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Entries in Private Placement (9)

Thursday
Jul112013

506(c) - Using General Solicitation /Advertising in Reg D Private Offerings.

Yesterday, the SEC took a big step in finally making the JOBS Act (or at least a portion of it) a reality for businesses trying to raise capital.  One of the biggest problems with the private offerings has been the difficulty in finding investors.  General solicitation / advertising has always been a no-no unless there was a public, registered offering.  With the introduction of new Rule 506(c), that all changes (albeit with some important caveats).

Prior to New Rule 506(c) - No General Soliciation / Advertising

Prior to the approval of 506(c), most exempt private offerings required that businesses raising capital have a "pre-existing substantive relationship" with anyone that invests in that business's private offering.  That means no advertising, no website investor solicitation, no flyers, no social media....you get the point.  It made it difficult and time consuming to find potential investors by severely limiting the pool of potential investors to which a business had access.  

Rule 506(c) - Lifting the Ban on General Solicitation/ Advertising

With the SEC's approval of the final rule on July 10, 2013, certain types of private offerings will be permitted to employ general solicitation and advertising to offer securities and solicit potential investors - no more requirement to have a "pre-existing substantive relationship" with investors.  It is important to note that, although yes the regulation has been approved - it is not effective until 60 days after publication in the Federal Register.

There are, of course, caveats and conditions.

There are, of course, a few hoops businesses will need to jump through in order to employ general solicitation and advertising without going awry of federal securities rules and regulations.  Of course, you should consult with an attorney to help craft a private offering structure and documents that comply with the new regulations.  That being said, in a nutshell, in order to employ general solicitation / advertising in a private offering:

  • An issuer must take reasonable steps to verify that the investors are accredited investors.
  • All purchasers of securities must fall within one of the categories of persons who are accredited investors under an existing rule (Rule 501 of Regulation D) or the issuer reasonably believes that the investors fall within one of the categories at the time of the sale of the securities.

The determination of the reasonableness of the steps taken to verify an accredited investor is an objective assessment by an issuer. An issuer is required to consider the facts and circumstances of each purchaser and the transaction.  What this likely means is that a widely posted social media solicitation would likely require a higher degree of assessment than a post to pre-screened network of accredited investors.

Taking reasonable steps to ensure investors are accredited.

An individual investor (the requirement for entities is different) is considered accredited if:

  • Individual net worth or joint net worth with a spouse exceeds $1 million at the time of the purchase, excluding the net value of a primary residence, OR
  • Individual annual income exceeded $200,000 in each of the two most recent years or a joint annual income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year.

In the past, it was enough to have a reasonable belief that either of these conditions were true - and to simply get a signed representation from the investor.  Now "reasonable steps" are required.  Luckily, the SEC provided a "non-exclusive" list of methods that issuers may use to satisfy the verification requirement for individual investors, which include:

  • Reviewing copies of any IRS form that reports the income of the purchaser and obtaining a written representation that the purchaser will likely continue to earn the necessary income in the current year.
  • Reviewing copies of recent documents that verify assets and income.
  • Receiving a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that such entity or person has taken reasonable steps to verify the purchaser's accredited status.

A New Box to Check on Form D.

The new rule also amends Form D, which is the notice that issuers must file with the SEC when they sell securities under Regulation D. The revised Form D adds a new check box that indicates if an issuer is claiming the new Rule 506 exemption that would permit general solicitation or general advertising.

A Few Other Important Things to Note.

The SEC also approved a rule disqualifiing felon and other "bad actors" from Rule 506 offerings.  This blog post won't get into that, but take a look, and be sure to discuss with your attorney.

The SEC is also proposing some significant changes to Form D for private offerings that choose to employ general solicitation and advertising.  Any changes there will take awhile as right now it is just a proposed rule, but certainly something to keep an eye on.

As always, you should consult an attorney with experience in these matters.

 

 

 

 

Wednesday
Sep192012

Latest on JOBS Act: SEC Proposed Rules to Permit General Solicitation in Private Offerings – What This Means for Your Business

One of the most difficult aspects of raising capital via a Private Placement / Private Offering is finding potential investors – let alone convincing potential investors to actually invest in your offering.  The main culprit of this difficulty is the prohibition on using general solicitation to get the word out about your Private Placement.  No advertising.  No standing on stage shouting out top a bunch of strangers that you are raising capital.  Nope – you basically need to have a pre-existing relationship – and that narrows your choices big time.

