Securities Law Implications of Private Placement Memoranda in Regulation D Offerings

When companies (whether public or private) want to raise capital to start their business or fund operations, improvements, or expansion of the business, they often turn to offering and selling securities to investors to raise the money they need. 

While capital raising is never easy, securities are one of the most popular ways for startups and established companies alike to raise money from investors. But before securities can be offered or sold, they must be registered with the Securities and Exchange Commission (SEC) unless they come within a legal exemption. SEC registration is a laborious, complicated, and expensive process. Which is why most companies look for an exemption from registration under the Securities and Exchange Act, such as Section 4(a)(2) or Regulation D (“Reg. D”). Not having to register securities can save a company a significant amount of time and expense. 

Exempt security offerings are referred to as “private placements.”

Quite often, only accredited investors or those who meet the legal standard of “sophisticated investor” can participate in a private placement offering. This frequently means that most private placement opportunities are reserved for institutional or high-net-worth investors. 

Because private placements are less regulated than public offerings, issuers are not required to provide investors with a prospectus or make detailed disclosures. But that does not mean that private placement issuers do not have to make disclosures. They do. It is simply that the disclosures required are not as onerous as those required of companies making public offerings. Instead of having to file a prospectus detailing the company’s finances, risk, management team, and specific details of the offer as required for a public offering companies engaging in private placement offerings are allowed to use a less formal and less cumbersome document.

What is that document?

It’s called a “PPM.”

What is a PPM?

Short for private placement memorandum, a PPM (sometimes referred to as an “offering memorandum”) is a legal document issued to investors to inform them of the risks, objectives and terms of a private placement. The purpose of the PPM is to provide prospective investors with the information they need to make an informed decision about the private offering. It also serves to protect issuers from liability associated with selling unregistered securities.

PPMs can be used for purposes other than raising capital, of course, but they are most often used in capital raises. Further, there is no single standard for writing a PPM. Yet PPMs are required to contain certain information. Among other things, a PPM should include:

• an executive summary or introduction

• financial statements

• biographies of management personnel

• company background and structure information

• details of the offering/description of the securities

• risks associated with the offering

• tax information and securities law compliance

• information on how proceeds will be used, 

and more.

PPMs can be used as marketing tools to attract investors. However, the PPM is not itself an “offering.” Rather, it is a disclosure document intended to provide prospective investors with the information they need and want to know when conducting their own due diligence regarding the offering.

What is the Legal Role and Requirements of PPMs Under Regulation D?

As noted above, for private placements, the PPM takes the place of a prospectus. Yet federal law does not actually require issuers to provide a PPM to prospective investors. That does not mean, however, that issuers making private offerings should not have a PPM. They absolutely should.

Wait! Why, if the law doesn’t require it, should issuers have a PPM?

Because a proper and effective PPM can assist companies in complying with — and proving that they took steps to comply with — Reg. D’s other requirements. Having a PPM is considered an industry “best practice.” It’s also a smart way to avoid investment fraud claims as well as potential SEC enforcement actions. 

For example, Rule 506(b) and 506(c) of Reg. D has different requirements with regard to whether a private offer can be made to accredited investors only, or to accredited and non-accredited investors. A PPM can confirm that an offer was indeed made in compliance with the specific requirements of a particular exemption. 

Plus, issuers of private placements are still subject to the federal anti-fraud laws. An effective PPM ensures that all necessary disclosures are made to potential investors — thus enabling companies to comply with the federal law’s anti-fraud provisions.

Although private placements do not have to make the same detailed disclosures that public companies must, their duty to disclose is still a serious one. Failure to properly disclose information can result in SEC or federal anti-fraud enforcement actions. It is critical to note that it is not enough to simply make disclosures. The law requires that the PPM disclose all material facts that a reasonable investor would consider important in making an investment decision. In addition, PPMs must be accurate. Misrepresenting or omitting material facts in a PPM can result in violations of the federal and/or state securities laws.

It should also be noted that even if a PPM is used, issuers who rely on Reg. D exemptions still must file a Form D with the SEC within 15 days of the first sale of securities in the offering. 

A properly drafted PPM not only provides critical information for prospective investors, but it is an essential tool for compliance and risk mitigation in private securities transactions for issuers. By clearly disclosing the unregistered nature of the offering, issuers can protect themselves against investor claims and comply with the anti-fraud requirements for unregistered offerings. It is also important that the PPM address any restrictions on the transfer of the securities and disclose broker-dealer compensation, along with any conflicts of interest that may exist. When properly drafted and accurate, a PPM can effectively protect issuers from civil liability and SEC enforcement actions.

It's important to have a good understanding of private placements and the laws governing them. Whether it is knowing why to use a PPM or verifying accredited investors, the securities laws touch on a vast number of financial and investment issues of importance to all investors and issuers. VerifyInvestor.com makes verifying accredited investors easy, cost-effective, secure, and reliable. Our services (which also include AML/KYC, qualified purchaser, and qualified client verification) are always code-compliant and confidential. We help companies fully and easily comply with their legal obligations to verify accredited investors.