Solutions

 

FUNDING AVAILABLE 

 

Our Private Placement clients are reporting to us that private investors are currently investing in their projects. Comments our clients have heard from prospective investors are: “I just don’t like the 1 to 3% return I’m getting on my CDs” — “I have money to invest and want to put some of that into higher risk, higher return investments” — “I have taken my licks on my real estate holdings; I’m liquid and am looking for real estate investments in a professionally managed project” — “I need to make up for some of my big board stock losses” — “The stock market sucks, I want some private action.” 

 

Like a Public Offering

 

The above sections discuss Private investor financing using Regulation D, Private Placement Memorandums (PPMs), the terms, forms, procedures, and documents. Reg D Private placement offerings differ from public offerings in that when the fund raising is completed, the company’s stock is not publicly traded on an exchange. HOWEVER, many of the steps and documents for properly raising private financing are similar to those of going public and Regulation D stock is tradable. We are specialists in the consulting, preparation and writing of Regulation D Private Placement Memorandums. We have a great deal of experience in developing, writing and producing documents and in obtaining entrepreneurial financing. 

 

We work with Regulation D, Private Placement Memorandum offerings and prepare documents for companies from all over the world who are seeking financing. We work with you one-on-one and we write your Private Placement Memorandum offering document from scratch. We will work closely with you to assist you in determining the proper structure for your company; debt, equity or combinations, offer a review of your articles, by-laws or LLC agreements to assure that you have the proper provisions for offering both common and preferred stock as well as sufficient officer/director liability protection clauses and provisions for a stock option program.

 

Our Private Placement Memorandum services include assistance in determining your corporate valuation, preparation of capitalization tables, determination of your use of proceeds and in deciding fair stock offering prices. Our services are based on the completeness of your business plan and company structure (C Corp or LLC). We offer personal comments to assist you in developing a set of dynamic funding documents. We work in many types of industries ranging from retailing and manufacturing to public company formation and management. We are involved in risk analysis and the evaluation of many new technologies, assembling management teams, and structuring and implementing private investor debt and equity placements. We are specialists in the consulting, preparation and writing of Regulation D Private Placement Memorandums (PPM), entrepreneurship, going public, business planning and financing.

 

Regulation D Private Placement Memorandums - The Preferred Investment Vehicles 

 

Regardless of the source of your financing–family and friends, angels, or venture capital–you will need some vehicle, forms, or set of papers to make it all nice and legal. On the surface, it would seem that if you’re going to sell stock, you could take the investors’ check and give them a stock certificate. Or if it was to be a loan, just take the check and sign a note. Unfortunately, it’s not quite that simple. And in fact, you don’t want it to be. 

 

Today’s “sue the buzzards” mentality causes some real problems for entrepreneurs when it comes to raising money. The main problem is the entrepreneurs themselves. Considering their natural propensity and rightful enthusiasm for their project, they tend to oversell. This is okay if everything works out the way it is planned. But we all know that “Murphy” will enter the program and that not always what is well, ends well. In the worst cases, your company may not survive. The problem then becomes that the friendly original investor is not the least bit happy about the fact that you did not perform up to expectations or lost all their money. Their fee-happy lawyer is more than pleased to take on the case of suing you because you said there wasn’t any significant competition, that your engineer was a genius and couldn’t miss on inventing the black box, that you had umpteen customers lined up, and the endless list goes on. What it comes down to is your word against theirs, and most likely they have more money (which is why you went to them in the first place) and they can afford the upfront legal fees that will be repaid when they sell your house.

 

There is a solution to this dilemma, various documents that have been blessed by our governmental bodies, which act like a sort of insurance policy for entrepreneurs to protect them against disgruntled investors, be they friend, family, angel, or venture capitalist. They are the subject of the next section. 

 

The Selling of Securities

 

Simply stated, it’s against the law to sell stock unless you are licensed to do so or can qualify for an exemption from the Securities and Exchange Commission (SEC) and the various states securities commissions’ rules. The very worst that can happen is that you will have to pay penalties or you can be put in jail. The least that can happen is that you would be required to refund any monies you raised. This can be very difficult if you’ve already spent a sizable portion before the legal problem arises. 

 

Regulation D

 

For most entrepreneurs, the best vehicle to accomplish initial equity financing under an exemption is through the use of a Private Placement Memorandum (PPM) under Regulation D (Reg D), which is a limited offer and sale of their company’s stock, or securities, without registration under the Federal Securities Act of 1933. Some risks continue under Reg D, but compliance is significantly easier than before Reg D. A major, major point is that by complying with Regulation D, it provides the company, its officers, and its directors with an insurance policy of sorts regarding disclosure.

