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Raising Capital Through a Private Placement of Equity Securities

May 1, 2016 | Corporate & Business

When an entrepreneur is starting a new business and needs to secure financing, one viable option is to raise money from investors.  Such private financing may be undertaken through a private placement.

Since you are essentially selling a portion of your company to one or more investors, you are subject to strict federal and state securities regulations. The Securities Act requires all offerings of equity to investors to be registered with the Securities and Exchange Commission (SEC) unless the offering can fall under an exemption.

The federal securities laws for both public and private offerings are based on the premise that investors in securities are best protected by the disclosure of all relevant information regarding the securities and the issuer. The underlying principle is that the issuer must disclose to investors anything material that a reasonable investor would want to know prior to making a decision to invest.

The Regulation D exemption for private offerings allows an entity selling stock, LLC units, partnership interests or other similar securities to avoid registering the sale of such securities with the SEC as long as the specific requirements are strictly followed.

Such private offerings, while exempt from registration, involve the drafting of an important disclosure document, also known as the “private placement memorandum” or PPM. The PPM should include a description of the business, the basic terms of the sale of securities, the projected return to investors, a business plan, and specific disclosures required under applicable federal and state securities laws depending on the nature of the private offering. Disclosure requirements may differ from state to state, depending on the state of residence of the investor.

Failure to properly include the above-listed items and other disclosures may subject the issuer to serious liability, including being forced to buy back the securities from the investor, as well as damages.

Also important is tracking each distributed copy of the PPM, including name and residential address of each recipient. This is because there are rules prohibiting general solicitation of investors.

To assure compliance with applicable law, an entrepreneur wishing to raise private capital should retain an experienced attorney to draft the PPM and provide guidance throughout the financing process. Padua Law Firm helps clients navigate the private placement process and minimize risk of liability under securities laws. The firm has represented both issuers and investors in private placement transactions from industries as varied as restaurant and hospitality, hotel construction, multi-family real estate, oil & gas funds, health & wellness, and senior housing.