LegalPerspective

Throughout the country, more and more biodiesel production plants continue to go from concept to reality. While the plants differ in size and technologies, one thing remains constant: capital is needed to take the project from concept to groundbreaking. This article explores issues concerning the raising of "seed capital" in financing initial development project costs.

Specified time frame and amount

"Seed capital," as the term implies, is the beginning capital necessary for the growth of a business concept. A primary question in raising seed capital, which seems intuitive but often is not, is how much money is needed? While each project is unique, biodiesel projects should count on raising anywhere from $500,000 to $1 million for initial capital needs. While some of this initial capital may come from federal or state grant programs-not to be overlooked-most of it will likely come from investors' pocketbooks.

For example, a project in the very early planning stages that has yet to conduct a feasibility study will not likely be in a position to conduct its primary equity offering for three to four months. Depending on the investment opportunity and the investor market, it may be an additional six or more months before the company could access any funds from that primary offering. Therefore, a rule of thumb is that a biodiesel project should estimate its initial capital needs for six months to a year, or more.

Some uses of seed capital include: 1) feasibility study ($15,000-$30,000); 2) business plan ($30,000-$45,000); 3) accounting and legal expenses ($150,000-$200,000); 4) printing and office expenses ($30,000-$45,000); and 5) site development, pre-engineering and permitting ($250,000-300,000). The costs add up quickly, and while a project could require significantly less seed capital if it were to wait until after permanent financing to purchase a site and begin site development, most projects are not willing to wait for fear of losing their slot on their selected builder's construction schedule. Thus, purchasing a site increases the project's capital needs (upwards of $500,000).

Who from and how

Early on in the seed capital decision-making process, developers must consider who the potential investors are and how investment may be solicited from them in compliance with federal and state securities laws. One scenario is that one to a few "angel investors" fund the entire seed capital requirement. In these instances, compliance is relatively straightforward, and the parties will negotiate the terms of the investment, including liquidation preferences, board seats and other preferential rights.

The more likely scenario, however, is that the start-up will need to solicit numerous investors to raise the necessary amount of initial seed capital. In this instance, compliance with the regulations is more burdensome, as the company will need to prepare a prospectus that discloses all material information including risks of the project. Notice filings would also likely be required at both the federal and state level, and some states may have specific pre-offer or post-sale filing requirements.
It is also crucial that seed rounds be planned with an eye on subsequent or permanent financing rounds. For example, it is important that seed rounds not be inadvertently "integrated" with subsequent, more permanent financing rounds, which may cause the seed round that was initially in compliance at the time money was raised to subsequently be non-complaint.

Mark Hanson and Todd Guerrero are members of the Agribusiness and Alternative Energy Practice Group of Lindquist & Vennum PLLP, a leading provider of legal assistance on bioenergy projects throughout the country. They can be reached at (612) 371-3211. Ron McFall, a senior securities partner in the group, contributed to this article.