A Private Placement Memorandum (“PPM”) is a document used to inform and provide all the legally required disclosures for potential investors when offering the sale of a security. The Securities Act of 1933 provides that all offerings of securities must first be registered with the Securities and Exchange Commission (“SEC”).
Exemptions to Registration
There are exemptions to registration such as Section 4(a)(2) of the Securities Act. Section 4(a)(2) of the Securities Act of 1933 exempts from registration any transactions by an issuer not involving any public offering.
However, this exemption is only available for those who are issuing securities. The exemption is not available for those who have acquired securities and are looking to resell the same securities.
Many companies who are seeking to raise capital will rely upon Section 4(a)(2) of the Securities Act to exempt registration of their security and pursue what is referred to as private financing.
Rule 506(b) of Regulation D and Private Financing
Rule 506(b) of Regulation D provides that companies can raise an unlimited amount of money and can sell securities to an unlimited number of accredited investors so long as there is no general solicitation of potential investors. Rule 506(b) of Regulation D also stipulates that the investment must not be offered to any more than 35 non-accredited investors.
The legal document which provides the terms of the private financing arrangement of a company seeking to raise capital through the sale of securities without registration with the SEC is a PPM. Generally, the PPM will provide:
- A description of the issuer of the security
- A description of the offering
- Risk factors and disclosures with the investments
- A subscription agreement
- An investor questionnaire and affidavit for accredited investors
- A summary of all material agreements to be signed and completed by the investors
Each PPM differs in its detail and complexity. It is important to speak with qualified and experienced legal counsel regarding your PPM and private financing arrangement.
Don’t Reuse Legal Work or Perform a PPM Yourself
As each PPM is different, there may be a desire to reuse legal work from a prior PPM or perform a PPM yourself using online forms. I would caution against this approach. There are countless legal actions resulting in millions of dollars in damages of companies who either attempted to reuse legal work or attempted to perform a PPM themselves.
To illustrate, Section 20(d) of the Securities Act provides that a court can impose a penalty of up to $120,000 on a defendant for a violation of the Securities Act which involves “fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement” and “directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons.” In fact, in 2008 in the case of SEC v. AmeriFirst Funding, Inc., the SEC issued a $1.2 million civil penalty.
To avoid unknowing violation of the Securities Laws, especially the duty to disclose risk factors associated with an investment, it is important to obtain experienced legal counsel when it comes to your PPM.
For More Information
The simple purpose of a PPM is to inform investors of all material aspects of the potential investment, disclose all applicable risk factors associated with the investment, and make all necessary and appropriate disclosures as required by the investment and pursuant to the Securities Act of 1933.
If you have questions regarding Private Placement Memorandums and Private Financing Transactions, please contact our office for a complimentary consultation so that we can discuss your legal needs.
We look forward to hearing from you!