 

There Are Six Basic Rules 

 

Regulation D consists of six basic rules. The first three are concerned with definitions, conditions, and notification. Rule 501 covers the definitions of the various terms used in the rules. Rule 502 sets forth the conditions, limitations, and information requirements for the exemptions in Rules 504, 505, and 506. Rule 503 contains the SEC notification requirements.

 

The last three rules for Regulation D (504, 505, and 506) deal with the specifics of raising money under Reg D. Rule 504 generally pertains to securities sales up to $1 million. Rule 505 applies to offerings from $1 million to $5 million. Rule 506 is for securities offerings exceeding $5 million.

 

Rule 504 

 

This rule for private placement memorandums is considered by many as the perfect answer for the company just starting out OR one that needs to raise less than $1 million. 

 

Regulation D Rule 504 offers such companies: 

• An exemption to raise up to $1 million 

• No disclosure criteria 

• Few general solicitation and resale restrictions 

• No limit as to the number or type of investors 

 

Actually, Congress’s original intent in 1982 for Rule 504 was to “set aside a clear and workable exemption for small issuers to be regulated by state blue sky requirements, but by the same token, to be subjected to federal anti-fraud provisions and civil liability provisions.” Rule 504 exemption is provided for almost any type of organization, including corporations, LLCs, partnerships, trusts, or other entities. However, it is not applicable to companies already reporting to the SEC (subject to the ’34 Act) or investment companies. 

 

You Cannot Exceed $1 Million.

 

The total offering amount under Regulation D Rule 504 for private placements can be up to $1 million in a 12-month period, less the aggregate offering of all securities sold within 12 months before the start of a 504 offering. So, if a company has raised$100,000 in private money in the previous 12 months, it can still raise up to $900,000 without being accused of breaking the rules, or “integration.” 

 

Generally speaking, there are no specific disclosure requirements under Rule 504 (disclosing what the company is about, what it intends to do, or who is connected with it). This means that, theoretically, an issuer can have a purchaser sign a subscription agreement and purchase stock without any information about the company being disclosed. However, the rule is dependent on the blue-sky laws of each state in which the securities are offered. This means that if a state’s blue-sky rules require disclosure, it must be provided regardless of Rule 504.

 

A word of caution to the entrepreneur–regardless of the amount of disclosure the issuer is willing to provide, Rule 504 for private placements does not dismiss the issuer from the federal requirements, nor is there an exemption from the fraud provisions, including the areas of material omissions or misstatements. The penalties for noncompliance are severe, including monetary fines and mandatory jail sentences.

 

Number of Investors.

 

With its limited disclosure requirements, Rule 504 also allows an issuer to sell securities to an unlimited number of investors. Theoretically, a company could raise $1 million by selling its stock at a penny a share to 100 million different investors. Obviously, the administrative economics are not too attractive, but there are no rule that stops an issuer from selling $500 blocks of stock to 2000 investors. Rule 504 is the only rule under Reg D that permits an unlimited number of investors.

 

A final note on Rule 504 is that the exemption provides for sales of securities of either debt or equity. This opens the door for combinations of both via convertible debentures. By way of explanation, convertible debentures are a debt issue (debenture) that is convertible to a preferred or, most commonly, common stock at some future date. 

 

Rule 505: Offerings of $5 million or less 

 

Regulation D Rule 505 for private placement memorandums is used for offerings of $5 million or less in any 12-month period and is restricted to 35 purchasers other than “accredited investors.” There are a number of required disclosures if the sale of securities includes investors who are not accredited investors: advertising and a general solicitation are prohibited, one must inform purchasers that they receive “restricted” securities (meaning that the securities cannot be sold for a time period without registering them), your must not violate the antifraud prohibitions of the Federal Security Laws, financial statements need to be certified by an independent public accountant or at a minimum, the balance sheet needs to be audited.

 

Companies must give non-accredited investors disclosure documents that are the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well. The company must also be available to answer questions by prospective purchasers. The Issuer must comply with the securities laws of each state in which a person who buys the security is a resident, and must usually file a notice with that state’s commissioner of corporations or similar official.

 

Rule 506: Offerings with no dollar limit

 

Under SEC Regulation D Rule 506 for private placement memorandums an issuer may issue an unlimited amount of securities, with no dollar limit, to 35 unsophisticated investors plus any number of “accredited investors.” There are required disclosures, if a sale of securities includes purchasers who are not accredited investors. All non-accredited investors must be sophisticated and must sign an Investor Questionnaire acknowledging same. Advertising and a general solicitation are prohibited. The securities are “restricted securities” which may not be readily resold. There is a major advantage to 506, in that it supersedes and preempts the securities laws of all the states. This saves a lot of time, effort, and expense if the issuer is obtaining money from investors in multiple states. Form D must be filed with the SEC within 15 days after the first sale of securities and also with the Secretary of State of each state in which a purchaser is a resident.