Business Transactions

What Is a Private Placement Offering?

When you sell securities in your company, you make the sale as either a private placement offering or as a public offering. Being classified as private rather than public means your offering has an easier time complying with applicable federal and state securities laws.

The IPOs (i.e., initial public offerings) you read about in the newspapers are public offerings. However, your sale of securities need not be as large as one of the IPO’s discussed in the Wall Street Journal to qualify as a public offering. Most venture capital financings qualify as private offerings. A private offering might also be one in which a start-up entrepreneur obtains financings through friends, families, and angel investors.

Categorizing an offering as private versus public is often a subjective determination dependent on the number and type of investors, the amount of the money being raised, and other factors. To reduce the uncertainty of knowing whether your offering qualifies as a private offering, the SEC offers the safe harbor of Regulation D which defines three categories of offerings that qualify as private.

Securing Upfront Money

If you plan to finance your company by offering equity to private investors, you cannot use any investor funds until your offering closes. Until closing any money provided by investors should be held in an escrow account or in a bank account that is separate from your company operating account.

For example, if you have told investors that you will not close the offering until you have raised a minimum of $1,000,000 and to date you have raised only $500,000, you can’t touch the $500,000. The exception is if one of your early investors agrees to provide “upfront money”. By upfront money, I mean money that an investor has given permission to use prior to the full capitalization of the company.

The upfront money arrangement can be structured in a variety of ways including as an early subscription to the offering in which the investor waives the right of refund if the offering fails to close. If you use that mechanism, the investor waiving refund must acknowledge the possibility of losing all or part of her investment if insufficient funds are raised to complete the offering.

Another method of structuring an upfront money arrangement is as a loan which can later be converted to equity as part of the offering. Of course, remember that if the offering does not go forward, the loan is ostensibly repayable.

How Your Business Plan Differs From Your Private Placement Memorandum

A business plan is your blueprint for building your business venture.  It explains the operational and marketing strategy for your business and lays out financial projections.  In addition to being your road map, the business plan hopefully motivates potential investors and lenders to finance you.

While the business plan is a planning and marketing document, a private placement memorandum (“PPM”) is a legal document used in a private placement offering.  The PPM’s primary legal purpose is ensuring compliance with federal and state securities disclosure and anti-fraud laws.  Compliance with those laws requires providing investors with accurate and complete information about the company.  The PPM is sometimes referred to as an offering memorandum or simply a disclosure statement.  A prospectus is the disclosure statement used in a public offering. 

 

Changes in Regulation D and Form D

Changes are ahead for Regulation D and Form D. Regulation D to the Securities Act of 1933 provides three “safe harbors” that give companies some assurance that their capital-seeking activities are in compliance with federal securities laws. Form D is the notice filing a company must file with the Securities and Exchange Commission (SEC) when it relies on one of the Regulation D safe harbors.

The SEC describes the revisions as simplifying Form D and updating some of the information required by Form D. For example, while a company issuing securities will still need to identify its executive officers, directors, and promoters on Form D, it will no longer have to identify those who own ten percent or more of the company’s stock.

The big change for Form D is “how” it is to be filed. Starting on September 15, 2008, companies may file Form D electronically with the SEC. Electronic filing becomes mandatory on March 16, 2009. As a result, the SEC will be able to make information included on Form D filings more easily available to, interactive, and searchable by the public. Eventually, the SEC hopes to enable companies to file Form D with the SEC and with any applicable states via one electronic transaction. Forty-eight states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands accept filings on Form D.

Finding an Exemption to State Securities Registration for the Sale of Equity in Your Company

In my last postings, I discussed compliance with federal securities laws and finding an exemption to registration with the Securities and Exchange Commission when you want to raise money by selling equity in your company.

In this posting, I'll discuss compliance with state securities laws.

Finding an Exemption to Federal Securities Registration for the Sale of Equity in Your Company

In my last posting, I mentioned Rules 504, 505, and 506 of Regulation D as an exemption to federal securities registration.  If you meet all the requirements of Rule 504, 505, or 506, you are in a “safe harbor” and can be certain your offering qualifies as private under federal law.

All offerings under Rule 504, Rule 505 and Rule 506 have the following characteristics:

Selling Equity in Your Company and Compliance with Federal Securities Laws

In my last posting, I explained that when you sell equity in your company, you must either (i) register with the Securities and Exchange Commission (“SEC”) and with each state in which investors reside, or (ii) qualify for an exemption to registration. 

Registration is time-consuming and costly. Fortunately, private offerings qualify for an exemption.

Are You Selling Securities Without Realizing It?

If you take money from someone who will share in future company profits but will not actively participate in the operation of your company, you have sold a security.  This holds true whether you’re seeking to raise Ten Thousand Dollars or Ten Million Dollars.

Steps in a Business Transaction. Part Three. Financing.

This is Part Three in a series discussing steps in a business transaction. In Parts One and Two, I discussed term sheets and definitive agreements. In this part, I’ll discuss financing considerations.

There are several methods of financing. Having the money required to complete the transaction available in your company or personal account certainly simplifies matters from a legal and paperwork point of view. However, there may be good business reasons that you want to use other sources of money for your transaction.

Other forms of financing include, private investor financing, venture capital financing, bank financing, and seller financing. These are the forms of financing most commonly used by my clients; however, the list is not exhaustive. Each method offers pros and cons.