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Private Placement Memorandum

Private Placement Memorandums Handled by an Experienced California Lawyer

Regulation D of the Securities and Exchange Commission permits the selling of unregistered securities to specific investors based on exemptions. Companies can sell unregistered securities to private parties by means of a private placement memorandum offering. The offering is made by means of a private placement memorandum offering, drafted by a securities attorney, which explains the offering and the risks. The offering must meet the requirements of regulation D and the three rules (Rule 504, 505 and 506), describing the specific exemptions permitted.

Private Placement Memorandum

While the private placement does not need to be registered, the memorandum still must comply with the anti-fraud requirements of the federal Securities Act and any state securities statutes or regulations that may apply (known as Blue Sky laws). Given the potential complexity and length (the private placement memorandum may run 25 to 75 pages) you want an experienced securities lawyer reviewing your offering and drafting the private placement memorandum.

At the Law Offices of Peter C. Bronstein, our Los Angeles firm offers business clients experienced representation with a wide variety of business law and securities issues, including drafting of private placement memorandums. Contact us today to further discuss your business' needs.

The core requirement for the securities law is the concept of disclosure; investors must receive enough information from a company selling securities for them to evaluate the risks involved and determine if they are willing to accept those risks. To understand the complexly of the requirement, the following is the SEC's summary for how some of the Rules under Regulation D functions:

Rule 505 of Regulation D

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 six months or longer without registering them; and
  • Cannot use general solicitation or advertising to sell the securities.

Rule 504 of Regulation D

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.

Rule 506 of Regulation D

Rule 506 of Regulation D is considered a "safe harbor" for the private offering exemption of Section 4(2) of the Securities Act. Companies using the Rule 506 exemption can raise an unlimited amount of money. A company can be assured it is within the Section 4(2) exemption by satisfying the following standards:

  • 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 purchases. Unlike Rule 505, 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;
  • Companies must 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 are generally 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 be available to answer questions by prospective purchasers;
  • Financial statement requirements are the same as for Rule 505; and
  • Purchasers receive "restricted" securities, meaning that the securities cannot be sold for at least a year without registering them.

Experienced Private Placement Attorney

These rules are merely two of the regulations that apply to a private placement offering and some of the topics that need to be explained and disclosed within a private placement memorandum ("PPM"). A PPM provides the business the opportunity to present all elements of the business, including potential risks, to the investor.

Because of the complexity and the potential risk of violating the federal and state securities law and the accompanying liability to investors, these documents should be prepared in consultation with a lawyer with years of experience drafting private placement memorandum and dealing with the federal and state securities law.

For more information about a private placement memorandum or another business issue, contact the Law Offices of Peter C. Bronstein in Los Angeles, California. Call 310.203.2249 for a FREE initial consultation. For your convenience, evening and weekend appointments are available by request.