Private Placements

Private Placements Practice Overview

Raising money for a business is challenging in any environment, but it is especially so in today’s tumultous capital markets.

The objective of our private placements focus area is to provide personalized outside general counsel services to small businesses and entrepreneurs, thereby enabling them to grow, build, and innovate enterprises that develop and improve products and services, provide employment opportunities, revitalize communities, and sustain American innovation and global competitiveness.

As business advisory attorneys, we listen to our clients, develop understanding of their business plan and goals, craft the best legal solution that satisfies their business needs, and provide appropriate counsel.

The Callender Law Firm provides a full suite of business and financial law services, including preparation of private placements offering documents under Regulation D (or Reg D) of the Securities Act of 1933, and assists business clients seeking to raise money through private placements.

Regulation D Private Placements Offerings

When a company raises money by selling stock, bonds, membership interests, limited partnership interests, limited liability company (LLC) interests, or any other ‘investment contract’, it is selling securities and must comply with applicable federal and state securities laws. This rule applies regardless of the form of compensation received in exchange for the security, for example, cash, stock in another company, services, or any other property.

The Securities Act of 1933 requires SEC (Securities and Exchange Commission) registration of any offer to sell securities unless the offering company meets requirements of a specific exemption. Rules 504, 506 (b), and 506(c) of Regulation D provide exemptions from registration requirements that allow some companies to offer and sell their securities without the requirement of registering the securities with the SEC. To qualify for an exemption, a company must meet specific requirements of the exempting rule. As with any security offering, whether exempt from registration requirements or not, both Federal and applicable state “Blue Sky” laws regulating securities require reasonable and full disclosure to purchaser prospects. The Private Placement Memorandum (or PPM) is the main disclosure document in a Regulation D private placement offering.

Under Texas law (Rule 139.19, Tex. Admin. Code, Title VII), companies satisfying requirements substantially similar to those of Reg D Rule 506 are exempt from registration requirements of the Texas Securities Act if they offer and sell their securities to “accredited investors”. This is known as the Accredited Investor Exemption.

Although companies using a Regulation D  Rule 504, 506(b), or 506(c) exemption are not required to register their securities and generally do not have to file reports with the SEC, they must file a “Form D” after first selling 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. The SEC requires electronic filing of Form D and disclosure of the date of first sale in the offering.

Rule 504 Exemption. Under Rule 504 of Reg D, a qualifying company is exempt from the registration requirements of federal securities laws when it offers and sells up to $5,000,000 in securities in any 12-month period. A company can use this exemption only if it is not a “blank check” company and does not have to file reports under the Securities Act of 1934. Additionally, the exemption generally prohibits companies from soliciting or advertising their securities to the public, and purchasers receive “restricted securities” (that is, they may not sell the securities without registration or an applicable exemption). Under certain specific circumstances and satisfying additional requirements, Rule 504 may allow companies to sell securities that are not restricted.

A “blank check” company is a developmental stage company issuing penny stock, and has (1.) no specific business plan or purpose, or (2) a business plan to merge with an unidentified company or companies.

Rule 506(c) Exemption, General Solicitation. A business entity, qualifying for exemption under Rule 506(c) of Regulation D, may broadly solicit and generally advertise an offering, if and only if:

• All purchasers are accredited investors; and
• The issuer takes reasonable steps to verify purchasers’ accredited investor status.

Rule 506(c) purchasers receive ‘restricted securities’. A company must file a Form D notice with the SEC within 15 days of the first sale of securities in the offering. While the Securities Act provides a federal preemption from state registration and qualification under Rule 506(c), the states still have authority to require notice filings and collect state fees.

Financial statement requirements applicable to this type of offering are:

• Financial statements should 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 (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.

Rule 506(b) Exemption, Private Placements. Rule 506(b) of Regulation D is a “safe harbor” for the private offering exemption of Section 4(a)(2) of the Securities Act. Under the Rule 506 exemption, companies can raise an unlimited amount of money in private placements. To obtain the Section 4(a)(2) exemption, a qualifying company must satisfy the following requirements:

• The company cannot use general solicitation or advertising to market the securities;
• The company may sell its securities to an unlimited number of “accredited investors” and up to 35 other purchasers.
• All non-accredited investors, either alone or with a purchaser representative, must be “sophisticated” – that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;
• Purchasers receive “restricted” securities, meaning that the securities cannot be sold for up to a year without registering them.

Companies have discretion on what information to give to accredited investors in private placements, provided it does not violate the anti-fraud prohibitions of the federal securities laws. However, companies must give non-accredited investors disclosure documents generally the same as those used in registered offerings. If a company provides information to accredited investors, it must also provide that same information to non-accredited investors. The company (“issuer”) must also be available to answer questions from prospective purchasers.

Who is an accredited investor?

Rule 501 of Regulation D defines an accredited investor 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, excluding the value of the primary residence of such person;
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 purchase is directed by a sophisticated person.

What is a Private Placement Memorandum (PPM)?

In private placements, the private placement memorandum is the primary disclosure and marketing document of a private placement offering. Typically, the PPM details the nature of the offering including type and number of securities offered, minimum offering amount, minimum subscription, disbursement of proceeds, risk factors, forward looking information, management, management compensation, description of units, placement plan, and other reasonable relevant information or disclosures.

The PPM should not contain any false, misleading, or deceptive information. Moreover, the issuer shall not leave out any relevant information, known to issuer, the effect of which omission renders the PPM false, misleading, or deceptive.

Regulation Crowdfunding. Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012 added Securities Act Section 4(a)(6) that provides exemption from registration for certain crowdfunding transactions. Regulation Crowdfunding permits eligible companies to offer and sell securities through crowdfunding. The Regulation Crowdfunding exemption:

• requires all transactions under Regulation Crowdfunding to occur online through an SEC-registered intermediary, either a broker-dealer or a funding portal;
• permits an eligible company to raise a maximum aggregate amount of $1,070,000 through crowdfunding offerings in a 12-month period;
• limits the amount individual investors can invest across all crowdfunding offerings in a 12-month period; and
• requires disclosure of information in filings with the SEC and to investors and the intermediary facilitating the offering.

Crowdfunding Purchasers receive “restricted securities” that generally cannot be resold for one year.

Contact us today to move forward with your business plan and to schedule an appointment for a free initial consultation! We will help you get your private placement done correctly, worry-free, and legally.

Information on this webpage contains excerpts from the SEC’s website located at http://www.sec.gov/answers/regd.htm.