The concept of a Private Placement Memorandum (PPM) and its importance for businesses seeking to raise capital without going public, will be addressed here. The complexity of securities laws that govern these transactions should only be undertaken by experienced securities lawyers. There is no replacement for experience and a proven track record of successful and compliant offerings. Missteps can result in serious legal consequences including fines and prison time.
Understanding Private Placements
Private Placements are a way of compliantly raising capital for businesses. They offer many advantages over public offerings including cost savings and less reporting to the SEC. A PPM must still be registered, but calls for nowhere near the amount of complexity that accompanies an Initial Public Offering (IPO). These are some key reasons why companies, particularly startups and small businesses, might opt for this method of raising capital.
Regulatory Framework
In the United States of America, The Securities Act of 1933 is the first federal law that regulates the securities industry. Here are its key points:
- The registration process – Generally securities offered in the US need to be registered with the SEC. As stated earlier, this process is much less complex when using some of the exemptions afforded by this Act.
- Not all securities offerings require registration – Issuers of these offerings are cautioned to consult a qualified securities attorney prior to any attempt to raise capital.
- There are disclosure requirements – Specific details about the company, the executives, the financial health of the company, what it intends to do with the capital, and much more, all need to be disclosed to potential investors.
- Fraud prohibition -The Act was created to prevent securities fraud by prohibiting fraudulent acts by the issuers, misrepresentations, and other illegal practices that can take place during the sale of securities.
The Role of a Private Placement Lawyer
Expertise in Securities Laws
A Private Placement Lawyer has a highly specialized knowledge and a track record of drafting experience in securities laws and regulations. Every issuer of securities needs to fully understand the importance of this expertise in ensuring compliance and avoiding legal pitfalls. There are attorneys that practice in multiple areas of the law. You will want an attorney with a focus on one thing; compliant securities offerings.
Drafting and Reviewing Legal Documents
The PPM lawyer will play a critical role in drafting and reviewing all necessary legal documents for a private placement, including the offering memorandum, subscription agreements, and disclosure documents.
Compliance and Risk Management
A private placement lawyer helps manage and mitigate legal risks by ensuring compliance with all relevant securities laws and regulations. This is highly important and will help the issuer to avoid costly legal disputes and regulatory penalties.
Key Services Provided by Private Placement Lawyers
Structuring the Offering
An experienced securities attorney assists in structuring the private placement to meet the company’s financial and strategic objectives. This includes determining the type of securities to be offered and the terms of the offering. Furthermore, they help set reasonable expectations for what will appeal to investors based on their past experience and awareness of the market.
Counsel will address fraud prohibition in the drafting process. The Act was created to prevent securities fraud by prohibiting fraudulent acts by the issuers, misrepresentations, and other illegal practices that can take place during the sale of securities
Regulatory Filings
Depending on the securities exemption chosen, regulatory filings required for a private placement, must be filed with the SEC. A Private Placement Attorney can aid in preparing and submitting these filings accurately and in a timely fashion.
Due Diligence
The due diligence process includes a vital role for the lawyer. They are there to conduct thorough due diligence to ensure all material information is disclosed and that the offering complies with securities laws. This is only done by proactive attorneys who are fully aware that many investors will do their own due diligence on the issuer prior to committing capital to their project.
Investor Relations
A private placement lawyer assists in managing relations with potential and existing investors, ensuring that all communications are legally compliant and that investors are adequately informed. Even when not obligatory, a principal’s involvement in an offering can be particularly effective for maintaining investor relationships.
Navigating Complex Securities Laws
Understanding Exemptions and Compliance
The various exemptions under securities laws include Rule 506(b) and Rule 506(c) of Regulation D, Regulation A+, and Regulation S. Securities lawyers will help a company determine which exemptions apply and will make sure that all compliance requirements are met. A trustworthy lawyer will properly help the issuer understand which exemption will help them reach their goals.
Handling SEC Inquiries and Investigations
Proper drafting of a Private Placement Memorandum is the first line of defense against SEC inquiries and investigations. Because Centarus Legal Services provides regulatory defense services to other law firms, the attorneys have first-hand experience in SEC litigation. The advantage for issuers is that our attorneys see mistakes that are made by other law firms with less experience. Learning from the mistakes of others helps us avoid making those same errors. Rarely will one find a law firm drafting PPM’s, that has courtroom experience.
Case Studies and Success Stories
Real-Life Examples
Your PPM lawyer should have many examples of successful private placements that were facilitated by their frim. Most clients require a level of anonymity, but the attorneys can speak in generalizations and highlight the strategies used.
Lessons Learned
In choosing the attorneys that you will work closely with, one important thing to look for is what they have learned from drafting numerous private placements. An outstanding firm will have done case studies, such as best practices for structuring and conducting a private placement. These lessons can then be applied to future transactions.
Conclusion
- From ensuring compliance to managing risks and facilitating successful transactions, the critical role that a private placement lawyer plays in navigating complex securities laws, is vital to the success of the issuer.
- Lawyers are typically good at speaking with their clients, but often can be poor listeners. Pay attention to how well your attorney listens to what is important to you.
- Great two-way communication between client and attorney throughout the process assures that there are no misunderstandings which can slow the process.
- Explanation of which exemption an issuer should use if an issuer wishes to sell securities pursuant to an exemption from registration should include a conversation with experienced securities counsel. The issuer must fully understand each exemption before making the determination.