John Worley Blog

Why You Need a Lawyer for Regulation D and Private Placement Memorandums in Dallas, TX

John Worley - Friday, April 14, 2017

With the handy dandy Internet these days, why do people even need lawyers when they can get needed forms, how-to instruction, and video tutorials just by Googling “private placement memorandum?”

In another sense, why mess with going to the doctor when WebMD says one’s symptoms are either osteoarthritis or spinal stenosis?
Isn’t that enough?

Oh, no, no, no. As many people find out the hard way, the Internet is a fantastic, wonderful, convenient tool that delivers information with a few keystrokes. But it can drown you with articles, blog posts, YouTube videos, and PDFs of private placement memorandums and bad backs. Good luck taking it all in, understanding what you’ve read, and using it correctly, which is important when considering a future business or one’s general health.

In the case of private placements — or better yet, Regulation D, Rule 506, and private placement memorandums — there’s so much info out there, so much noise, that it’s complex, overwhelming, and confusing.

A Matter of Trust

Who do you trust?

What do you trust? Flat-fee services? Using a DIY template? Or face-to-face consultations and custom services?
When it comes to Regulation D, Rule 506, and private placement memorandums it’s recommended to start with an attorney experienced in such matters, not cousin Vinny.

An attorney — one who is easy to work with and speaks in a language you understand — can help you wade through a landscape fraught with legalese, laws, rules, exceptions, and forms. Without that legal sherpa, you’ll have to manage the process alone or hope that the template you choose or the all-in-one DIY solution is prepared correctly, mistake-free, and exactly what you need.

Otherwise . . . 


To begin with, what is a private placement?

Quickly and simply, a private placement is an offering of securities, typically to a small select number of potential investors that is not required to be registered under federal or state securities laws.

Private placements are exempt because they consist of high-dollar offerings made to accredited investors or investors who meet certain criterion.

The most frequently used exemptions from registration applicable to private placements are contained in Section 506, Regulation D of the Federal Securities Act of 1933 and rely on factors such as the private nature of the offering (not being advertised to the public, except in 506(c) offerings), restrictions on the resale of the offered securities, and that all or most of the investors qualify as accredited investors.
Additionally, some of the legal protections that apply to larger offerings made to public shareholders do not apply in the case of private placements.

Why is a Private Placement Memorandum Important?

Securities laws prohibit a company (“issuer”) from making false or misleading statements to investors when selling its securities, regardless of whether or not public registration of the offering is required.

Specifically, Rule 10b-5 of the Federal Securities Exchange Act of 1934 requires that any information provided to investors “must be true and may not omit any material facts necessary to prevent the statements made from being misleading.”

A properly-written private placement memorandum (PPM) ensures your company’s compliance with these anti-fraud laws by fully informing prospective investors about your company and the offered investment.

Potential investors receiving a PPM will learn about your business and management team, as well as your company’s prior performance, future prospects, the terms of the offered security, the planned use of the funds to be raised, and the risks of the investment.
A well written and detailed PPM protects your company and its management from liability.

While PPMs typically follow a standard format, sophisticated investors expect the document to be carefully drafted, contain accurate and current information, and provide a balanced, objective description of the potential benefits and risk of the investment.

Cue the Attorney

Attorneys provide many services, but the one that differentiates them from others is full transaction consulting, which includes strategy on structuring the offering, the offering documents, and how to deploy and administer the offering successfully.

Aside from consulting and strategy development, full offering documents include drafting and preparing all documents, not just the private placement memorandum. This can include operating agreements, subscription agreements, blue sky notice filings, and anything else required.

Subscription Agreement

While the private placement memorandum is a critical document, the subscription agreement shouldn’t be overlooked. It is the actual “sales contract” for the shares of stock being placed. This is the doc an investor will sign and send in with their investment capital.

Just as the private placement memorandum provides disclosure to the client regarding a company’s financial status, the subscription agreement provides full disclosure to the company regarding the investor’s financial status.

In the subscription agreement the investor provides assurances to the issuing company that an absolute loss of their investment capital will in no way impact their standard of living or jeopardize their financial picture as a whole. These qualified investors are typically referred to as “accredited investors.”

Other Documents and Attachments

Many companies will attach to the private placement memorandum a business plan, financial statements, articles of incorporation, and other documents as supporting documentation. This is an acceptable practice, and it’s recommended to work with an attorney to make sure the additional information provided corresponds with the info in the PPM and that the investor is made aware that the business plan alone does not constitute an offer to sell securities. Only the PPM can make that offer.

Custom Documentation

Another advantage of a good lawyer over cookie-cutter solutions is custom documentation, which applies to all offering documents because it properly captures the risks and features of that specific offering, not Scenario A or Scenario B in an all-in-one solution.
That’s customization of information, not how documents and presentation materials look visually. In the highly visual age of digital media, graphic design and how materials look are increasingly important to maximize impact and aid in successfully communicating your offering.

In the next post, I will take a closer look at private placement memorandums.

Contact John Worley Attorney at Law for any of your Regulation D, Rule 506, and private placement memorandum needs and questions.

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