Tag Archive | "ppm"

Private Placements – A Brief Overview of Raising Capital with a PPM

Tags: , , ,

Private Placements – A Brief Overview of Raising Capital with a PPM


If you are looking to raise capital for your business, a private offering of securities might be one way for you to consider. Selling securities, whether it be to friends and family or angel investors, is an excellent means of raising capital if you are prepared and do it the navigate the maze of state and federal laws and regulations involved.  The following is intended to provide a basic understanding of raising capital via the private placement process. You should retain the services of a private placement attorney to advise you through the entire private placement process.

The SEC created Regulation D, which creates certain rules for private offerings. By following these rules, an issuer (i.e. a company selling stock, LLC units, partnership interest, notes, or other forms of a security to raise capital) generally may raise capital without a public offering.

Generally, a private offering may have no more than 35 investors. On the federal level, though, certain high-net-worth investors defined as “accredited investors” may be excluded when calculating the number of investors. There must also be NO general solicitation of investors by the issuer – no advertising. Just this weekend I came across someone soliciting the “private” sale of securities on Twitter – definitely not a good idea if you are trying to comply with the registration exemptions under Regulation D.

The federal securities laws for both public and private offerings are based on the premise that investors in securities are best protected by the disclosure of all relevant information regarding the securities and the issuer. The underlying guideline in this respect is Rule 10b-5, which requires the issuer to disclose to investors anything material that a reasonable investor would want to know prior to making a decision to invest. This is why PPMs are stocked to the brim full of material facts, disclaimers, and lots and lots of risk factors. Failure to properly include these and other items may subject the issuer to serious liability, including being forced to buy back the securities from the investor, as well as damages. If you want to avoid liability, overdisclose, do not hide anything, and do not mislead (among other things of course).

Keep in mind that there are also state “blue sky” laws to comply with – and they will need to be complied with in every state that a security is offered and/or sold.

There are lots and lots of land-mines to avoid when raising money in a private offering – so make sure to consult a private placement attorney / securities law attorney before you raise capital for your business. Also, I may be a lawyer, but the above is not legal advice!

Reblog this post [with Zemanta]

Posted in Private Placement (PPM)Comments Off on Private Placements – A Brief Overview of Raising Capital with a PPM

Private Placement – A Brief Overview of Rule 506

Tags: , , ,

Private Placement – A Brief Overview of Rule 506


One of the exemptions from the federal securities laws regarding the registration of offerings of securities comes in Rule 506.   Rule 506 contains no limit on the amount of capital that can be raised in an offering. Similar to other exemptions, an issuer using Rule 506 cannot use general advertising or general solicitation to market its offering.  Rule 506 is available to an unlimited number of accredited investors and up to 35 non-accredited investors.  Unlike Rule 505, all nonaccredited investors, either alone or via a purchaser representative, must be sophisticated, that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.  Just as with Rule 505, nonaccredited investors must receive a substantive disclosure document that includes financial statements, although even if only accredited investors are involved, care must be taken such that the anti-fraud requirements are met and that there are no false statements, no misleading statements, and no omissions that might make what you have disclosed misleading.  Purchasers must receive restricted securities, meaning that the securities may not be sold without either registration or an exemption.

As always, make sure you get the advice of a securities attorney with private placement experience. There are lots of complicated regulatory requirements to comply with, both on the state and federal level.   A private placement attorney can help you navigate the regulations and to draft your private placement memorandum.

Reblog this post [with Zemanta]

Posted in Private Placement (PPM)Comments Off on Private Placement – A Brief Overview of Rule 506

Private Placements – A Brief Overview of Rule 505

Tags: , , ,

Private Placements – A Brief Overview of Rule 505


One of the exemptions from the federal securities laws regarding the registration of offerings of securities comes in Rule 505.  Rule 505 allows a company to raise an aggregate amount of $5,000,000 over a twelve-month period.  Similar to Rule 504, Rule 505 does not permit an issuer to use general advertising or general solicitation to market its offering.  A Rule 505 offering is available to an unlimited number of accredited investors and up to 35 non-accredited investors.  Unlike a Rule 504 offering, nonaccredited investors must receive a substantive disclosure document that includes financial statements, although even if only accredited investors are involved, care must be taken such that the anti-fraud requirements are met and that there are no false statements, no misleading statements, and no omissions that might make what you have disclosed misleading.   Purchasers must receive restricted securities, meaning that the securities may not be sold without either registration or an exemption.

