A Private Placement Memorandum, or “PPM,” is a disclosure document often used in connection with a private offering of securities. It contains a compilation of information about the company issuing the securities, the terms of the securities, and the risks of investing in those securities. This article explains the legal background underlying why a PPM is commonly used and overviews what is typically included in a PPM.
SEC Updates Definition of Accredited Investor
On August 26, 2020, the Securities and Exchange Commission (“SEC”) issued a press release indicating that it had adopted amendments to the definition of “accredited investor.” The amendments, among other things, added to the list of individuals who qualify as accredited investors, holders in good standing of a Series 7, Series 65, or Series 82 license. The amendments also updated the definition of accredited investor to include, with respect to investments in private funds, natural persons who are “knowledgeable employees” as defined in Rule 3c(5)(a)(4) of the Investment Company Act of 1940. This change could prove significant for private funds with under $5 million is assets under management which wish to allow certain employees to participate in the private fund’s offering.
[Read more…]Why Startups Use Convertible Notes
For the past 10 years or so, founders of early-stage startups have been increasingly turning to convertible notes and convertible equity instruments to structure investment rounds, particularly for their first capital raise. While some in the angel investment community have argued that it would be best if founders did fewer convertible note rounds and more equity deals, it’s important to consider why the convertible note structure has made such a big splash in early-stage financing world in the first place. What are the primary benefits for founders and their investors to opt for a convertible note offering over a stock offering? In future posts, we will consider the key deal terms to consider for your convertible note offering but first let’s look at the key benefits of the convertible note structure to determine if it is right for your company.
[Read more…]Dos and Don’ts of Conducting a Rule 506(b) Offering
When raising capital, a company must comply with securities laws. As previously discussed, all offerings of securities, must either be registered with the SEC or exempt from such registration. Rule 506(b) is the most commonly used securities exemption for private companies. Even after complying with the basics of this exemption, there are many nuanced requirements that, if missed, can jeopardize qualifying under the exemption. Failure to comply with Rule 506(b) can subject an issuer and its officers and directors to various penalties. The SEC and state regulators can institute investigations and administrative and civil actions, enter various orders, and impose significant monetary penalties, and can transmit evidence to the U.S. Attorney General, who can bring criminal proceedings. In addition, violating securities registration requirements entitles the purchasers to rescission rights under federal and state laws. This blog post compiles some of the best practices for conducting a 506(b) offering in a bullet-pointed list for easy reference.
[Read more…]Verifying Accredited Investors in a Rule 506(c) Offering
Companies raising capital that are relying on Rule 506(c) (often informally called “Accredited Investor Crowdfunding”) for their offering of securities have several options as to how to verify whether their investors’ are indeed “accredited investors.” Since most offerings of securities generally rely on Rule 506(b) which allows for the investor to self-verify (e.g., through a simple questionnaire), founders are not as familiar with the verification process of Rule 506(c). This post will briefly explain Rule 506(c) and describe some of the options companies have to verify its investors as accredited investors.
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