reg d

What Is A Private Placement?

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A Private Placement is a capital transaction between an issuer, the entity seeking to raise capital, and an investor, or group of investors. When discussing a private placement, its usually in the context of a private company raising capital; however, public companies will also seek to raise capital using a private placement. In the latter case, this type of transaction is known as a “PIPE,” which stands for private investment in a private entity.

Private placements fall under what is know as Regulation D, or Reg D of the Securities Act of 1933. Private placements are also sometimes called Reg D offering. Reg D is what provides for the registration exemption under the Securities Act requirement that any offer to sell securities must either: 1) be registered with the SEC, or 2) meet an exemption. The exemptions provided under Reg D are known as Rule 504, Rule 505 and Rule 506.

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Get Professional With A Private Placement Memorandum Template

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Private placements are not just for multi-million dollar deals. Even if you are seeking raise $100,000 to acquire a franchise or a piece of investment real estate, you are still required to present prospective investors with a private placement memorandum, or PPM. The challenge is that PPMs can be expensive to have drafted. A good attorney will cost you $20,000 or more. A PPM consultant will cost $5,000 to $15,000 (and you should still have an attorney to review it). Unfortunately, these costs are either i) out of reach for many businesses and entrepreneurs, or ii) recognized as sunk money if their deal doesn’t close.

A great alternative for many business owners and entrepreneurs is to purchase a Private Placement Memorandum Template. A well-formulated private placement template will help guide the issuer through the process from the term sheet through the business description. Specifically, the template should help the issuer craft the memorandum so that the prospective investor can make an intelligent Go / No-Go decision. Of course the template can only go so far; the issuer must be totally transparent in presenting the business and opportunity – warts and all. There should be no commission of false statements or omission of facts that, had they been presented, would lead the reader to a different conclusion.

Aside from being required to be legally compliant with securities laws, a well-written PPM will present you and your company in a professional manner. Your private placement template should include the same things you would want to see if you were sitting in the seat of the prospective investor. Some of these sections include investor disclosures, a term sheet, risk section, business description, transaction description, capitalization, sources and uses of funds, financial presentation (including discussion and analysis), description of the securities being issued and a tax discussion.

So if you want to save some money and mitigate your risk of ending up with huge busted deal expenses, consider using a private placement memorandum template. Just make sure that its flexible enough to accommodate your transaction and that the template itself is set up to guide you through each section. Finally, regardless of where you purchase your PPM template, make sure that after you get your PPM drafted, have your attorney review it and provide comments.

Reg D – What Is It?

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Reg D, or Regulation D, refers to the SEC exemption provided to businesses for issuing debt or equity securities without going through the SEC registration process. These type of security offerings are targeted at private investors. Within Reg D, the SEC provides three rules that guide the amount of the offering and who the target prospective investors are. These rules are know as rule, 504, 505, and 506.

The document used to comply with Reg D is known as a Private Placement Memorandum, or PPM. The PPM can be thought of as a prospectus for a private offering. A PPM can be accomplished in one of three manners – through a competent securities attorney, a private placement writing service, or through the purchase of a private placement template. Having an attorney draft your private placement memorandum can cost north of $20,000. There are several private placement consultants that will draft your private placement for $5,000 to $15,000. And finally, a private placement template will cost you around $300. However, in the case of writing your own PPM with a template, or using a private placement service, you should factor in the cost of have a good securities attorney review and sign off on your PPM before you hit the streets.

Writing your PPM is not difficult, but will take you some time. While this is a little of an oversimplification – the PPM essentially your business plan with a term sheet. Of course, it more than that, but the bulk of your PPM will be the who, what, where, how and why of your business:

  • who you are
  • what your company does
  • what your company sells
  • why  customer buy what you sell
  • who your customers are
  • how you manufacture or go to market
  • who your competitors are
  • what are the industry drivers
  • how your financial performance has been

I think, based on the calls I receive, the hardest part for business owners is trying to figure out what type of security to issue and what the cost of that security should be. Again, not hard, but if you are not familiar with certain corporate finance terms and concepts, there can be a very steep learning curve.

The other difficult part of writing your offering memorandum, is the risk section. In this section you will want to discuss all of the risks of your company, the industry, and your transaction. You should do this without giving in to the natural inclination of wanting to mitigate each risk (hey, your trying to get a deal done, right?). You should approach this section as coming up with all of the reasons that an investor wouldn’t want to invest in your deal.

Once you have your private placement memorandum drafted and signed off by an attorney, you are ready to start “smiling-n-dialin.”

