So, now that you have made the decision to write a Private Placement Memorandum, what goes in it? State and federal securities laws are most interested in protecting the investor. In this context, there is one cardinal rule: tell the truth, the whole truth and nothing but the truth. Do not misrepresentmaterial facts, and do not omit material facts where the inclusion of such facts would lead the investor to a different conclusion.
Aside from being truthful and factual, your Private Placement Memorandum should provide a prospective investor with all the information required to make an levelheaded investment decision. It is commonsense to put yourself in the investor’s shoes and think about what information you would like to have if you were in the shoes of your investor . The summary below describes some of the main items that should be covered in your Private Placement Memorandum.
And, while the required disclosure will vary depending on various factors, such as size of the offering and whether there are non-accredited investors, I recommend erring on the side of caution. You may run afoul of securities laws by not having the right disclosure, but there is no harm if you over-disclose.
Following includes some of the sections that should be part of your Private Placement Memorandum:
Notices to Investors: The Notices to Investors section includes federal and state disclosure legends, providing certain notices to your prospective investors informing them that the securities described in the Private Placement Memorandum are unregistered securities. Additionally, some states have specific disclosure terminology they will require over and above the federal/NASAA disclosures.
Term Sheet: This section provides a summary of the deal; i.e. purpose of the transaction, who the issuer is, what type of security is being issued, specific terms of the security being issued (dividends or interest; current pay or accrued; warrants; collateral), affirmative and negative covenants, conditions precedent, etc.
Risk Factors: The Risk Factors section sets forth the risks specific to the company and risk of investing in the type of securities being issued. Some examples include reliance on customer concentration, cyclicality, inability to achieve projections, changes in regulations, etc.
Conflicts of Interests: Identifies and describes potential conflicts of interests of the issuer, and its principals or affiliates. As an example, one of the principals may provide accounting services for the issuer .
Description of the Issuer, its Business and the Business Plan: Describes the business of the issuer, its products, strategy, customers, sales and marketing, operations, industry and competitive analysis, and discussion of management.
Transaction Description: The Transaction Description section describes the transaction, including a schematic of the deal, a sources and uses table and capitalization table.
Financial Information: This section includes a presentation of historical financial performance as well as discussion and analysis of the results. The financial information section will also include management forecasts and relevant assumptions behind the Company’s Plan .
Misc Sections: These sections will typically comprise of tax matters, and a description of the capital stock of the issuer.
Subscription Section: The Subcription section provides the investor with the instructions on how to participate in the offering.
Appendices: The appendices will vary from deal to deal, and should consist of supplemental information and documents that may be material to a prospective investor’s investment decision. Items that may be part of the appendices include the letter of intent, audited financial statements, shareholders or operating agreement, etc.
While all of this seems complicated, you can make it easy on yourself by using a Private Placement Memorandum template. Once you have your Private Placement Memorandum written, then have your lawyer review and comment on it. Proceeding in this manner will minimize your upfront costs and be an efficient use of your attorney.
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