Writing The Risk Section Of Your Private Placement

When writing your Private Placement, the risk section is one of critical parts. And given the mindset of seeking investors to invest in your transaction, there is some incongruity in that with the risk section you are telling your prospective investors all the reason they should not invest in your deal.

The reason the risk section is so important for your private placement is two-fold. First is to warn investors of the risk of inverting in the deal. The securities laws are in place to provide protection for the investor. Second, is to protect the issuer and you, the sponsor (the person putting the deal together), from potential claims that material risks were not disclosed.

There are a couple of things to keep in mind as you write the risk section of your private placement. First and foremost is to be totally transparent. Be factual and truthful in articulating the risks of your transaction. Look beyond your role as the one seeking investment capital and put yourself in the shoes of the investor; what would you want to know.

Second, present the risks of the transaction as they relate specifically to your deal. Avoid just stating general risks that would apply to any and all investments. For example, instead of just stating something like “…our business is affected by the economy”, your might instead state that “…our sales are dependent on discretionary income, which would be negatively affected by a slowing economy”. See the difference?

Third, just state the risk. Do not soften or try to mitigate the risk you are stating with commentary on why the risk may not happen. By doing so you are voiding the whole purpose of the risk section.

Finally I want to share a simple method on how to think through the risks in your transaction. Take your income statement and starting with revenue, think about all the things that could negatively affect each line item. For example looking at revenue would focus you on a major customer and the effect the loss of that customer would have on the business. Similarly, looking at the costs of good sold would focus you on the risk of having a single manufacturing facility and the effect that losing your facility would have on the business.

Your private placement is a document that is meant to help prospective investors make prudent decisions. Your role as an honest sponsor is to layout the facts and present your transaction, warts and all, as transparently as possible.