We recently posted about the advantages of a Private Placement Memorandum (ppm), and the necessity of complying with all of the requirements to stay within the exemption granted by the Securities and Exchange Commission.  This post explores the reasons you need the assistance of a securities attorney in the preparation and execution of your PPM to avoid misunderstandings with your potential investors and the resulting problems to you and to them.

Forbes Magazine suggests some of the more common issues that investors should look for, and the business owner should also be aware of them, so the offering will be clear and understandable to both parties.  Understanding the risk factors is critical.  These factors should be listed in the term sheet, and the investors should have a working understanding of how much they can lose”, but a thorough and understandable explanation of the risks and the consequences can go a long way in preventing angry, confused investors down the road. 

Liquidity of the securities is important, so you need to clarify under what conditions your investors can sell, and how much it will cost them.  Are there restricted conditions for making distributions to the investor?  Will you be making regular distributions, which the investor can count on, or do you only need to pay the investors when you sell certain assets or other major events?

Are you making the offering on a contingency basis, and if so, are those conditions for concluding the placement clearly explained.  A common condition would be that a specified dollar amount needs to be invested before a specified date, or else the placement is canceled.  “If any specified conditions or contingencies are not met, the offering document should clearly state that investors will be refunded their investment amount.  If there are no contingencies, be wary. An offering that may proceed without a minimum level of investments or other conditions could be a red flag, as the issuer can use the proceeds immediately, regardless of the amount raised from other investors.”  That means the wording on your Private Placement Memorandum needs to be very specific on these issues, and clearly understandable.

FINRA emphasizes, “Each year, companies raise billions of dollars selling securities in non-public offerings that are exempt from registration under the federal securities laws. These offerings, known as private placements, can be a key source of capital for American businesses, especially small or start-up companies. But investing in private placements is risky and can tie up your money for a long time. As with other investments, you can also lose some or all of your money.”

If some of this seems a little unnecessary or insignificant, remember, the investors most likely have their attorneys looking at it, and they will be watching to see if you fail to fully advise their clients of all required disclosures. 

The law firm of Wilson, Bradshaw & Cao LLP is experienced in all securities issues and transactions, so you can rest assured that your PPM will be handled professionally and accurately.

Leave Comment

Your email address will not be published. Required fields are marked *