The Four Professional Functions of a Securities Offering

Before examining the mechanics of deal structuring, you need to understand the workings the 4 professional functions of a securities offering. These functions are in relation only to a securities-offering, as each professional has more to offer after the successful offering.


The investment banks, i.e. securities-brokerage firms, are the “real players” in small, medium and larger capital markets. Once you understand how the investment-banking divisions of Wall Street firms work, you will understand how they dominate the landscape and why they are the top of the food chain in the capital markets. They dictate to legal and accounting, how things are to be handled because they have immediate access to capital. They also employ the stockbrokers, directly with an in-house sales force or in-directly through syndicating deals with other broker dealers. By understanding each professional function you’ll be able to better relate their capital-raising techniques to your Company’s capital-raising efforts and needs. Further, this is part of building a functional finance department within your Company, which is a necessary step for any entrepreneur seeking to raise substantial amounts of capital in the post-seed-capital stage.


As a side note, venture capital firms feed investment banks quality deal flow from their portfolio of companies that they have invested in and benefit from the exit strategies investment banks provide, i.e. IPOs, mergers and acquisitions. They’re rarely, if ever, involved in a securities offerings of their portfolio companies.


We’re not attempting to teach you everything you need to know about conducting an effective offering of securities, with a marketable deal structure, compliant with federal and state(s) securities laws, rules and regulations, as that would be immensely impractical. What we hope to accomplish here is to give you enough knowledge so you and your management team can “run the table,” not your professional advisors. This is extremely important, as you go through this process. Investors want to invest in effective management teams that will execute with conviction, not management teams that rely on decisions from a collection of advisors that have no real skin in the game. You either dominate this process or you will be dominated by the other players in it.


The following fundamental, four professional functions are used by Wall Street firms in the process of raising capital in the United States:


  1. The first function is that of the investment banker. The investment banker “runs the show” and has access to the institutional and individual capital markets through the firm’s sales force of Financial Consultants (stockbrokers). The investment banker inherently knows what the capital markets will and will not accept, as far as the size and types of companies and their related deal structures is concerned. The deal structure must be marketable and sold to the market of investors. The investment banker analyzes a company’s future valuation, establishes the current price of the company’s securities based on estimated rate of return, and then structures the capitalization plan (“deal structure”) so it is accepted by or fits the demand of the various private or public, capital markets—i.e., individual or institutional investors. The investment banker then tailors the securities offering(s) to meet or exceed that market demand. Next, the investment banker oversees, coordinates and essentially rules the other three, subsequent, professional functions.


  1. The second function is that of the accountant, in the production of historical, financial statements in a year-to-year comparative-trend-line fashion for existing companies. With that information and management’s vision of the future with the influx of additional capital sought, the accountant can begin the process of producing the pro forma financial projections to GAAP compliancy. These projections analyze potential future sources of revenue, operational expenses, net-income potential, tax liability, cash flow, and capital budgets, normally over a 5 year period. The pro forma financial statements that the account produces illustrate the elements mentioned above and would include the pro forma Income Statements; the pro forma Statement of Operations; the pro forma Statement of Cash Flows, the pro forma Balance Sheets; the pro forma Sources and Uses Statement and Notes thereof, as appropriate. Although often[1], but not always, derived from the pro forma financial statements the company valuation statement is normally a function of the accountant, as well but must be supervised by the investment banker to be germane to the capital markets and industry standards, as the company valuation statement will have an impact on the pricing of the securities. The pricing of the securities and calculating an estimated ROI, IRR, yield to maturity or yield to “call” also must be supervised by the investment banker for the same reasons. In the case of an existing company, the accountant would also produce compiled financial statements, which may need to be audited if necessary and depending on the circumstances of the size of the offering and the degree of access needed to solicit various, capital markets.


  1. The third function is that of the attorney, in regards to start-up and early stage companies the production and filing of the legal documentation of the entity, such as; the Articles of Incorporation (for Corporations) or Articles of Organization (for LLCs); Tax Identification number with the IRS if the accountant hasn’t already done so. For companies deemed ready, the attorney completes the securities offering documents and files the necessary documentation with the SEC and state(s) FORM D- Notice of Sales, for instance, to comply with the various federal and state securities laws, rules, and regulations. The attorney is generally also retained to handle other administrative compliance follow up after the sale of securities, such as; the review of annual reports; acts as transfer agent; and maintains the registrar and securities ledger. Your legal counsel should structure the legal documents but not the deal—financing structure. Most attorneys claim to have expertise in this area, which requires company valuation and securities pricing, and some do when it comes to venture capital, but since 1985 I’ve never seen a deal structure for a securities offering that was produced by legal counsel sell, ever.


