Phone: (504) 568-1990 Address:Fax: (504) 310-9195 601 Poydras Street, Suite 2775Website: www.lawla.com New Orleans, LA 70130

Financing Debt and Equity:Overcoming Obstacles

Presented by:

Stewart Peck and Benjamin KaddenPartners

Lugenbuhl, Wheaton, Peck, Rankin & Hubbard

Buying and Selling a Business: Start to Finish New Orleans, LA, December 9, 2016

How should the acquisition be financed? Debt or Equity?• What is being financed?

Is this a start-up, an acquisition of a settled business, acquisition of a new type of business, acquisition of business in same field, one buyer and one seller or different structure?

• How much capital is needed?A traditional small business may opt for debt financing if less capital is needed, but a high-risk venture with potential for bigger return may be better suited for equity financing if cash flow is a concern.

• Small business or big business?Small business may be better suited to debt, it won’t require as much so it will be shorter payoff while maintaining control; big business may have assets and stability that invites big investors with equity financing.

• Low risk or high risk?Low risk may be better suited for debt financing because it will be more able to pay back steady interest payment, but high risk may be better suited for investors who float or sink with the business if a loan might not be able to get repaid.

Pros and Cons of Debt Financing

PROS CONSDoesn’t dilute ownership interest in

the businessToo much debt may damage credit rating and hinder future investment

or equity financingDoesn’t relinquish operating control

of businessMoney must be paid back within a

certain amount of timeDoesn’t relinquish shares in future

profitsMay be limited by lender covenants

and restrictionsMay be more available or

accessible Acquisition may be too large to

borrow enough moneyInterest on loan is tax-deductible Constraint on cash flow with

required monthly paymentEasier to plan a budget because

principal and interest are set amounts

May have to personally guarantee a loan or secure with assets

Pros and Cons of Equity Financing

PROS CONSNo mandatory interest payments Dilution of ownership interest

No principal to repay by set date Dilution of ownership interestMay have more cash on hand to

grow businessRelinquish operating control

No requirement to pay back investment if business fails

Potential conflict with investors who want control

No impact on company’s credit rating

Volatility of share price may cause uncertainty

Time required to find investorsPotential security law issues

Hybrid Financing• Royalties

Investors provide capital in exchange for a percentage of cash receipts. Like equity because doesn’t require set payments, doesn’t require collateral to secure a loan, but like debt because it doesn’t require sharing control of company with investor.

• Selling Marketing Rights or Licenses Terms of the agreement can provide for up front payment, periodic payment, of payment based on sales, in exchange for marketing rights now or later.

• Preselling Products or Services Payment for product or service prior to production.

• Crowdfunding Fundraising campaigns that allow investors to provide capital in exchange for non-monetary returns and that allow the company to maintain full ownership. Examples are Indiegogo, Kickstarter, Peerbackers LLC, and RocketHub, Inc.

• Combination of Debt and Equity A smaller loan combined with a few equity investors means smaller monthly payments and less relinquishment of control.

Securities Law Issues in Equity FinancingThe Federal Securities Act and the Louisiana Securities Law regulate the offer and sale of “securities,” which may apply to equity financing.

Applicable Federal and State Statutes:• Section 5 of the Securities Act of 1933, as amended (the

“Securities Act”)• Section 10 of the Securities Act• Section 4 of the Securities Act – exemptions from registration• 17 CFR Part 240 – General Rules and Regulations• National Securities Markets Improvement Act of 1996 (“NSMIA”)• Louisiana Securities Law, LA R.S. 51:701, et seq.• Louisiana Administrative Code, Title 10, Part XIII

Securities Law Issues in Equity Financing

Federal RegulationsThe Securities Act defines the term “security” broadly to mean “any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract…or, in general, any interest or instrument commonly known as a ‘security’.”