The JOBS Act FINALLY looks to be close to changing all that.

 

Section 201(a) of the JOBS Act requires the SEC to remove the prohibition on general solicitation and general advertising in offerings done pursuant to Rules 506 and 144A, so long as all purchasers of the securities are “accredited investors.”  Also, it requires you to take reasonable steps to verify that purchasers are accredited investors, using procedures developed by the SEC.

On August 29, 2012, the SEC proposed several amendments to Rules 506 and 144A to implement these requirements.  Highlighted below are the important proposed changes the SEC made, three ways it would benefit you when seeking to raise capital for your business, and two key concerns you should be aware of.

Proposed Rules

Proposed Rule 506(c) would permit general solicitation and general advertising.  However, if you generally solicit or advertise under this new rule, you would essentially have to: (1) take “reasonable steps” to verify that all of the purchasers are accredited investors; and (2) check a box on Form D indicating that you are acting pursuant to Rules 501, 502(a), and 502(d), which allow for general solicitation.

No specific method is required for verifying a purchaser’s accredited status.  Rather than creating specific safe-harbor steps, the SEC  has stated that the steps that you take would be required to be reasonable under the “particular facts and circumstances of each purchaser.”  The SEC included a non-exclusive list of factors that you would consider when taking reasonable steps to verify, including: (1) the nature of the purchaser and the type of accredited investor that the purchaser claims to be; (2) the amount and type of information that is available to you about the purchaser; and (3) the nature and terms of the offering, including the manner in which investors were solicited, and the terms of the investment, such as the minimum investment amount. 

There was been some criticism that the “reasonable steps” standard may raise privacy concerns for accredited investors if issuers must seek personal financial information as a "reasonable step." The SEC attempted to address this criticism in its release by stating that the greater the personal relationship the potential investor and the issuer have, the lesser the level of investigation required to meet the "reasonable steps" standard. The SEC has pointed out that information for use in verifying accredited investor status is available from various public and third party sources are available for certain information that could be used to substantiate a claim of accreditation. The SEC has also suggested that receiving a letter from an attorney, a broker-dealer, or an accountant of the investor may be enough for an issuer to rely on the investor’s claim that he is accredited.

You needn’t comply with the new rules.  If you were to comply with the existing 506 and 144A rules—and you do not generally solicit or advertise—you would not be subjected to the amended rules.  There would be no additional verification requirements.

Be sure to keep records.  Regardless of the particular steps taken, it would be important for you to maintain adequate records that document the steps taken to verify that a purchaser is an accredited investor.

 

Key Benefits of Proposed Rules

Broader access to investment capital.  If you are starting a business, the SEC’s proposed rules are good for you in that they would offer broader access to investment capital.  The ability to solicit and advertise your Private Placement / Private Offering to a larger pool of investors would make it easier for you to raise capital for your business.

2 Key Concerns

1.  The SEC provided no specific steps to verify a purchaser’s accredited status.  The SEC did not provide sufficient guidance as to what “reasonable steps” you should take to verify that a potential investor is an accredited investor.  It only provides that the steps you take be reasonable under the “particular facts and circumstances of each purchaser.”  No clear, bright-line rule is provided to protect you.  An important benefit of the JOBS Act is that it allows you to know with reasonable certainty that your offering is exempt from registration under the Securities Act.  If your receiving of the exemption is dependent on individual facts and circumstances, it takes away a lot of certainty.  If the SEC does not provide more guidance, you should be very cautious and obtain as much information from qualifying investors as you can—including a letter from their attorney, accountant, or broker confirming their investor status.

2.  There is inadequate investor protection.  The proposed rules to the JOBS Act do nothing to guarantee that investors are adequately protected in private offerings.  Commissioner Aguilar was the lone vote against the SEC’s proposal for this reason.  It would allow some fiscally shrewd opportunists to promote ambiguous, high-risk transactions to the public to get some quick cash. 

Request for Public Comment

The SEC urges the public to submit comments in regards to its proposed rules.  The SEC’s proposal and request for comment are available at http://www.sec.gov/rules/proposed/2012/33-9354.pdf.  Comments are due by October 5, 2012.

It will be interesting to see the SEC’s final adoption of these rules.  Be sure to check back for an update when it does so.

As always, you should be sure to consult experienced securities attorney before you engage in a private placement / private offering of securities.

