What is a Regulation D Private Placement Memorandum?

A Regulation D (Reg D) Private Placement Memorandum (PPM), or offering, is a document that discloses the primary information about a company for the prospective investors. It is written in a very negative way to give investors information about the company’s operations, the risks the investor assumes, the terms of the offering (for equity–price per share, number of shares offered and outstanding, and for debt–note amounts, maturity, interest rates) along with a great deal of legal caveats to comply with both Federal SEC and states securities disclosure. These, among other details, are not found in a business plan and the use of a PPM offers a form of liability protection for entrepreneurs. Our private placement program includes a “Subscription Agreement” which is the sales contract that the Investor signs for purchasing your securities, and an “Investor Questionnaire” which the investor completes that declares their investment status.

What is a “security?”

As a General rule: If a person invests money in an enterprise with the expectation of deriving profit from the efforts of someone else, it is a “security” under Federal and state law (you offered the security, the investor gave you something of value-money, you issued the security). For equity offerings, a security takes the form of stock, either common, preferred or units. In the case of an LLC, they are called membership units. In a debt Private Placement offering, the security is in the form of a note, bond or debenture. Private offerings can be combinations of equity and debt.

Securities Regulation

As a general rule, securities regulation focuses on three variables: (1) the security being offered, (2) the entity or person/s selling the security, (3) the disclosures made to the investor. The offering and sale is regulated by both federal and state law.

What type of companies need PPMs?

All types, there are no exceptions! From mom and pop retail to multi-million dollar super-sophisticated high-tech projects and including all types of real estate deals. Size of the project and type of industry make no difference. The important point is to comply with the security rules and regulations and to present a concise, structured set of professional disclosure documents.

Do I really need a PPM offering document?

The primary reason for having a Private Placement Memorandum to go along with your business plan is that the PPM offering document satisfies the legal issues on raising capital as well as provides you with a sophisticated and professional way to present your project to prospective investors. If you sell securities improperly, or do not make the proper disclosures, you could face fines and rescission (give the money back), as well as law suits from investors or regulatory bodies. By having a PPM, you are complying with the state and federal rules and regulations for selling securities (debt or equity) when raising capital. This includes deals from $100,000 to multi-millions. When you use a Reg D memorandum, along with the proper clauses in your articles of incorporation (or an LLC operating agreement), you limit the liability exposure for the initial owners and directors of the company. The PPM also ensures that you are treating all investors equally. It eliminates the “he said-she said” discussion since all investors are treated equally and sign off on the information that is presented in the offering memorandum.

Do I need a Private Placement Memorandum for a start-up?

You may not have much in assets or any revenues, however, this is the ideal time to have a Memorandum. A large number of early stage companies use PPMs to raise their initial capital. Reg D financial rules do not require you to have a lot of assets and there are no minimums, in fact, many company’s have losses and negative net worth. Remember, Regulation D Private Placements are disclosure documents and as long as you disclose your financial conditions, you are complying with the regulations. The investors make the investment choice knowing all the facts about the project, including financial conditions, prior to making their investment. Where banks are reluctant to lend to start-ups, private investors like early-stage deals where they have the opportunity to obtain substantial returns.

What kind of details go into a Private Placement Memorandum?

Your business plan is made to sell the company. A PPM is made to disclose the required information on the company, the deal, and the management team to the prospective investor. There are defined requirements as to the information required for disclosure in a PPM. They include such areas as:
Are you raising debt or equity? How much of the company are you selling? If equity; is it common, preferred or stock units? What is the share structure? How much of what type stock is authorized? Are you having a mini-max raise? How much dilution?
If a debt issue; note amount, maturity terms and annual rate of return (interest), or maybe convertible. The PPM addresses the company and management information, lots of risks involved in the investment, the use of proceeds, discourse on certain transactions, conflicts of interest, as well as other required disclosures. The main point to remember is that under Reg D, you can structure a deal in anyway you wish, you just have to disclose the full details.

What is “Disclosure?”

A major point to remember regarding what should or should not be disclosed when working with a PPM is that under commercial law, “In most commercial transactions the rule is that the buyer should beware.” Under the federal securities law, the rule is that” the seller should beware.” If an investor might reasonably consider a matter to be material, the matter must be disclosed to the investor in such a way that disclosure can be proven. It also means that the information must be free from false or misleading statements.

Do I have to be a C Corp?

Not necessarily. But in most cases for raising equity, it is the best. S Corps are often limited to the number of investors they can have and you can only issue one class of stock. Most sophisticated private investors are not interested in the tax benefits that are offered by S Corps or LLCs. And, they cause the company a great deal of extra management time and expense in reporting. LLCs are good for one-off type of deals where there is a known exit or limited number of investors. Again, the company’s tax reporting is a hassle. And, most sophisticated investors like to have a vote in the business of the company. The investor just wants to make a big return on their investment. C Corps are also the best way to accommodate future additional rounds of financing including going public.

What about multiple investors?