Any sale or offer to sell a security must be registered with the Securities and Exchange Commission, unless it qualifies for an exemption under Section 4 and the applicable Regulations. Common exemptions include:- Section 4(a)(2) of the Securities Act: private placement exemption applies to “transactions by an issuer

not involving any public offering”- Section 4(a)(5) of the Securities Act: accredited investor exemption applies to sales of securities to

“accredited investors” when the total offering price is less than $5 million- Regulation D: Rules 504, 505, and 506 each offer exemptions- Regulation A: exemption for public offerings not exceeding $5 million in any 12-month period- Section 3(1)(11) of the Securities Act: intrastate offering exemption

Securities Law Issues in Equity FinancingState Regulations

The Louisiana Securities Law also defines the term “security” broadly to mean “any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract…or, in general, any interest or instrument commonly known as a ‘security’.”

Any sale or offer to sell a security must be registered with the Securities and Exchange Commission, unless it qualifies for an exemption, which closely mirror federal exemptions. Common exemptions include:- LA R.S. 51:708- LA R.S. 51:709- LA. Admin Code tit.10, §§ 701-707: “The exemption contained in §703 of this Chapter is intended to

provide a state safe-harbor exemption for private placements similar to the federal exemption provided by Rules 501, 502, 503, 505, 506, 507 and 508 promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended. The exemption contained in §705 of this Chapter is intended to provide a state exemption similar to the federal exemption provided by §4(2) of the Securities Act of 1933.”

Benjamin W. Kadden is a Shareholder in the New Orleans office of Lugenbuhl, Wheaton, Peck, Rankin & Hubbard.  Mr. Kadden’s practice focuses upon Bankruptcy, Restructuring, & Creditors’ Rights, Corporate & Commercial Law, Mergers & Acquisitions, and Commercial Litigation.  In connection with his restructuring practice, Mr. Kadden has experience acting as lead Debtor’s counsel, counsel for official committees of unsecured creditors and as counsel for secured lenders.  Mr. Kadden has also actively participated in a number of merger & acquisition transactions pertaining to numerous businesses based in the Gulf Coast, with a focus upon representation of non-public buyers and sellers in equity and asset sales.  Because of his experience in complex Chapter 11 bankruptcy cases, Ben has direct experience and knowledge regarding the purchase or sale of assets by distressed companies, including navigating the process while a buyer or seller is in bankruptcy.

Ben has earned an AV Preeminent Rating by Martindale-Hubbell, and been recognized as a Super Lawyers Rising Star (2014-2016) and Top Lawyer by New Orleans Magazine in Insolvency and Reorganization Law (2014 & 2015).

Stewart F. Peck is a Senior Managing Partner and founding member of Lugenbuhl, Wheaton, Peck, Rankin & Hubbard, with offices in Houston, Texas, New Orleans and Baton Rouge, Louisiana. With 39 years of experience in multiple legal areas, Mr. Peck has handled over 70 reported cases. He has handled significant, complex financing and merger and acquisition transactions and Chapter 11 proceedings. He has been involved with the purchase and sale of numerous businesses. Mr. Peck graduated from Tulane Law School in 1977 where he was elected to the Order of the Coif and was a member of the Tulane Law Review. Mr. Peck graduated with distinction from Kenyon College, Magna Cum Laude, in 1974, where he was a member of Phi Beta Kappa.

Recognized for many accomplishments, Mr. Peck is listed in Chambers USA, Best Lawyers in America, Best Lawyers in New Orleans, and Louisiana Super Lawyers. He was recently named to the 2016 class of New Orleans CityBusiness Leadership in Law.

This presentation authorship was in partnership with Lugenbuhl Associate

Ms. Leslie-Johns Ray.

Financing Debt and Equity:Overcoming Obstacles

Stewart Peck and Benjamin KaddenPartners

Lugenbuhl, Wheaton, Peck, Rankin & Hubbard

601 Poydras Street Suite 2775

New Orleans, LA 70130

Phone: (504) 568-1990 Fax: (504) 310-9195Website: www.lawla.com

New Orleans • Houston • Baton Rouge