Tuesday
Jan182011

Goldman Sachs to its US Clients - NO [FACEBOOK] SOUP FOR YOU!

Yesterday I was interviewed by the New York Post regarding my thoughts on why Goldman Sachs yanked its offer to its US clients to invest in Facebook, indirectly via a special purpose entity it set up that would act as a single shareholder of Facebook.  You can see the article here.  Here is the comment and quote they attributed to me:

Still, some legal experts said that Goldman is being overly cautious as there is little precedent for halting a private deal due to media attention.

"There's just no precedent for a deal being blown up because of hype in the media," said Brian Powers, an attorney specializing in private placements.

 

My understanding of the deal is that Goldman Sachs was offering shares of the special purpose entity to its high net worth, pre-qualified (i.e. accredited) investors.  The deal has been all over the media, as is anything that involves Facebook - and obviously anyone and everyone wanted in on the deal.  Problems arose on two fronts.  First, the SEC apparently was raising an eye over the requirement that private companies maintain no more than 500 shareholders.  I have no idea how many shareholders Facebook has, but the SEC was apparently concerned about this even though technically the Goldman Sachs deal was only creating 1 additional shareholder.

Second, and more importantly the reason being cited by Goldmans Sachs, the intense media attention made Goldman Sachs fear they would run afoul of the proibition against general solicitation and advertising in a private placement of securities - which this was intened to be.   The applcable regulation is rule 502(c), which states:

 

[N]either the issuer nor any person acting on its behalf shall offer or sell the securities by means of any form of general solicitation or general advertising, including, but not limited to, the following:
1) Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and 
2) Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.
The SEC and courts are pretty clear that an issuer can't just go out and advertise an offering to the general public in the newspaper..etc.  What is different here, though, is that there was no solicitation to the general public or even any sort of "advertisement" in general circulation - there was simply media attention - just lots of it.  The other difference here is that, despite the media attention, Goldman Sachs had no intention or desire to open the offering to anyone other than its own prexisting and pre-qualified clients.  On the surface, then, it doesn't seem like Goldman Sachs has done anything in contravention of SEC rules.
 
But that is a view from the outside, and I admit that I know very little about the facts here other than what has been reported in a few different media reports.  I don't know how the media attention started - did Goldman Sachs initiate it via a press release?  Was it leaked?  Did it offer the deal to its clients before the story broke?  A safer approach would have been to confidentially open the deal up to its clients BEFORE the story was released (or leaked) to the media.  If, instead, Goldman broke the story in the media BEFORE taking it to clients, the exposure to potentially blowing its exemption from the registration requirements is probably greater.

 

There is no way of really knowing what action the SEC may have taken had the offering remained on the table to Goldman's US clients. If I had to guess, though, this was simply a matter of eliminating an unecessary risk.  Media reports are saying that the offering was fully subscribed many times over, and I am guessing the entire offering can easily be subscribed via foreign clients. Rather than run the risk of drawing the ire of the SEC - I am betting Goldman decided to simply eliminate that risk and take the much less risky foreign money.

 

Wednesday
Aug042010

The Change to the Accredited Investor Definition - Exclusion of Primary Residence from Calculation of Net Worth

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was signed into law.  Among the slew of provisions contained in the legislation, is a change to what constitutes an accredited investor under the Securities Act of 1933.  

As I have blogged about in the past, one way to qualify as an accredited investor under Rule 501 of Regulation D is to be:

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

Section 413 of the Dodd Frank Act changes that, by requiring the SEC to adjust the definition of “accredited investor” under Regulation D to exclude the value of a natural person’s primary residence when calculating that person’s net worth (emphasis added):

The Commission shall adjust any net worth standard for an accredited investor, as set forth in the rules of the Commission under the Securities Act of 1933, so that the individual net worth of any natural person, or joint net worth with the spouse of that person, at the time of purchase, is more than $1,000,000 (as such amount is adjusted periodically by rule of the Commission), excluding the value of the primary residence of such natural person, except that during the 4-year period that begins on the date of enactment of this Act, any net worth standard shall be $1,000,000, excluding the value of the primary residence of such natural person

This is obviously an important change for anyone out there with a private placement of securities - who should seek legal counsel to make sure they are obtaining the appropriate representations from individual investors.

