect to have been completed with the funds from the first offering. There is simply no way the corporation cannot look inept in doing this. Either it could not properly forecast costs or it did not have a handle on its spending, neither really send a good message to investors.
Keep in mind, it sends a strong message to raise a good chunk more than the minimum offering but it sends an even better message to have that offering last awhile. The market gets weary of the same deal coming up again and again.
We can look at the options through two recent examples. The latest Prestigious Properties offering had a minimum offering of zero; however, the project was such that any amount of money could be efficiently utilized by the corporation On the other hand, the recent Rock Spring deal had a minimum of $1.25M because an amount under that would not have been a productive use of investor capital. Even though both have been recommended by many advisors, their projects call for differing minimum amounts.
The second point of discussion can be, is there anywhere else the corporation can get the money after this offering? If secondary financing is available, albeit at a higher rate, a lower minimum amount may be possible than if the proposed financing is the only accessible source of funds. Clearly the corporation does not want to be in a consistent state of hand-to-mouth necessity but similarly, a corporation should not set the minimum offering bar so high that it is unattainable, if the financing is not going to be their only source of funds.
Lastly, the final discussion point is, how long will this take us and when do we need the money? Just as the issuer should ensure that it raises enough funds to complete the project, it must also ensure that it raises the funds before they are needed. Setting a minimum offering cut-off of December 31, is of no benefit if the funds are needed a month before that. Similarly, setting a cut-off of November 30, if there is no way to raise the minimum amount by then is a waste of time and effort. In both cases, it behooves a corporation to revise its deal before starting to sell if the minimum offering cut-off dates are not going to be practical to complete the deal as envisioned.
Investors tend to have two concerns when assessing minimum offering amounts. First, similar to above, is an evaluation of whether the issuer is raising enough funds to complete the goals stated in the offering document. The investor is betting that the attainment of those goals will result in them making money, so if they don’t believe the company is raising enough money to meet their goals, they may pass on the investment opportunity.
The second concern relates to timing, specifically, how long is the time period to reach the minimum offering? While issuers may prefer longer time periods to ensure they can meet the minimum, investors are stuck waiting for the first closing to occur, all the while earning nothing on their funds tied up in a trust account. While not always a huge concern, issuers should be aware that given two similar deals, investors will likely choose the deal that looks more likely to go ahead soon, especially if the security in question is interest bearing.
The dealers and their representative have reasons to lean towards both lower and higher minimum offerings. Most obviously, they must see a minimum offering that will allow the project to be successful and investors to earn the advertised returns; an offering with a minimum set below that amount is unlikely to pass a KYP or be recommended by representatives. However, a minimum set above that amount will increase the time until the first closing and risk that the minimum offering is not met, resulting in delayed payment or potentially negating all the work by a dealer’s representatives.
As should be clear, there’s no magic bullet in setting a minimum offering amount. Issuers must take into account the interests of all parties and then determine an amount that best balances them. The best way to do that is the start the conversation early, bringing together management, the EMD and any external advisors to ensure all views are considered before deciding on an amount. This will eliminate the need for expensive last minute change, and ultimately result in a more successful offering.