Detailed use of proceeds example

It is structured systematically to lay out the capital spending made from the investments.

Currently an investment analyst focused on the TMT sector at 1818 Partners (a New York Based Hedge Fund), Sid previously worked in private equity at BV Investment Partners and BBH Capital Partners and prior to that in investment banking at UBS.

Sid holds a BS from The Tepper School of Business at Carnegie Mellon.

Prior to becoming a Founder for Curiocity, Hassan worked for Houlihan Lokey as an Investment Banking Analyst focusing on sellside and buyside M&A , restructurings, financings and strategic advisory engagements across industry groups.

Hassan holds a BS from the University of Pennsylvania in Economics.

• What Is The Use Of Proceeds Statement?
• Formation Of Use Of Proceeds Statement
• Purpose Of Making Use Of Proceeds Statement

What Is The Use Of Proceeds Statement?

A proceeds statement is a statement where the expenditures are explained to the investors. It is structured systematically to lay out the capital spending made from the investments.

Use of proceeds statement is used majorly by start-ups seeking funds; the document is short and doesn’t usually exceed more than two pages.

The numbers added on proceeds statements are tentative estimations and are usually averaged to the nearest millions or thousands.

The proceeds statement or document is usually added to other business documents, such as annual business planning, etc., where a section describes the tentative funding.

Venture capitalists or Angel investors usually seek the use of proceeds statements or documents whenever a young start-up or entrepreneur makes an investment proposal.

Other than start-ups or individual businesses, the use proceeds statements are also used by big companies and corporations when they plan to go public, usually during their IPOs (Initial public offerings).

Using a proceeds statement can be beneficial while raising capital as the investors know where the money is being allocated to and can better model the company on what it is valued at and how it might perform.

A good use of a proceeds statement can increase the chance of investments. On the other hand, wrong “use of a proceeds statement,” failing to allocate net required capital can drastically impact invested capital .

Key Takeaways

• Use of a proceeds statement is a systematic way of describing how the proceeds are tentatively going to be spent.
• This statement showcases the estimation to potential investors to make better investment decisions.
• Use of proceeds report can be formatted in multiple ways, for example, in writing or a pie chart, depending on the circumstance it will be used.
• A pie chart better represents the tentative percentage of spending and can be used in seminars/conferences.
• A detailed tabular use of proceeds statement is generally used in documents while opting for IPOs or venture capitals.

Formation of Use of Proceeds Statement

There are two main ways the proceeds statement is formatted, usually in wording or a graph describing each expense ratio by percentage or numeric.

The proceeds statement is just a simple chart of expenses rather than a predictive forecast like any model. Let us differentiate these two to see if either provides any advantage.

1. Written

A written summary of the use of proceeds statement is usually added in financial documents describing the areas where the capital will be spent.

The statement starts with the net proceeds, and the rest expenses add up to less than or equal to the net proceeds.

The difference between the net proceeds and total expenditures accounts for the issuance of shares and other expenses.

As given in the example, the total research and development expenditures are 90,000, 10,000 less than the net proceeds.

2. Chart

The proceeds statement in a chart form is usually used in the presentation case to simplify the expenditures.

The form of the chart is not specific and depends on the presentation's author.

A chart summing the values is usually preferred, like a pie chart.

The same statement is presented through a chart that is better understood.

Purpose of making use of proceeds statement

A proceeds statement is an important filing while releasing an IPO as it gives an overview to the potential investors in the company of what the invested capital will be used in.

Some companies prefer to keep their investments private from competitors as the statement might reveal their future plans for the company and their products or services.

To counter this, a company could follow a general corporate purpose format which includes the necessary allocations of the IPO funds such as working capital, operating expenses, and capital expenditures.

General corporate purpose is vague and doesn't provide investment details that detailed use of proceeds statement otherwise would.

Detailed use of proceeds statement highlights multiple sections, including

1. Research and development
   A company could allocate its IPO funds for research and development of new technology or products which don’t yield direct returns and hence are hard to define.
   Inflow cash or investments and output profits from the R&D department tend to be vague and not discrete.
2. Product lineup
   A company could allocate its IPO funds to a new product line, including initial costs of goods and services, setups, etc.
3. Future acquisitions
   A company could be thinking of acquiring companies to expand its business possibly. They could define the potential funds required for such acquisition in their use of proceeds statement.
4. Debt
   A company could use its funds from the IPO to mitigate any long-term or short-term debts taken by the respective company to maintain liquidity and not have solvency issues.