From Bea Wray

Last week the post and Courier ran this story: During Nuclear Audit Santee Cooper Executives Faced a Question: Disclose or Not

I couldn’t wait to dive in and learn more about the meeting, the audit they had requested, and the

conversation which preceded the current devastating financial situation for Santee Cooper and South Carolina. There is another hearing at the Statehouse today on this topic, where our elected officials are also diving in on this issue.

Click to read the full note

The article (handwritten board notes and all) is about a phone meeting three years ago during which Santee Cooper top executives and their lawyers discussed an audit about the progress of the $9B VC Summer nuclear project. During that call they questioned, Do we tell our investors?

At this time they were setting out to sell $200 mini-bonds to South Carolinians in order to fund the approximately $2B needed to keep the project going. Their answer to this pivotal question was no, they would not disclose the audit results.

I find this surprising, perhaps even stunning. As an entrepreneur I have not only raised outside equity capital for companies I founded, but I have also consulted with dozens of founders as they went through the process. Securing investors always involved a Private Placement Memorandum. This document naturally set out the number of shares that would be sold and the price per share. More importantly, the document included key sentences like “The securities offered hereby are highly speculative and involve a high degree of risk, and should not be purchased by anyone who cannot afford the loss of his or her entire investment.“ I don’t believe such statements are included in publicly approved investments like the mini-bonds described above.

The private placement offering process also includes many detailed risk statements about competitors, market risks, potential industry changes, business threats, etc. There are tons of other sentences about the information being shared, that it is accurate, complete, unchanged….etc.

Further, I had legal limits as to how many investors I could allow that were not accredited investors. I chose to only accept investment capital to be on the safe side. To be an accredited investor, a person must demonstrate an annual income of $200,000, or $300,000 for joint income, for the last two years with expectation of earning the same or higher income. I always explained this clause to CEO’s as the government’s way of protecting your grandparents from some smooth talking investor coming and taking their retirement for just any hair brained idea.

Preparing the documents and disclosures was one thing. The major hurdle was finding an audience. When I ran a non-profit supporting hundreds of startup companies we hosted dozens of events annually where private start up businesses shared their ideas. In nearly each case, they were seeking investors. So, we had to have two kinds of events. One that was exclusively for accredited investors. At these events the company founders were permitted to speak openly about seeking investment capital so they could say things like, “I am raising $1M over the next six months and that money will be used to hire our sales and marketing teams.” However, most of our events were open to the public and such statements we not permitted. In these settings, company founders could talk about their product and their market and their plans for growth. However, openly they were not permitted to talk about raising capital as that would have been seen as soliciting.

So taking people’s money is a serious thing. Disclosure of information matters.

Why? Because these were private companies without board oversight in place trusted by the Securities and Exchange Commission to shepard the financial investment vehicles and ensure public citizens don’t take unnecessary risks.

So, back to the Santee Cooper mini-bonds. This was about public shares. Those that were scrutinized by the Securities and Exchange Commission. Such investment vehicles are available to any investor not just to accredited investors. These shares are in companies that have a board in place to manage that fiduciary responsibility and the communication around that investment. It is the board that approves the annual reports so investors can decide whether to hold their investment and potential investors can decide whether or not to buy.

What do you think?

If your grandmother owned the mini-bond or she was considering buying it, would you want her to know the state of the company and the investment which would make or break the business?  Perhaps Santee Cooper will provide some answers.