Private Placement Agreement

Private Placement Agreement

Many of the business companies sell corporate bonds to the investors without any open market sale. If you also want to expand your business, then you can do it by raising funds. Selling corporate bonds can also help you to gain long term stability, but it requires you to sign an agreement with the investor’s company. You will be allowed to keep your business private in this agreement.

When Do You Need a Private Placement Agreement?

A private placement loan agreement is taken by the companies and their investors. The public sale offering is included under a private placement memorandum when it isn’t considered during the sale of bonds. The investors can include insurance companies, mutual funds, and banks.

Purpose of a Private Placement Agreement

The purpose of the agreement is to make sure that the company is able to speed up with raising finance. Since only a little amount is spent on getting the work done, most businesses prefer private placement. If any company wants a small amount to be raised, then it can sign a private placement agent agreement with the investor company.

How to Draft a Private Placement Agreement?

To draft this agreement, you can take the help of the reputed attorney. Since you might be unaware of a lot of these agreements, it is advised that you focus on learning more about the rules and guidelines of the agreement. You can also take the help of the templates with which it can be easier for you to make such an agreement.

Benefits of Private Placement Agreement

This agreement helps to avoid any fraudulent activities or issues with the payments. When the investors buy your securities, then this agreement helps you to tie a legal contract with the party. There aren’t any drawbacks to having an agreement that will protect your rights.

What Is a Private Placement?

A private placement is a sale of stock shares or bonds to pre-selected investors and institutions rather than on the open market. It is an alternative to an initial public offering (IPO) for a company seeking to raise capital for expansion.Investors invited to participate in private placement programs include wealthy individual investors, banks and other financial institutions, mutual funds, insurance companies, and pension funds.

Understanding Private Placement

Private placement (or non-public offering) is a funding round of securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors. Generally, these investors include friends and family, accredited investors, and institutional investors. PIPE (Private Investment in Public Equity) deals are one type of private placement. SEDA (Standby Equity Distribution Agreement) is also a form of private placement. They are often a cheaper source of capital than a public offering.Since private placement is not offered to the general public, they are prospectus exempt. Instead, they are issued through Offering Memorandum. Private placements come with a great deal of administration and are having normally been sold through financial institutions such as investment banks. There are minimal regulatory requirements and standards for a private placement even though, like an IPO, it involves the sale of securities. The sale does not even have to be registered with the U.S. Securities and Exchange Commission (SEC). The company is not required to provide a prospectus to potential investors and detailed financial information may not be disclosed.The sale of stock on the public exchanges is regulated by the Securities Act of 1933, which was enacted after the market crash of 1929 to ensure that investors receive sufficient disclosure when they purchase securities. Regulation D of that act provides a registration exemption for private placement offerings.The same regulation allows an issuer to sell securities to a pre-selected group of investors that meet specified requirements. Instead of a prospectus, private placements are sold using a private placement memorandum (PPM) and cannot be broadly marketed to the general public.It specifies that only accredited investors may participate. These may include individuals or entities such as venture capital firms that qualify under the SEC’s terms.

What is Private Placement Memorandum?

PPMs are disclosure documents used by small businesses raising money through private securities transactions. A private placement memorandum (PPM) is a legal document provided to prospective investors when selling stock or another security in a business. It is sometimes referred to as an offering memorandum or offering document. A private placement memorandum may also be called an offering memorandum (OM), confidential offering memorandum (COM) or confidential information memorandum (CIM). A PPM is similar to a business plan, although it focuses much more on legal issues. The primary purpose of a PPM is to disclose to prospective investors the terms of a potential investment and primary risk factors involved in making the investment. A PPM also usually contains a considerable amount of information about the business opportunity, structure and management. It is less sales-oriented than a traditional business plan, partly because business lawyers typically create them. A PPM is used in “private” transactions when the securities are not registered under applicable federal or state law, but rather sold using one of the exemptions from registration. The PPM describes the company selling the securities, the terms of the offering, and the risks of the investment, amongst other things. The disclosures included in the PPM vary depending on which exemption from registration is being used, the target investors, and the complexity of the terms of the offering. A PPM must contain accurate, truthful and current information. While many PPMs share some similarities, they are all completely customized and unique to each investment deal. For example, a well-prepared PPM will avoid using formulaic risk factors. Instead, they will detail the specific risks associated with the company’s industry, such as market trends, competitive analysis, or regulatory and tax issues. In addition, a well-prepared PPM will avoid sales/revenue projections, especially overinflated ones, that are not based on expected reality and that are the exception. Investors will likely expect you to achieve those financial targets, and the SEC will closely scrutinize such performance forecasts set out in the PPM. Whether a company needs to use a PPM or not, and the amount and type of information in the PPM, will, in general, depend on;
• which exemption from registration is being used,
• the type of issuer,
• the number of investors,
• the level of sophistication and type of investor,
• the amount of money being raised, and
• the complexity of the terms of the offering.
A. Size of the Offering
Less than $5 million: No PPM is required.
More than $5 million: No PPM is required if all are accredited investors.
B. Type of Issuer

Private Equity Fund

Most Private Equity (PE) funds rely on the Rule 506 of Reg D exemption from registration for their securities offerings. While Rule 506 does not technically require any specific disclosures to accredited investors, in practice, a PPM is used when raising money from institutional or qualified individual investors. Generally, a PE fund’s PPM contains the same disclosures and information found in a prospectus filed with the SEC as part of a registration statement. Of course, the PPM is not in fact filed with the SEC. For prospective investors, the PPM is often the starting point in their investment decision process. Once the investors are interested in the PE fund’s investment offering, they do further research and due diligence before they invest.

