Regarding the sale of private placements, it is very important for clients to recognize that the investment landscape has changed over the past few years. I’m, specifically, referring to the heightened interest on the part of the US Attorneys’ and the SEC’s offices concerning improperly drafted or flawed sponsor offerings. Ten years ago, these government agencies had only a marginal interest in flawed offerings of less than 15 million dollars, but today we are witnessing a significant increase in the criminal investigation and prosecution of issuers who have been involved in troubled offerings in the range of one million dollars. As recently as a few years ago, the threat of criminal prosecution was just that—“a threat,” but now it is only too real —there appear to be more prosecution resources devoted to this effort, and legal pursuit of even low level syndicators is a higher priority than ever, which is likely a rebound effect of the relaxed environment that produced the Madoff debacle. In fact, our office is personally aware of three sponsors within 10 miles of our location that have been criminally investigated and targeted for prosecution during the last year.
Earning Your Business
We hope to earn your business. However, whichever law firm you decide to select for your legal work, we would simply recommend that you choose one that can not only draft a PPM for you, but will also have the experience to guide you through the business and sale process. Most law firms feel as though they are DONE after they have drafted your private placement memorandum. They will kindly and professionally hand you the PPM and impliedly communicate, “Thanks for the business; now you’re on your own; go out and sell–we can’t help you from here.” This may seem unlikely or uncommon, but actually, this is how 95% of law firms work with clients following a private placement engagement. This is simply because beyond constructing the PPM, most law firms have no capability or interest in assisting with the sale process. They are only in the legal business, and their business model does not typically include the ability to refer you to an affiliated business consulting division that has securities marketing and sales expertise.
As such, we recommend that you seek out and work with a firm, like ours, that has intimate knowledge of the sale process—because it can be a minefield (as you will see below in the enumerated list). Many inexperienced lawyers can draft a simple PPM but they often lack sufficient experience to guide their clients through the minefield. After all, the PPM is being used to SELL securities, however, it is not a selling tool by itself — clients NEED direction to avoid engaging in sales activities that will cause them to lose their protections — In legalese this would be referred to as “losing your exemptions.” Losing your exemption, in simple terms, means — that you— (the sponsor) will be liable to investors both civilly and criminally if you fail to return their investment capital.
Most clients’ end goal isn’t simply to create a beautiful, fifty-page PPM that will be framed and poised on a shelf for viewing. The objective, of course, is to utilize the private placement document as part of a sales package that ideally includes a carefully crafted professional business plan and a pitch book to raise capital. And even more importantly, we believe most clients have an unstated, yet implied, goal of avoiding the cost and life altering affects of civil and potential criminal prosecution which results from making small mistakes in the sale process. Let us help you navigate the sale process safely. You CAN raise capital legally and effectively without assuming undue risk, but if any of the following apply, you are “treading on thin ice.” Let us help you stay off the ice:
1. Are you using or planning to use a template or a “mill house” to draft your PPM? If so, you are in danger…and preparing to walk on thin ice.
2. Is the lawyer you are using or planning to use for the drafting of your offering documents a general practice attorney or does he specialize in securities and business law? Use caution
3. Have you sold or are you planning to sell your investment opportunity to any investors other than friends and family? If so, you are in danger…and preparing to walk on thin ice.
4. Have you advertised or are you planning to advertise your new offering on any blogs, websites, or any other publicized source? If so, you are in danger…and preparing to walk on thin ice.
5. Has the firm you are using or planning to use discussed with you the “Issuer Exemption” and its limits? If not, you may be in danger and preparing to walk on thin ice.
6. Has the firm you are using or planning to use discussed with you the “General Solicitation Bar” and its limits”? If not, you may be in danger…and preparing to walk on this ice.
7. Will any of your investors be “non-accredited” investors: “Non-accredited investors” are ones who have earned less than $200k per year over the last two years or less than $300k in combined family income in the last two years? If any of your investors are “unaccredited” the type of disclosure required completely changes. Many inexperienced attorneys will miss this point –and you will be in danger…and preparing to walk on thin ice.
8. Does the firm you are using or planning to use have any experience representing sponsors who have been under investigation by state and federal agencies? If not, they may lack knowledge and experience regarding even the most basic risks.
9. Does the firm you are using or planning to use have any experience in representing investors who have been defrauded by sponsors that failed to provide proper disclosure documents? If not, they can’t adequately foresee future legal challenges to your offering.
We understand that you simply wish to raise capital and sell securities without risking civil and criminal prosecution (or loss of freedom—i.e. test website speed jail). We can help. Call us today.