Are You Missing Critical Components of Your Private Placement Memorandum?
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Now what? You have made the decision to use a Private Placement Memorandum, but 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 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 Private Offering Memorandum should provide a prospective investor with all the information required 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 see. 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 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 private placement memorandum are unregistered. Additionally, some states have specific 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 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.
• Conflict of Interests: Identifies and describes potential conflicts of interests of the issuer, and its principals or affiliates. As an example, one of the principles may provide accounting services for the issuer, or 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: This section describes the transaction, including a chart 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 plan.
• 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 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 private placement memorandum template will ensure that you end up with a professional-looking offering memorandum, while easily saving $15,000.
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