A Regulation D 504 PPM sets the company up for receiving investment funds from any number of investors. We have written PPMs for deals with just three investors and for deals with hundreds of subscribers. Since a PPM establishes the deal structure – how much stock is being sold for what price – it eliminates all negotiation for investment. The entrepreneur doesn’t have to argue with the investor over how much of the company their money is going to buy. This is pre-determined in the deal structure. You can accommodate $1,000 or $1 million dollar investors. Deals larger than $1 million requires filing under rule 506, which does have a limit of 35 unaccredited investors.

How successful are Reg D PPM programs?

Our Private Placement program is successful and we have proven that for over 20 years. Our documents do what they are intended to do, provide you with liability disclosure protection for all prospective investors in the same manner. The real question is can you successfully raise the financing? Only you can answer that question. It will require a realistic analysis of the viability of your project. It requires that you present the prospective investor with a valid return on their investment. One that fits the current money market returns, a return that is appropriate to the degree of risk. Have you put together an outstanding, experienced management team? If your team is not complete, are you open for input from your investors. Most investors tend to in invest in projects that they identify with, have some experience in. They are usually well equipped to help you find good team members and recommend qualified folks. Obviously, a Regulation D document will not change a bad deal into a good one. But it will help you present your project in a professional manner and increase your chances to be successful in your money raising efforts.

Can I advertise the sale of my security?

Basically NO — not in the newspaper, TV, or radio. However, there are some ways to get the word out that you are seeking investment. This includes; brokerage firms, individual stockbrokers, fund mangers, the Internet via web-based services that promote private investor opportunities and many angel and private investor groups. The most successful entrepreneur’s network. It’s hard work and takes time, but investors run in packs and once you get involved with one investor, it is very common that your effort will lead to many others. See our Tips and Notes section of How to Find Private Equity for more information. Finding Private Equity

Will the company have to register with regulatory authorities?

Yes, but the requirements are simple and inexpensive. You must file a Form D (four pages) with the US Securities And Exchange Commission. This is a compliance filing for information only and you do not have to submit your business plan or a copy of your PPM. The filing is not subject to review or approvals and there is no cost. Form D You also have to comply with the Blue Sky laws of any state in which you intend to raise money. “Blue Sky” refers to the individual states notification filings that are required, which depends upon which state/s you are raising money in. The best way to determine any states requirements is to visit the website for the Secretary of State or State Security Commission office of a particular state. Many states simply accept the Federal Form D filing. State fees vary from $25 to $300.

How much difference will my or my management team’s personal credit history have on our ability to raise funding?

Technically, it doesn’t matter. Personal credit is not disclosed unless there has been a bankruptcy filing in the past ten years. Even then, it is simply a note. That said, the more personal money that’s been invested, the more stake the management team has in the deal, the more comfortable the prospective investors feels. And, less dilution can usually be justified.

How long does the process take? There are two parts to this question: first, document preparation and second, raising the funds. Document preparation depends on a number of factors like: how complete is your business plan (we offer multiple critiques and guidance as part of our package), is your company structure completely established; proper authorized common and preferred stock along with a stock option plan for C Corporation, management and operating agreements for LLC’s (we’ll guide you through this process too). The answer really depends upon how fast you can respond to the information we need to create an exceptional document. Commonly, it takes three to six weeks (really fast is two weeks), the longest has been 1 1/2 years (this entrepreneur was really busy running his company).

Secondly, you have up to 12 months from the date of your prospectus to raise the funds. Usually, you will have a really good feel within the first 30 to 90 days. We have had projects that fully funded in two weeks and others that didn’t raised a dime in 10 months. The quality of your project and the amount of hard, diligent effort you apply reflects in the timing and success of all fund raising. It’s hard work!

How much of my company will I have to give up?

The general equity guidelines are that every round of financing is worth 10% to 40% of a company. Now the however, it always depends on a lot of factors, is this a first round or a follow-on raise, how much has already been invested, how big is the total potential of the company, how strong is the management team, how much and what type of competition, how many barriers to entry, how fast will break-even be reached, how long till an exit is contemplated, and the list goes on. The returns vary with the risk and to enhance growth, most companies keep reinvesting any profits the first couple of years. The point is, basically the process of valuation is more art than science. We assist all our clients in working through this key process and produce “Capitalization Tables” for your review and discussion so that that you can make informed decisions on how much of your company you should give up.

What is Due Diligence?

Due Diligence is the process that an investor goes through to “check-out” your company. The purpose is to provide the investor an opportunity to become familiar with the company and the management. Investors may bring in their accountants, attorneys and industry consultants to assist them in the analysis. This is your opportunity to demonstrate your knowledge about your project and get acquainted with a prospective investor.

Is there a better time of the year to raise money?

This is a frequent question. After 20 plus years of experience, we have made some general observations. Investors are pretty pre-occupied during the holidays (mid December to mid January). Sometimes there is a mild slowdown around tax time (the first part of April). And the summer is commonly a bit slower due to vacations (this doesn’t mean they don’t invest, it’s just takes a bit more time). That said, the off-times are good times to prepare so one can be ready to hit the streets when the time is ripe. Mid January to the first of June is a peak time and then again early September through mid December. A lot of last minute investing goes on between mid December and the end of the year as investors shuffle portfolios. So don’t count it out, there is always money for good deals!

If you have more questions that weren’t answered here, get in touch with us via our contact us page.