It will be interesting to see exactly how the SEC implements this, and how it will treat, for example, a mortgage on a primary residence in the determination of person's net worth.  There are a lot of people out west with upside down mortgages - so this change may actually help some people qualify as accredited investors depending on how the SEC interprets and acts on this.

Tuesday
May182010

Affordable PPM Attorney / Private Placement Attorney Services? Why Not!

I hear from entrepreneurs all the time who are trying to raise capital - either for a business start-up or to expand an existing and established business.  Many usually dread picking up the phone to speak with an attorney about preparing a PPM - due to the notion that such an endeavor will cost them upwards of $20,000 - $40,000!  Sure, there are some transactions that could merit legal fees in that range and possibly above - especially when you consider that most law firms will prepare a PPM on an hourly basis (which is always an expensive and intimidating proposition for the business owner/client).  

I don't do it that way.  Entrepreneurs raising capital need to focus on successfully raising capital while also running a business (after all, the business doesn't just shut down while the founders and officers are out raising capital) - the last thing they need on their mind is the uncertainty of mounting PPM related legal fees that may actually lure them into avoiding legal counsel during portions of the capital raising process.   It is crucial that businesses raising private capital work with legal counsel throughout the entire private placement process to make sure they remain in compliance with federal and state securities laws.  

If you are looking for a securities attorney to help you with a PPM and advise you through the private placement, capital raising process, here are a few ways you can help make you fees more affordable / predictable:

 

  1. Have a good thorough business plan prepared - in writing.  This saves an attorney lots of time trying to learn about your business - which is crucial to the preparation of a good private placement memorandum.  A good portion of the business plan might also be used in the body of the PPM.
  2. Do some upfront research on securities laws so you know what questions to ask.  Your attorney most likely (and should) give you a thorough run down of the legal restrictions involved in raising private capital using a private placement / PPM, but doing a little reading up front will let the attorney know you are serious about your capital raising project and that you have some sophistication in the matter.
  3. Ask for a fixed fee.  If your attorney is like me, you won't need to since I almost always provide a fixed fee to prepare a PPM and provide certain other private placement legal services. 

 

Wednesday
Jan132010

Do I need a PPM to offer notes? (Private Placement Attorney - Debt PPM)

This is a question I get from so many clients and potential clients that have the misconception that only stock in a corporation, membership interests in an LLC, or partnership interests in a partnership are "securities."  Under the Securities Act of 1933, a security is defined as:

...any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

Notice the first word is NOTE.  The words "EVIDENCE OF INDEBTEDNESS" are also used.  Notes, bonds, and indebtedness in general are a form of a security, and as such, any offering involving them must be handled and scrutinized in the same manner as an offering for equity (stock...etc).  This doesn't necessarily mean that you need a private placement memorandum (PPM) depending on the specifics of the offering, the types of investors you seek, or the securities law registration exemption you will pursue - but that is a determination that should be made by an attorney with experience in those matters.  

So don't make the mistake of believing that debt instruments are not securities!

Tuesday
Nov242009

Private Placement / PPM Attorney - Comparing 504, 505, and 506

When raising capital via the private placement process, a business will typically use one of three exemptions to the registration requirements under federal securities laws.  In this post, I briefly summarize and compare each of the exemptions.

Rule 504

One of the exemptions from the federal securities laws regarding the registration of offerings of securitiescomes in Rule 504Rule 504 provides an exemption for the offer and sale of up to $1MM of securities in a single twelve month period. In general, an issuer of securities may not advertise, market or otherwise publicly solicit the sale the securities. Purchasers must receive restricted securities, meaning that the securities may not be sold without either registration or an exemption. Unlike some other exemptions, Rule 504 allows for a private sale without any specific disclosure requirements, although care should be taken to provide sufficient information to investors to avoid violating the anti-fraud provisions of the federal securities laws – as I mentioned in an earlier post – disclose, disclose disclose. Make sure there are no false statements, no misleading statements either, and no omissions that might make what you have disclosed misleading.

Rule 505

Another exemptions from the federal securities laws regarding the registration of offerings of securities comes in Rule 505.  Rule 505 allows a company to raise an aggregate amount of $5,000,000 over a twelve-month period.  Similar to Rule 504, Rule 505 does not permit an issuer to use general advertising or general solicitation to market its offering.  A Rule 505 offering is available to an unlimited number of accredited investors and up to 35 non-accredited investors.  Unlike a Rule 504 offering, nonaccredited investors must receive a substantive disclosure document that includes financial statements, although even if only accredited investors are involved, care must be taken such that the anti-fraud requirements are met and that there are no false statements, no misleading statements, and no omissions that might make what you have disclosed misleading.   Purchasers must receive restricted securities, meaning that the securities may not be sold without either registration or an exemption.