As always, make sure you get the advice of a securities attorney with private placement experience.   There are lots of complicated regulatory requirements to comply with, both on the state and federal level.   A private placement attorney can help you navigate the regulations and to draft your private placement memorandum.

Reblog this post [with Zemanta]

Posted in Private Placement (PPM)Comments Off on Private Placements – A Brief Overview of Rule 505

What is an Accredited Investor?

Tags: , , , ,

What is an Accredited Investor?


One of the more common questions I get from clients interested in raising capital is “what is an accredited investor?” The answer is spelled out in fairly plain english in Rule 501 of Regulation D:

  • a bank, insurance company, registered investment company, business development company, or small business investment company;
  • an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
  • a charitable organization, corporation, or partnership with assets exceeding $5 million;
  • a director, executive officer, or general partner of the company selling the securities;
  • a business in which all the equity owners are accredited investors;
  • a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase [08/05/2010 – See this link for a recent change to this portion of the definition];
  • a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
  • a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

In addition to understanding what it means to be an accredited investor, it is also important to understand how accredited investor status relates to the most common exemptions from the registration requirements of federal securities law. In a nutshell:

Rule 504 permits allows a business to sell up to $1 Million in securities during a 12 month period to an unlimited number of non-accredited investors. Additionally, Rule 504 does not require the issuer to provide any specific disclosure to the offerees, regardless of whether they are accredited.
Rule 505 allows a business to sell up to $5 million in securities during a 12 month period to an unlimited number of accredited investors, and up to 35 non-accredited investors.  The big problem with selling to non-accredited investors is that the disclosure requirements are significantly more diffucult to meet – very similar to the disclosures required in a public offereing.
Rule 506 allows a business to raise an unlimited amount of capital via the sale of securities to an unlimited number of accredited investors, and up to 35 non-accredited investors.  In addtion to the substantial disclosure requirements discussed above for Rul5 505. any non-accredited investors must also meet a “sophistication” standard, either themselves or via a qualified purchaser’s representative.  The status of an investor as “sophisticated” is a fairly high standard; investors who are merely
knowledgeable about the particular industry are not necessarily sophisticated.
As you can see, raising capital from non-accredited investors puts a start-up in a much more tenuous position in terms of disclosure – which means substantially more legal and accounting fees.  Non-accredited investors also tend to be more difficult to deal with in the long term.  Consider carefully the decision to raise capital using non-accredited investors – and of course consult with a securities attorney.
One other thing to keep in mind is that the burden of establishing whether an investor is an accredited investor falls on the issuing company. At a minimum, the issuing company must reasonably believe that the investor falls into one of the 8 categories in the definition of “accredited investor.”  This is typically accomplished using a carefully drafted investor questionnaire – make sure you use on and that you consult a secruities attorney.d investors) is also tainted.
  • Rule 504 permits allows a business to sell up to $1 Million in securities during a 12 month period to an unlimited number of non-accredited investors. Additionally, Rule 504 does not require the issuer to provide any specific disclosure to the offerees, regardless of whether they are accredited (but keep in mind the anti-fraud requirements).
  • Rule 505 allows a business to sell up to $5 million in securities during a 12 month period to an unlimited number of accredited investors, and up to 35 non-accredited investors.  The big problem with selling to non-accredited investors is that the disclosure requirements are significantly more difficult to meet – very similar to the disclosures required in a public offering.
  • Rule 506 allows a business to raise an unlimited amount of capital via the sale of securities to an unlimited number of accredited investors, and up to 35 non-accredited investors.  In addition to the substantial disclosure requirements discussed above for Rule 505, any non-accredited investors must also meet a “sophistication” standard, either themselves or via a qualified purchaser’s representative.  The status of an investor as “sophisticated” is a fairly high standard; investors who are merely knowledgeable about the particular industry are not necessarily sophisticated.

