Regulation D and PPM Lawyers – Going Public
A private placement memorandum (“PPM”) is also referred to as a confidential offering circular or memorandum. PPM’s are used by private companies in going public transactions and by existing public companies to raise capital by selling either debt or equity in an exempt offering. In registered direct public offerings, the resale of these shares are often registered on Form S-1. These exempt offerings are usually private placements. PPM disclosures vary depending on a couple of factors including whether the investor is accredited or non-accredited and whether the Company is subject to the SEC’s reporting requirements, and a few other factors.
When a Company sells equity, it most often offers common shares to investors who then become shareholders of the Company.
In going public transactions, the shares held by these investors will often by registered on Form S-1 with the Securities and Exchange Commission (the “SEC”) so that the Company meets the requirements of the Financial Industry Regulatory Authority (“FINRA”) to obtain its ticker symbol assignment.
The common exemptions from registration for companies using PPM’s to raise capital are provided by under Regulation D of the Securities Act of 1933. With new Rule 506(c) allowing general solicitation, the popularity of Rule 506(c) offerings will increase.
Rule 504 l PPM Not Required
Rule 504 which allows a Company not subject to the reporting requirements of Sections 13 or 15(d) of the Securities and Exchange Act of 1934 to raise up to $1 million within a 12 month period. Rule 504 is often used by private companies going public to obtain seed capital. It does not have specific disclosure requirements and as such, so a PPM is not required.
PPM Disclosures l Non-Accredited Investors
Rule 505 l 506
Using Rule 505, reporting and non-reporting companies may raise up to $5 million in a 12 month period. Under Rule 506, reporting and non-reporting companies may raise an unlimited amount of capital. Both Rules 505 and Rule 506 permit companies to raise capital from an unlimited number of accredited investors and up to 35 non-accredited investors.
When Rule 505 or 506 are private placements are only sold to accredited investors, there is no informational requirement and many times a PPM is not used. If a Company raises capital from even one non-accredited investor, unless it is an SEC filer, specific disclosures comparable to those found in a registration statement under the Securities Act must be made.
Even if a securities offering is exempt under any of the exemptions from registration discussed above, the anti-fraud provisions of federal and state securities laws are still applicable.
When a Company uses a PPM to raise capital, it should be prepared to provide investors with significant disclosures including financial information. The consequences of the Company failing to do so in its PPM can prevent the Company’s offering from qualifying for an exemption from the securities registration requirements. It is therefore important for the Issuer to adhere strictly to the requirements for making a nonregistered offering of its securities. Should it fail to do so, the Company, its directors and its executive officers become personally liable and the investors will be able to rescind their investment.
Non-Reporting Company l PPM Disclosures
If the Company is a non-SEC filer, it must provide detailed information in its PPM about among other things:
♦ its business and industry;
♦ its authorized and outstanding securities;
♦ a description of the offering terms and whether any commissions or finders fees will be paid in connection with the offering;
♦ the risks of the offering including business, economic and other risks of investing in the securities being offered by the Company sufficient to enable the purchaser to make an informed investment decision;
♦ its management; and
♦ its corporate history.
If the Company is seeking to raise up to $2,000,000, it should provide an audited balance sheet for the prior two years which is less than 6 months old. For offerings over $7,500,000, it must provide the financial statements that would be required in a registration statement filed under the Securities Act.
Reporting Company l PPM Disclosures
SEC-reporting companies must provide unaccredited investors with a brief description of any information concerning the offering that it provided to accredited investors and give each non-accredited purchaser the opportunity to ask questions and receive answers concerning the terms and conditions of the offering. Potential investors are also entitled to any additional information which the Company possesses or can acquire without unreasonable effort or expense that is necessary to verify the accuracy of information furnished to the purchaser.
Regulation D specifically prohibits the any form of general solicitation or general advertising and as such the Company should not engage in advertising or publish an article, notice or other communication on the internet or in any newspaper, magazine, or similar media or broadcast over television or radio; nor should it conduct any seminar or meeting whose attendees have been invited by means of general solicitation or general advertising.
PPM Disclosures l Offering Compliance
Upon compilation of the PPM, all members of the Company’s management should read it for accuracy and ensure that the information contained therein is truthful and that all material information is disclosed. It is critical that the PPM not contain misstatements of material information or omissions of material facts, in order to make the disclosures not misleading. The PPM should be amended if any of the disclosures made in the PPM become inaccurate or misleading. The Company should not use any sales literature that has not been reviewed and approved by its legal counsel. Management and representatives should be cautious in any verbal or written statements to potential investors that may contradict or modify the PPM disclosures. Most importantly, the Company and its representatives should never make representations about increases in its stock price or offer assurances about the Company’s prospects, its profits, or potential returns on an investment.
The failure to be provide proper disclosures in a PPM may subject the Company as well as its management to civil action including rescission rights. Both could also be subject to SEC Enforcement actions including fines, prohibition on future securities offerings, and criminal actions prosecutions should the Department of Justice become involved.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855