Private Placement Memorandum

Registering securities is a complex, costly, and time-intensive process that most entrepreneurs would rather avoid. Thankfully, the Securities and Exchange Commission (SEC)’s exemptions can help you quickly raise capital without the burden of a securities registration. Below, Mangum & Associates explains the basics of a private placement memorandum and some of the most popular SEC exemptions.

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Understanding the Essentials of SEC Exemptions

Unless you qualify for an exemption, all securities offers and sales must be registered with the SEC. However, in our rapidly changing world, many entrepreneurs need a streamlined means of raising capital, without the challenge and expense of an SEC registration. For this reason, many companies rely on SEC exemptions.

Before you select an exemption (or series of exemptions), you should understand:

  • Typically, SEC exemptions are non-exclusive, and you can select all that apply to your offering
  • They apply only to the SEC’s registration requirements, and you still must comply with the SEC’s other regulations and rules
  • Exemptions also have significant limitations that can limit your investors and ability to advertise your offering

To learn more about SEC exemptions and how they’ll impact your fundraising strategies, contact Mangum & Associates. One of our experienced private placement offering attorneys can help you understand your options and build a strategy that suits both your long and short-term goals.

Raising Capital With a Private Placement Memorandum

A private placement memorandum is one of the most commonly used exempt offerings. To qualify as a private placement offering, you must show those purchasing your securities:

  • Are “sophisticated investors,” and have sufficient knowledge and experience to understand the securities’ risks or can bear its economic risk
  • Have information that would typically be available in a securities prospectus
  • Will not sell or distribute your securities for a period of time, typically six months to a  year

You may also have to decide whether you want to sell your securities to accredited or non-accredited investors. The SEC defines an accredited investor as:

  • Banks and insurance companies
  • Registered investment, business development, and small business investment companies
  • Certain ERISA benefit plans
  • Corporations and partnerships with more than $5 million in assets
  • Charitable organizations with more than $5 in assets
  • An executive officer, partner, or director of the company that is selling the securities
  • Businesses that only have accredited investors as equity partners
  • Individuals with a net worth of at least $1 million, not including their primary home or residence
  • Individuals with more than $200,000 in income in the last two years or joint income with their spouse that exceeds $300,000– and a reasonable expectation of that income level in the current year
  • Trust with more than $5 million in assets that are not simply formed to purchase your securities

A private placement memorandum can be used to raise capital for a variety of projects and businesses. However, there are limitations on how you communicate your offering to potential customers. For more information about advertising and solicitation of a private placement memorandum, keep reading or call one of our offices for personalized advice.

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Rule 506: Unlimited Funding From Accredited Investors

Rule 506(C) is a popular exemption used for private placement offerings. You qualify for an exemption under Rule 506(C) when:

  • You take reasonable steps to ensure that all of your investors are accredited
  • The terms and conditions of both Rule 501 and 502(a) are met
  • Investors have access to information that would be provided in a registered securities prospectus
  • Your company is ready and available to answer your investor’s questions and concerns
  • The securities are restricted and cannot be freely traded on the market

When you meet these and other criteria, you may raise an unlimited amount of capital from an unlimited number of accredited investors– and you can solicit investment from accredited investors.

Throughout your fundraising efforts, you’ll need to document your compliance with Rule 506(C)’s requirements. This may involve documenting your reasonable efforts to vet your investors, accurately communicate information about your investment merits and risks, and your methods of solicitation and advertisement.

If you need assistance with these activities, it’s best to consult with a private placement memorandum attorney.

Rule 505: Limited Fundraising From Diverse Investors

If you’re interested in raising capital from both accredited and non-accredited investors, you should consider a private placement memorandum under Rule 505’s exemption. However, you are limited to offering up $5 million in securities in any 12-month period. And while you may again offer your securities to an unlimited number of accredited investors, you can only sell to 35 non-accredited investors and you cannot use general advertising or solicitation to attract investors. Additionally, you must show:

  • You informed investors that they cannot buy your securities for resale, and if they decide to sell them for at least year unless they register the transaction
  • If you have at least one non-accredited investor, you must make  financial disclosure to all your investors
  • Unaccredited investors typically must receive the same type of information they would receive in a registered offering
  • You must be ready and available to answer your investors’ questions and concerns

Additionally, unlike Rule 506, Rule 505 does not preempt state blue sky laws. This means that you’ll also need to monitor your compliance with state securities laws that apply to your offering. If you’re selling your securities nationwide, that means you may need to comply with 50 different regulatory systems.

Due to these limitations, Rule 505 is a less popular option. However, it is still a powerful tool when used strategically and appropriately. To learn if Rule 505 is right for your private placement memorandum, contact Mangum & Associates for a customized securities evaluation.

What Are the Elements of a PPM Document?

A private placement memorandum is a securities disclosure, and you and your legal team need to carefully outline information about your offering within it. From your perspective, your PPM is a compliance document. From your investors’ point of view, it helps them make educated and informed decisions about your offering. The document will typically include:

Offering Terms

A summary of the offering’s terms, the class of securities, their price, management fees, applicable investor qualifications, information about the company’s governance, and other essential information. Typically, your securities or PPM lawyer will draft this document, due to its complexity.

Risk Factors

A detailed discussion of the offering’s risks. This should not be a boilerplate disclosure. Instead, the SEC expects a customized, specific rundown of the risks associated with the offering. Again, due to its length and complexity, a securities lawyer typically drafts your risk factor document.

Use of Proceeds

Explains how you will use the funding from your offering. This may include a table that itemizes your planned expenditures. It should also clearly state any compensation that you will provide to related parties, such as consultant payments and indirect compensation to executives and other stakeholders.

Securities Description

Discloses information about your offering and its attributes. This portion of your PPM also outlines essential information about your promissory note or governing document.

Business and Management

Educates investors about your business, the investment opportunity, and your executive team. This section may include biographies of key stakeholders and information about the company’s operations. You should do your best to ensure that this information is neither vague nor misleading.

Avoid Costly Mistakes in Drafting Your Documents

In addition to the PPM itself, your legal team will also need to draft other documents relating to private placement offerings. This may include documents that govern your company’s operations, such as your operating agreement and shareholder agreements. However, it may also include the offering’s subscription agreement, an investor suitability assessment or questionnaire, and a promissory note.

Drafting PPM documents requires sophistication and attention to detail. Rather than attempt a “do-it-yourself” offering, it is in your best interest to consult with an experienced private placement attorney. An improperly drafted PPM and related documents can lead to regulatory scrutiny, lost capital, and significant penalties.

Practical Solutions From Experienced Securities Lawyers

Private placement offerings require a sophisticated assessment, ongoing compliance audits, and careful planning. Most companies and entrepreneurs, even though most experienced, typically need assistance with their offerings. Mangum & Associates’ team of securities attorneys includes some of the most respected thought leaders in the industry.

If you’re looking for thoughtful, real-world advice that is focused on your company’s goals, we’d love to speak with you and learn more about your fundraising needs.

Request a Free Consultation With a Private Placement Memorandum Lawyer

To schedule your complimentary consultation with a private placement offerings attorney, contact Mangum & Associates today. As one of the country’s premier boutique securities law firms, we guide our clients through complex securities transactions and offerings. Our offices are conveniently located nationwide and we look forward to hearing from you.