private placement memorandums 101

Private Placement Memorandums Q & A

Securities Lawyer 101

Published by:Hamilton & Associates Law Group, P.A.101 Plaza Real South, Suite 202 NorthBoca Raton, Florida 33432www.securitieslawyer101.com

Hamilton & Associates Law Group, P.A. All Rights Reserved101 Plaza Real South, Suite 202 NBoca Raton, FL 33432Telephone: (561) 416-8956www.SecuritiesLawyer101.com

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Private Placement Memorandums Q & A

A private placement memorandum (“PPM”) is also referred to as a confidential offering circular ormemorandum. PPM’s are used by private companies in going public transactions and by existing publiccompanies to raise capital by selling either debt or equity in an exempt offering. Most exempt offeringsare private placements.

Q. What Disclosures Are Required in PrivatePlacement Memorandums?

A. PPM disclosures vary depending on a couple offactors including whether the investor isaccredited or non-accredited and whether theCompany is subject to the Securities andExchange Commission’s (“SEC”) reportingrequirements, and a few other factors.

Q. What is a Regulation D Private Placement?

A. The common exemptions from registration forcompanies using PPM’s to raise capital areprovided by under Regulation D of the SecuritiesAct of 1933. With the new Rule 506(c) allowinggeneral solicitation, the popularity of Rule 506(c)offerings will increase.

Q. What is the Rule 504 Exemption?

A. Rule 504 which allows a Company not subjectto the reporting requirements of Sections 13 or15(d) of the Securities and Exchange Act of1934 to raise up to $1 million within a 12 monthperiod. Rule 504 is often used by privatecompanies going public to obtain seed capital.

Q. Are Issuers Required to Provide a PrivatePlacement Memorandum in Rule 504 Offerings?

A. It does not have specific disclosurerequirements and as such, so a PPM is notrequired.

Q. What is Rule 505?

When using Rule 505, reporting and non-reporting companies may raise up to $5 million ina 12 month period. Rule 505 allows issuers toraise capital from an unlimited number ofaccredited investors and up to 35 non-accreditedinvestors.

When Rule 505 private placement is sold toaccredited investors, there is no informationalrequirement and many times a PPM is not used. Ifa Company raises capital from even one non-accredited investor, unless it is an SEC filer,specific disclosures comparable to those found ina registration statement under the Securities Actmust be provided to investors.

Q. What is Rule 506?

Rule 506(b) permits companies to raise capitalfrom an unlimited number of accredited investorsand up to 35 non-accredited investors so long asgeneral solicitation and advertising is not used inconnection with the offering. Rule 506(c) alsoallows companies to use general solicitation andadvertising to sell their offering so long as salesare only made to accredited investors and certainverification requirements are complied with.

If a Company raises capital from even one non-accredited investor, unless it is an SEC filer,specific disclosures comparable to those found ina registration statement under the Securities Actmust be made.


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Q. Do the Antifraud Provisions Apply to PrivatePlacements?

A. Yes. The Antifraud provisions apply to allofferings even private placements. Even if asecurities offering is exempt from registration, theanti-fraud provisions of federal and statesecurities laws are still applicable.

Q. What Disclosures Are Required in PrivatePlacement Memorandums?

A. When a Company uses a PPM to raise capital, itshould be prepared to provide investors withsignificant disclosures including financialinformation. The consequences of the Companyfailing to do so in its PPM can prevent theCompany’s offering from qualifying for anexemption from the securities laws. It is thereforeimportant for the Issuer to adhere strictly to therequirements for making a non-registeredoffering of its securities. Should it fail to do so,the issuer, its directors and its executive officersbecome personally liable and the investors will beable to rescind their investment.

Q. What Specific Disclosures Are Non-ReportingCompanies Obligated to Provide to Non-AccreditedInvestors in their Private Placement Memorandumsin Offerings under Rule 505 and 506?

If the issuer is a non-reporting company, it shouldprovide complete, accurate and detailedinformation about:

its business and industry; litigation; its authorized and outstanding securities; a description of the offering terms and

whether any commissions or finders’ feeswill be paid in connection with theoffering;

the risks of the offering includingbusiness, economic and other risks ofinvesting in the securities being offered bythe Company sufficient to enable the

purchaser to make an informedinvestment decision;

its management; and its corporate history.

If the Company is seeking to raise up to$2,000,000, it should provide an audited balancesheet for the prior two years which is less than 6months old. For offerings over $7,500,000, it mustprovide the financial statements that would berequired if a registration statement was filedunder the Securities Act.

Q. What Specific Disclosures Are ReportingCompanies Obligated to Provide to Non-AccreditedInvestors in Their Private Placement Memorandumsin Offerings under Rule 505 and 506?

SEC reporting companies must provide non-accredited investors with a brief description ofany information concerning the offering that itprovided to accredited investors and give eachnon-accredited purchaser the opportunity to askquestions and receive answers concerning theterms and conditions of the offering. Potentialinvestors are also entitled to any additionalinformation which the Company possesses or canacquire without unreasonable effort or expensethat is necessary to verify the accuracy ofinformation furnished to the purchaser.

Q. What Compliance Measures Should ManagementUndertake to Ensure Compliance With the SEC’sDisclosure Requirements

A. Upon compilation of the PPM, all members ofthe Company’s management should read it foraccuracy and ensure that the informationcontained therein is truthful and that all materialinformation is disclosed. It is critical that the PPMnot contain misstatements of materialinformation or omissions of material facts, inorder to make the disclosures notmisleading. The PPM should be amended if anyof the disclosures made in the PPM becomeinaccurate or misleading. The Company shouldnot use any sales literature that has not been


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reviewed and approved by its legalcounsel. Management and representativesshould be cautious in any verbal or writtenstatements to potential investors that maycontradict or modify the PPM disclosures. Mostimportantly, the Company and its representativesshould never make representations aboutincreases in its stock price or offer assurancesabout the Company’s prospects, its profits, orpotential returns on an investment.

The failure to provide proper disclosures in a PPMmay subject the Company as well as itsmanagement to civil action including rescissionrights. Both could also be subject to SECEnforcement actions including fines, prohibitionon future securities offerings, along with criminalactions and prosecutions should the Departmentof Justice become involved.

For further information about Private Placement Memorandums, please contact Brenda Hamilton,Securities Attorney at 101 Plaza Real South, Suite 202 North, Boca Raton, FL, (561) 416-8956, or by emailat [email protected]. This securities law Q & A is provided as a general or informationalservice to clients and friends of Hamilton & Associates Law Group, P.A. and should not be construed as,and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that prior results discussed herein do not guarantee similar outcomes.

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