As you can see, raising capital from non-accredited investors puts a start-up in a much more tenuous position in terms of disclosure – which means substantially more legal and accounting fees.  Non-accredited investors also tend to be more difficult to deal with in the long term.  Consider carefully the decision to raise capital using non-accredited investors – and of course consult with a securities attorney.

One other thing to keep in mind is that the burden of establishing whether an investor is an accredited investor falls on the issuing company.  At a minimum, the issuing company must reasonably believe that the investor falls into one of the 8 categories in the definition of “accredited investor.”  This is typically accomplished using a carefully drafted investor questionnaire – make sure you use one and that you consult a securities attorney.

Enhanced by Zemanta

Posted in Private Placement (PPM)Comments (5)

Raising Venture Capital – What form of entity should I choose?

Tags: , , ,

Raising Venture Capital – What form of entity should I choose?


Have a great idea and plan on starting a business? Thinking about raising venture capital at some point in the future? You should think twice about forming an LLC. Venture capitalists typically require a “C” corporation when investing in a business. Here are a few reasons why:

  • Venture Capitalists like preferred stock, they are familiar with preferred stock, and will usually have already perfected terms for preferred stock.
  • Venture Capitalists typically don’t care about / don’t want pass through losses from an LLC.
  • Venture Capitalists will invest with an exit strategy in mind. That exit will likely either be an IPO, which is generally only available to “C” corporations, or sale of the company, which would preferably occur via a tax-free reorganization. Only corporations can participate in tax free reorganization.

So why not an “S” corporation? First, “S” corporations, under most circumstances, may not have a shareholder that is not a natural person; most Venture Capital funds are organized as limited partnerships. Second, “S” corporations may not have more than one class of stock. As I mentioned above, Venture Capital funds love preferred stock, and they can’t get it from an “S” corporation.

My business law practice can help you set up your business and plan for raising venture capital.

Reblog this post [with Zemanta]

Posted in Choosing a Business Type, Raising Venture CapitalComments Off on Raising Venture Capital – What form of entity should I choose?

Private Placements – A Brief Overview of Rule 504

Tags: , , ,

Private Placements – A Brief Overview of Rule 504


One of the exemptions from the federal securities laws regarding the registration of offerings of securities comes in Rule 504. Rule 504 provides an exemption for the offer and sale of up to $1MM of securities in a single twelve month period. In general, an issuer of securities may not advertise, market or otherwise publicly solicit the sale the securities. Purchasers must receive restricted securities, meaning that the securities may not be sold without either registration or an exemption. Unlike some other exemptions, Rule 504 allows for a private sale without any specific disclosure requirements, although care should be taken to provide sufficient information to investors to avoid violating the anti-fraud provisions of the federal securities laws – as I mentioned in an earlier post – disclose, disclose disclose. Make sure there are no false statements, no misleading statements either, and no omissions that might make what you have disclosed misleading.

As always, make sure you get the advice of a securities attorney with private placement experience.  There are lots of complicated regulatory requirements to comply with, both on the state and federal level.  A private placement attorney can help you navigate the regulations and to draft your private placement memorandum.

Reblog this post [with Zemanta]

Posted in Private Placement (PPM)Comments Off on Private Placements – A Brief Overview of Rule 504


Powderkeg Conference
The Speakeasy - a place for Indianapolis-based entrepreneurs, startups, and the folks who support them to work, play, and collaborate
Launch Fishers

  • Latest
  • Popular
  • Comments
  • Tags
  • Subscribe
IndianaStartup.com on LinkedIN.com