  1. The fourth function is that of the stockbroker, in the legal execution of the solicitation and sales of securities to raise capital for the client firm. As previously mentioned, the investment bankers also employ the stockbrokers, directly with an in-house sales force or in-directly through syndicating deals with other broker dealers. This is obviously an essential part of the process, because without the effective execution of a securities offering through a salesforce of professionals who know how to sell securities, it’s all academic.


Remember, all four functions are managed by the investment-banking divisions of Wall Street firms.


Here are a few realities you should know.


Most securities attorneys work for large law firms on Wall Street that only cater to publicly traded or larger, privately held companies because that is where the money is. The practice of securities law is a Wall Street industry in and of itself. It’s a fast paced, high octane environment that burns out most securities attorneys before they hit forty years of age. Former SEC enforcement attorneys are also in the same fast paced, high octane industry of Wall Street but aren’t compensated nearly as much as their Wall Street brethren for their early burnout rates.  After their Wall Street “tour of duty,” these attorneys often choose private practice, which is certainly less money, but a lot let stress and we’re grateful for this. Most of these attorneys have earned their seat at your table, but you must remain at the head of that table, not matter what. Consider engaging an attorney of this caliber as In-house legal counsel. The attorney would practice law for your firm, but only be compensated as an officer and as per the executive compensation package you produce through your corporate engineering exercise.  Or consider engaging an attorney of this caliber as a board member, as opposed as outside counsel. In such a position, the attorney would not practice law for your firm, but would oversee outside legal counsel’s activities and billing—thereby justifying the expense of that board seat.


Most accountants can produce pro forma financial projections, but rarely are they able to determine and formulate a marketable deal structure for a securities offering. Most accountants are hesitant to produce pro forma financial projections if they know they are to be used in a securities offering document. Their fear is not unfounded, as most start-up and early stage companies will fail within 5 years. If they produce pro forma financial projections for a start-up or early stage company and that company fails they could easily be called into a lawsuit by disgruntled investors. The return rarely justifies the risk.


Most investment bankers can determine and formulate a marketable deal structure, because they are in touch with the private and public securities markets on a daily basis. However, like securities attorneys, investment bankers deal primarily with larger companies…because it generally requires less time to place $100 million in securities for a well-seasoned company than it does to place $1 million in securities for a start-up or early stage company. Once again, they go where the money is and take the paths of least resistance.


Most stockbrokers can sell securities to raise capital, but they generally will not do so for start-up or early stage companies…because they do not want to tie up the funds—in a private placement—or risk losing their clients’ money due to the nature of start-up or early stage companies in general. Note: The traditional stockbroker has evolved into one of two distinct areas within the securities industry. The first and primary area is that of the Financial Consultant, which functions as a financial planner for the client and asset gatherer for the firm. The second is that of the professional trader, which rarely interacts with the client, unless working as an independent Financial Consultant with a clearing firm. The point is, if hiring a CFO or VP of Finance for your firm, look only to the Financial Consultants with pre-established trust relationships with many investor clients to assist you in raising capital from those contacts. Stockbrokers aka Financial Consultants face increased regulatory environment and ever decreasing commission payout structures. With securities industry attrition rates as high as ever, it should be relatively easy to hire one as your CFO.


In summary, you may surmise that hiring an attorney to either work as outside counsel, in-house counsel or as a board member overseeing outside legal counsel activities should be relatively easy. Hiring a CFO or VP of Finance from the securities industry should be relatively easy, as well, owing to the increased regulatory environment and the squeeze of commission payout structures.  However, hiring accountants to produce GAAP complaint pro forma financial projections and investment bankers to valuate you company and price your securities is going to be next to impossible for most start-up and early stage companies. Not to worry, as we’ve enabled you to perform those tasks with our Corporate Engineering Conservatory™. We know where the gaps are so we filled them so you can engineer your company to the quality deal flow we, and other investors, seek.

[1] Due to the nature of start-up and early stage companies’ limited operating histories, company valuation statements are normally derived from pro forma financial projections, as there isn’t enough historical operating or financial data to rely upon.