Rule 506

The final exemption I will discuss here comes in Rule 506.   Rule 506 contains no limit on the amount of capital that can be raised in an offering. Similar to other exemptions, an issuer using Rule 506 cannot use general advertising or general solicitation to market its offering.  Rule 506 is available to an unlimited number of accredited investors and up to 35 non-accredited investors.  Unlike Rule 505, all nonaccredited investors, either alone or via 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.  Just as with Rule 505, nonaccredited investors must receive a substantive disclosure document that includes financial statements, although even if only accredited investors are involved, care must be taken such that the anti-fraud requirements are met and that there are no false statements, no misleading statements, and no omissions that might make what you have disclosed misleading.  Purchasers must receive restricted securities, meaning that the securities may not be sold without either registration or an exemption.

As always, make sure you get the advice of a securities attorney with private placement experience.  There are lots of complicated regulatory requirements to comply with, both on the state and federal level.  A private placement attorney can help you navigate the regulations and to draft your private placement memorandum.

Monday
Jun082009

Private Placement Attorney - Brief Overview of Rule 504

One of the exemptions from the federal securities laws regarding the registration of securities offerings comes in Rule 504. Rule 504 provides an exemption for the offer and sale of up to $1MM of securities in a single twelve month period. In general, an issuer may not use public solicitation or advertising to market the securities. Purchasers must receive restricted securities, meaning that the securities may not be sold without either registration or an applicable exemption. Unlike some other exemptions, Rule 504 allows for a private sale without any specific disclosure requirements, although care should be taken to provide sufficient information to investors to avoid violating the anti-fraud provisions of the federal securities laws - as I mentioned in an earlier post - disclose, disclose disclose. Make sure there are not only no false statements, but no misleading statements either, and no omissions that might make what you have disclosed misleading.

As always, make sure you get the advice of a securities attorney with private placement experience.  There are lots of complicated regulatory requirements to comply with, both on the state and federal level.  A private placement attorney can help you navigate the regulations and to draft your private placement memorandum.

Friday
May292009

Private Placement Attorney - The Basics of Raising Capital with a PPM

If you are looking to raise capital for your business, a private offering of securities might be one avenue for you to consider. Selling securities, whether it be to friends and family, or to angel investors, is an excellent way to raise capital if you are prepared and do it the right way. But beware, as the sale of securities (i.e. stock, notes, LLC interests...etc) is a highly regulated area on both the state and federal level. The following is intended to provide a basic understanding of raising money through a private placement. You should retain the services of a private placement attorney to advise you through the entire private placement process.

The SEC created Regulation D, which sets forth certain rules for private offerings. By following these rules, an issuer (i.e. a company selling stock or other form of security to raise capital) generally may raise up to $5,000,000 without a public offering.

Generally, a private offering may have no more than 35 investors. On the federal level, though, certain high-net-worth investors defined as "accredited investors" may be excluded when calculating the number of investors. There must also be NO general solicitation for investors by the issuer - no advertising, no seminars. Just this weekend I came across someone soliciting the "private" sale of securities on Twitter - definitely not a good idea if you are trying to comply with the registration exemptions under Regulation D.

The federal securities laws for both public and private offerings are based on the premise that investors in securities are best protected by the disclosure of all relevant information regarding the securities and the issuer. The underlying guideline in this respect is Rule 10b-5, which requires the issuer to disclose to investors anything material that a reasonable investor would want to know prior to making a decision to invest. This is why PPMs are stocked to the brim full of material facts, disclaimers, and lots and lots of risk factors. Failure to properly include these and other items may subject the issuer to serious liability, including being forced to buy back the securities from the investor, as well as damages. If you want to avoid liability, overdisclose, do not hide anything, and do not mislead (among other things of course).

Keep in mind that there are also state "blue sky" laws to comply with - and they will need to be complied with in every state that a security is offered and/or sold.

Make sure to consult a private placement attorney  / securities law attorney before you raise capital for your business.

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The Law Office of Brian V Powers can help your business raise capital and help draft a private placement memorandum (PPM). Contact us today.