A Broker-Dealer

A broker must be licensed and registered with FINRA (Financial Industry Regulatory Authority), the SEC and a state securities regulator (depending on the type of business the broker and his or her firm conducts). FINRA Rule 5123 requires member firms to file the private placement memorandum, term sheet or other offering document that sets forth the terms of the offering. Under federal securities laws and FINRA rules, a broker-dealer has a duty to conduct a reasonable investigation of all securities that it recommends to its investor clients. In practice, most broker-dealer firms will require a PPM in order to have the offering approved for retail to their investor clients. A PPM must allow the broker-dealer to determine whether an investment is suitable for its investor client. The broker-dealer would be very involved in the drafting process and assists the company in all aspects of fundraising in exchange for a fee. This fee is typically a percentage of the total capital raised. This makes use of a broker-dealer quite expensive. For this reason, PPMs are most likely to be utilized by mature companies that have hired a broker-dealer. For example, nearly 65% of private equity funds engage the services of third-party marketers/placement agents for their investment offerings. On the other hand, very few small and emerging companies utilize the services of a placement agent, banker or broker-dealer to raise capital. Often, the amount of the investment being raised by small and emerging companies is small (usually, less than $5 million) and accordingly, the potential commission for a broker-dealer is not worth the time and risk associated with such transaction. As a result, in general, most small and emerging companies do not need to use a PPM to raise capital from investors.
C. Type of Investor

Venture Capital Fund

In practice, all you need to gain the monetary support of a VC is a thorough business plan. VCs will almost never require a PPM. A VC may agree immediately to invest just from your pitch. If they like your company idea and decide that they want to invest, the VC will then provide you with a term sheet, representing its investment proposal.

If you want Hollywood to invest in your movie, don’t send them a PPM. Studios will usually finance a movie idea if it’s a proven concept or appeals to the biggest demographic. No amount of fancy disclosures about the market and sales predictions will make a difference. You don’t need a PPM to pitch your project to Hollywood or to obtain studio financing.

Angel investors are high net-worth individuals who provide capital for early-stage companies or start-ups. Angels are accredited investors. Therefore, technically, you are not required to provide a PPM, or any specific disclosures contained in a PPM, when offering securities to angel investors. A PPM would be a mere formality, since these sophisticated investors usually perform their own extensive due diligence and risks assessment before they invest. For angels, an important step in the due diligence process usually involves reviewing the company’s business plan. Like VCs, angel investors typically like to negotiate the terms of the deal with a term sheet. However, unlike VCs, who will be the one to supply the term sheet, the company will provide its own term sheet. Once the deal is fully negotiated, the term sheet goes back to the company’s attorneys who use it to draft a subscription agreement or stock purchase agreement, LLC operating agreement, or other document establishing the rights and preferences of the angel investor.

Family and Friends

The most common source of seed capital when starting a business is friends or family. However, in general, the amount that can be raised from friends or family is no more than $100,000. As such, a PPM is generally not required to raise capital from family members and close friends. For investment offers of $5 million or more to family and friends who are non-accredited investors (but they must possess a degree of financial sophistication), reviewing the PPM is an important step in the due diligence process. The PPM may serve as a stand-alone document, so that, without having to review any other material, the family member or friend is able to make an informed decision about the investment. A major downside of seeking money from non-accredited investors is the much greater disclosure requirements. On the other hand, in general, the legal disclosure burdens are dramatically reduced (subject to the antifraud provisions of the securities laws), when only accredited investors are involved. In which case, you may avoid using a PPM to raise funds. Having family and friends as early stage investors can be a dangerous endeavor. Investing in a start-up has inherent risks, which most professional investors understand, but your friends and family may not. They may not understand that there are a million things that can go wrong between raising the initial capital for forming the business entity, covering the initial operating expenses, attracting angel investors and the delivery of the finished goods or services. Therefore, whether or not you provide a PPM to your family or friend investors, you should be prepared to present them with your investor deck, pitch deck, financial statements, business plan and any other relevant documents that describe your business strategy and goals, how much capital your business needs, why you need the money and how you plan to spend it. There are many types of private placements that companies do to raise funds.

Brokered Private Placement

In a brokered private placement, a brokerage house acts as a middleman between the company and investors. The broker raises the money from clients and directs it to the company. The broker receives a commission in the 6% to 10% range for performing this service.This usually happens when it’s a large financial raise. Or when a small cap company needs the help of a broker to drum up interest.Some brokers have large client bases who like to participate in private placements. Getting access to a large base of investors can make it attractive for a company to go down the brokered financing route.The management teams who have large networks can go down the non-brokered financing route. This way they cut out the middleman (broker) to save on financing costs.

Non-Brokered Private Placement

In a non-brokered private placement, the investors place their money directly with the company. This saves a lot of money on fees for the company.Non-brokered financings are typically done by companies with access to good contacts and networks. They have “reach,” so they don’t need to pay a broker.

Bought Deal Financing (Private Placement)

A bought deal financing is when an underwriter (like a brokerage) decides to buy the whole financing allotment, at a set price, from the company issuing the shares. Those shares are then re-sold to the public or their clients.

Private Placement Lawyer

When you need legal help with a Private Placement Agreement, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

Ascent Law LLC

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