Regulation D provides companies with a great opportunity to raise private capital for their business needs. A security issued under Reg D can be accomplished by a start-up or a existing mature company.

Using Private Placements For Reg D Capital Raising

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Private placements are a great alternative for businesses to raise capital. Permitted under Regulation D, also known as Reg D, companies can seek capital from individual investors. These individual investors will typically need to meet the accredited investor requirements of Reg D.

Private placements can be used to raise debt or equity, and can be used for any number of purposes. Businesses have used private placements to raise capital for growth initiatives, acquisitions, and new business ventures.

The challenge for businesses is the traditional initial cost to prepare a private placement memorandum. These costs are typically $20,000 and can run as high as $40,000. The concern many businesses have is that these costs are incurred before they even begin the actual process of pitching prospective investors. The good news is that with the right template, businesses can write their own private placement memorandum and then have their attorney review for significant upfront cost savings.

See all of our Private Placement Templates

Accredited Investor

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Are you pitching your private placement to Accredited Investors? Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as “accredited investors.”

The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:

1. A bank, insurance company, registered investment company, business development company, or small business investment company;

2. 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;

3. A charitable organization, corporation, or partnership with assets exceeding $5 million;

4. A director, executive officer, or general partner of the company selling the securities;

5. A business in which all the equity owners are accredited investors;

6. 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;

7. 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

8. A trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

Why A Private Placement Memorandum

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Why would you need to draft a Private Placement Memorandum? Where do you go for capital if you run or own a private company? There are several sources of capital for privately held businesses. One is the capital generated internally by judiciously managing the company’s working capital. Another source is your local bank, which is the one the primary financing vehicles for private companies. And of course, there is always the owner’s pocket.

But where do you go if your capital needs outstrip what is available from a bank, especially if your company is in need of permanent capital to fund long term growth objectives, capitalize a start-up, or finance an acquisition? If you do not have the wherewithal to write checks yourself, you will need to raise outside capital.

Junior Capital
Junior capital is a term used to describe capital that sits below bank debt, and includes mezzanine, or subordinated, debt, and equity. Sources of junior capital include institutional investors, such as insurance companies, hedge funds, private equity funds, mezzanine funds and SBICs.

Individual Investors
Another source of junior capital is individual investors. This class of investor includes friends, family, and high net worth individuals. And if you are issuing securities to individual investors, you may be required by law to write and distribute a private placement memorandum to each of your potential investors.

Protect Yourself Against Securities Fraud Claims
Besides the compliance issues, there are two major reasons for preparing a Private Placement Memorandum. First is to give you cover against securities fraud claims. By writing and delivering a PPM, you are establishing a record of what has been communicated to the investors about the offering and the company. When issuing securities, state and federal law is most concerned with securities fraud issues. Anti-fraud requirements call for the issuer to not make any unture statements of a material fact, or to leave out a material fact, the absence of which would make any statements made misleading; i.e. the issuer must disclose all relevant and material facts of the issuance and the company. A well-prepared PPM will establish a record of the information presented to investors, and will provide a level of protection for the company and issuer against claims of securities fraud.

Professional Image
The other reason for writing a Private Placement Memorandum is that it presents a professional face to the issuance. The image presented to investors by presenting a document that is well-prepared is one of professionalism and competency. Approaching sophisticated investors with a poorly drafted offering document will scream “unprofessional”, “novice”, “don’t know what they’re doing” – the exact opposite of what you are trying to project.

There are many reasons to use a PPM. And now with the availability of PPM templates, the upfront costs of using a PPM are manageable.

Contents Of A Private Placement

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Now that you have made the decision to use a Private Placement Memorandum, what goes in it? The main concern of State and Federal securities laws are the protection of the investor. In this context, there is one cardinal rule – tell the truth, the whole truth and nothing but the truth. This means do not misrepresent material facts, and do not omit material facts where the inclusion of such facts would lead the prospective investor to a different conclusion.

Aside from being truthful and factual, your PPM should provide your prospective investor with all the information necessary to make an intelligent investment decision. It is common sense – put yourself in the investor’s shoes and think about what information you would like to have.

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”.

The following includes some of the sections that should be included in your Private Placement Memorandum:

• Notices to Investors: The Notice to Investors section includes federal and state disclosure legends, providing certain notices to prospective investors informing them that the securities described in the PPM are not registered. Additionally, some states have specific disclosure language they will require over and above the federal disclosures.

