“Do I need an attorney to draft my securities offering documents? And when do I need a PPM?”
The first question is akin to asking whether you need a surgeon to perform brain surgery. After all, everyone has a knife in his or her kitchen and surely anyone could order a scalpel online. So what’s the big deal? We’ve all seen a picture of what the brain looks like, and who hasn’t seen brain surgery performed on TV? We’re all experts, right? Well, unless I was in an emergency situation and I knew that someone was going to die if the pressure wasn’t removed on that person’s brain immediately, I don’t think I would risk it. And you shouldn’t either.
When Do I need a PPM?
There are companies out there who claim you don’t need a Private Placement Memorandum to do a Regulation D, Rule 506(c) advertised offering. Technically, they are correct — if all investors are accredited. But, what’s the downside of not providing one?
Let’s examine the purpose of a Private Placement Memorandum (PPM). It serves as the disclosure document required by the Securities and Exchange Commission (SEC).
When selling securities, the issuer has an obligation to give investors all of the material facts they need to make informed consent.
The PPM provides important information relative to an investor’s understanding of the securities being offered and the purpose of the Company. This includes:
- Disclosing all of the risks of the investment,
- Describing the structure of the company,
- Identifying who is on the management team and their prior experience (or lack thereof),
- Noting any conflicts of interest,
- Listing projected Distributions to Investors,
- Detailing all of the different ways the members of the management team might earn money from the investment, and
- Providing a summary of how the Company will be operated, among other things.
The PPM and its Exhibits are a standardized way to provide this information. Further, providing all of the information required in a well-drafted PPM may serve to shift the risk of loss from the issuer to the investor.
Without a PPM, you may have a harder time proving that you did this or that the investor assumed the risk of the investment. Investors might claim: “I wouldn’t have invested if I’d known that…” And it is likely “that” would have been discussed in the PPM if you had one.
A PPM is required for non-accredited investors.If you are selling securities under Regulation D, Rule 506(b) and will allow unaccredited investors in your offerings, you are required to provide a PPM containing information similar to that required in a Regulation A Offering Circular (Form 1-A, Part II).
But what if you aren’t allowing unaccredited investors in your Rule 506(b) offering? Or what if you are selling securities under Regulation D, Rule 506(c)? Is a PPM still required?
Technically, it is not. But as the issuer of securities, you still have the obligation to give investors all of the material facts they need to make informed consent, even if all investors are accredited.
When is Foregoing a PPM Worth the Risk?
Perhaps if you are doing a small deal with 3-4 accredited investors you know well, the risk might be small and it might be worth doing a deal without a PPM. But what if you are advertising to a large group of strangers? Is it still worth it?
Before you take on risky behavior, decide what you have to lose and whether it’s worth foregoing the insurance policy a PPM can provide. And don’t forget, the funds you raise from investors can be used to reimburse you for the legal expense of having your securities offering documents professionally drafted – so, in effect, this is an insurance policy that protects you that your investors will pay for. Why wouldn’t you want that?
Is it Really Worth the Risk to Bypass Having an Attorney Draft Your Offering Documents?
If someone tells you don’t need a PPM, they might not have your best interests in mind. Consider the source of such information and decide who it serves before you make your decision.
If you have any questions on this or any other securities or deal structuring matter, please contact us to schedule a free 30-minute consultation by calling 844-Syndic8 (844-796-3428) or emailing us at info@SyndicationAttorneys.com.
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