Acquisition, Development & Construction (“ADC”) costs are a term used in corporate finance and securities offerings. ADC costs refer to the costs of acquiring, developing and/or constructing the income-producing capital assets a business requires for the purposes of being able to commence operations. All businesses have ADC costs – not just commercial real estate properties. Whether your business is software, consulting services or producing pickles, your business needs to have certain equipment, fixtures, furnishings, facilities and working capital in order to commence the actual operations of that business. All of these things are potential income-producing capital assets that have to either be acquired, developed or constructed.
In securities offerings, there is typically a line item in the statement of uses of offering proceeds that captures the totality of ADC costs the business is projecting to have in order to start operations. Note the graphic above.
Securities Offerings Use of Funds Main Categories
There are other categories as well.
Acquisition Fees & Other Third-Party Costs
This line item reports third-party costs owing to acquisition fees and commissions paid to parties that assist with the acquisition of ADC items.
Due Diligence Costs
This line item reports the costs of due diligence associated with the offering itself. These items would include underwriting reports, feasibility studies, business plan development and related costs of the offering.
Offering & Organizational Costs
This line item (also known as “O&O”) reports the costs of legal, accounting, tax and filings related to the offering.
This line item reports reserves the issuer (i.e.: the business raising financing) has control over such as a replacement reserve, operating reserve, etc.
This line item reports the reserves controlled by lender(s) in the sources of funds of the offering like debt service reserves, tax & insurance impounds and the like.
Lender Finance & Related Costs
This line item reports all of the costs owing to any loans or other credit instruments that are part of the sources of funds of the offering.
Placement Agent, Dealer & Soliciting Sales Syndicate Fees Allocation
This line item provides reporting on the fees paid to the broker-dealer who is the placement agent of record, the dealer of record and can also be used to report the sales actually made by the placement agent/dealer of record.
Managing B-D Fee & B-D Soliciting Sales Syndicate Fees
This line item is for reporting the fees paid to securities broker-dealers who actually sell the offering to investors. The agent who sells the investor a portion of the offering receives a commission for doing so and that is reflected in this line item as well as the fee paid to the broker-dealer who is the managing broker-dealer.
Retirement of Convertible Debenture
This line item reports debt being paid off. In the case of this example, the debt being paid off is a convertible debenture. If it is some other kind of debt it is usually defined.
This line item reports the projected use of working capital. Working capital consists of the funds spent on setting up operations before the company goes into business, the funds spent on actual operations due to operating losses, and any required reserves funding.
Escrow, Fiduciary & Other Issuance Costs
These cost items refer to the escrow closing costs, costs of fiduciary (i.e.: funds custody) services and related issuance costs not otherwise shown in one of the other line items.
Other Common Terms
Here are some other common terms used in securities offerings…
The term “mini-max” refers to a securities offering where there is a minimum dollar amount of investment funds that have to be received in order for the company to close escrow and receive the funds from investors (the “mini-side”). Once the mini-side requirement is met, the offering has an initial escrow closing, but the offering doesn’t stop. It continues until the offering investment funds received hit the “maxi-side” (or maximum subscription limit) or the offering expires. Most offerings are in fact mini-max offerings (as opposed to “all or nothing” offerings where the company has to sell 100% of the securities being offered before it can get the investor funds).