• Summary of Terms: The Summary of Terms 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: This section sets forth the risks specific to the Issuer and the risks 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 Interest: The conflict of interest section identifies and describes potential conflicts of interest of the Issuer, and its principals or affiliates. As an example, one of the principles may provide accounting services for the Issuer, or one of the principles may be a significant customer of the Issuer.

• Description of the Issuer, its Business and the Business Plan: Describes the business of the Issuer including its products, strategy, customers, sales and marketing, operations, industry and competitive analysis, and discussion of management.

• Transaction Description: The transaction section describes the transaction, including a schematic of the deal, sources and uses table and capitalization.

• Financial Information: This section includes 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 forecast.

• Misc Sections: These sections will typically comprise of tax matters, and a description of the capital stock of the Issuer.

• Subscription Section: This section provides the prospective 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 an investor’s investment decision. Items that may be part of the appendices include the letter of intent, audited financial statements, shareholder’s agreement, etc.

While all of this seems complicated, you can make it easy on yourself by using a Private Placement Memorandum template. Using a PPM template will ensure that you end up with a professional-looking offering memorandum, while easily saving thousands of dollars.

Regulation D Offering

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Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D (or Reg D) contains three rules providing exemptions from the registration requirements, allowing some smaller companies to offer and sell their securities without having to register the securities with the SEC. For more information about these exemptions, read our publications on Rules 504, 505, and 506 of Regulation D.

While companies using a Reg D exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what’s known as a “Form D” after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s executive officers and stock promoters, but contains little other information about the company.

As an investor, if you are thinking about investing in a company that is issuing securities which have not been registered with the SEC, you should access EDGAR Company Search to determine whether the company has filed a Form D. If the company has filed a Form D, you can request a copy. If the company has not filed a Form D, this should alert you that the company might not be in compliance with federal securities laws.

You should always check with your state securities regulator to see if they have more information about the company and the people behind it. Be sure to ask whether your state regulator has cleared the offering for sale in your state. You can get the address and telephone number for your state securities regulator by calling the North American Securities Administrators Association at (202) 737-0900 or by visiting its website. You’ll also find this information in the state government section of your local phone book.

Rule 504

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Rule 504 of Regulation D provides an exemption from the registration requirements of the federal securities laws for some companies when they offer and sell up to $1,000,000 of their securities in any 12-month period.

A company can use this exemption so long as it is not a blank check company and does not have to file reports under the Securities Exchange Act of 1934. Also, the exemption generally does not allow companies to solicit or advertise their securities to the public, and purchasers receive “restricted” securities, meaning that they may not sell the securities without registration or an applicable exemption.

Rule 504 does allow companies to sell securities that are not restricted, if one of the following circumstances is met:

  • The company registers the offering exclusively in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors;
  • A company registers and sells the offering in a state that requires registration and disclosure delivery and also sells in a state without those requirements, so long as the company delivers the disclosure documents required by the state where the company registered the offering to all purchasers (including those in the state that has no such requirements); or
  • The company sells exclusively according to state law exemptions that permit general solicitation and advertising, so long as the company sells only to “accredited investors.”

Even if a company makes a private sale where there are no specific disclosure delivery requirements, a company should take care to provide sufficient information to investors to avoid violating the anti fraud provisions of the securities laws. This means that any information a company provides to investors must be free from false or misleading statements. Similarly, a company should not exclude any information if the omission makes what is provided to investors false or misleading.

While companies using the Rule 504 exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what is known as a “Form D” after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s owners and stock promoters, but contains little other information about the company.

Rule 505

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Rule 505 of Regulation D allows some companies offering their securities to have those securities exempted from the registration requirements of the federal securities laws.

To qualify for this exemption, a company:

  • Can only offer and sell up to $5 million of its securities in any 12-month period;
  • May sell to an unlimited number of “accredited investors” and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions;
  • Must inform purchasers that they receive “restricted” securities, meaning that the securities cannot be sold for at least a year without registering them; and
  • Cannot use general solicitation or advertising to sell the securities.

Rule 505 allows companies to decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that generally are the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well. The company must also be available to answer questions by prospective purchasers.

Here are some specifics about the financial statement requirements applicable to this type of offering:

  • Financial statements need to be certified by an independent public accountant;
  • If a company other than a limited partnership cannot obtain audited financial statements without unreasonable effort or expense, only the company’s balance sheet (to be dated within 120 days of the start of the offering) must be audited; and
  • Limited partnerships unable to obtain required financial statements without unreasonable effort or expense may furnish audited financial statements prepared under the federal income tax laws.

While companies using the Rule 505 exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what is known as a “Form D” after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s owners and stock promoters, but contains little other information about the company.