Presenting a live 90-minute webinar with interactive Q&A Structuring Private Placement Memorandum for the Private Offering and Sale of Securities Determining Materiality, Assessing Risk Factors and Conducting Due Diligence THURSDAY, JUNE 29, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Yelena M. Barychev, Partner, Blank Rome , Philadelphia Brett G. Evans, Partner, Evans & Kob , Santa Ana, Calif. Brett A. Cenkus, Cenkus Law , Austin, Texas Karolyn Ann Knaack, MBA, JD, Member, Karolyn A. Knaack, P.C ., Austin, Texas The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Structuring Private Placement Memorandums for the Private Offering and Sale of Securities By: Yelena Barychev, Brett Cenkus, Brett Evans and Karolyn Knaack June 29, 2017
Yelena Barychev Brett Cenkus Brett Evans Karolyn Knaack 6
What We’ll Overview of regulatory framework Cover Essential elements of a PPM Determining materiality for disclosure Assessing relevant risk factors Due diligence 7
1 Overview of Regulatory Framework: 4(a)(2) and Regulation D Presented by Brett Cenkus & Brett Evans 8
Private Placements Generally Under Section 5 of the Securities Act, any offering of securities must be registered with the SEC or be exempt from registration. A private placement is a securities offering that is exempt from registration. Benefits of private placements: ▫ Less expensive and quicker than SEC registration ▫ Reduced disclosure requirements ▫ Direct negotiation with investors = easy to tailor to fit the needs of specific investors ▫ Avoiding certain liabilities (e.g., Section 11 of the Securities Act) 9
Source of the Primary Exemption Section 4(a)(2) of the Securities Act ▫ First adopted by Congress as a part of the Securities Act in 1933 ▫ Rationale: in an offering with a limited number of offerees capable of protecting themselves, the compliance burden of a public offering is not necessary ▫ Provides a statutory exemption for “transactions by an issuer not involving any public offering” “Public offering” is not defined by the statute. Standards have been developed by courts and the SEC. BE CAREFUL OF PLACING TOO MUCH EMPHASIS ON THE PLAIN MEANING OF THE WORD, “PUBLIC.” 10
What constitutes a “public offering”? SEC v. Ralston Purina (1953) The Supreme Court established the general principle that the exemption under 4(a)(2) is available only for an offer and sale made privately to persons able to fend for themselves. Whether a purchaser can fend for itself is based on factors such as: ▫ The purchaser’s access to the same kind of information that would be included in an SEC registration statement; and ▫ The purchaser’s sophistication and ability to bear the economic risks of the investment. 11
What constitutes a “public offering”? (cont’d) Other factors used in determining availability of the private offering exemption (developed since Ralston Purina) include: ▫ The number of offerees and their relationship to each other and to the issuer ▫ The number/amount of securities offered - size of the offering ▫ The manner of the offering (e.g., general solicitation) ▫ The sophistication and experience of the offerees ▫ The nature and kind of information provided to the offerees or to which the offerees have ready access ▫ The actions taken by the issuer to prevent the resale of securities Each factor is flexible and highly fact-dependent. No single factor alone is determinative. 12
Regulation D In 1982, the SEC adopted Regulation D to provide greater certainty regarding which transactions are exempt from registration. Funds Raised via Reg. D vs SEC Registered Offerings in 2014 13
Regulation D Regulation D is a series of nine rules, Rules 500-508, establishing three transaction exemptions from the registration requirements of the Securities Act ▫ Rule 500 lays out general rules around using Regulation D ▫ Rule 501 sets out certain definitions ▫ Rule 502 sets out four general conditions to be met under the Regulation D ▫ Rule 503 establishes the requirement to file a Form D ▫ Rules 504 and 506 establish the exemptions, each with particular qualifications and limitations (former Rule 505 is gone and 506 now has two rules - 506(b) and 506(c)) ▫ Rule 507 disqualifies an issuer from relying on Regulation D in certain situations ▫ Rule 508 provides that an insignificant failure to comply (when considered in connection with the offering as a whole) will not disqualify an offering from the exemption. 14
Miscellaneous Private Offering Terms Accredited investor ▫ Salary test ($200K/300K last two years and current) ▫ Net worth test ($1MM+ without equity of primary residence) General solicitation Any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio or any seminar or meeting whose attendees have been invited by general solicitation. Includes internet activity. 15
Rule 502 – General Conditions for use of Reg D Integration Several private placements offered within a short period of time, each relying on separate offering exemptions, may be integrated and, when taken together, may constitute a single plan of financing for which the private placement exemption is not available. The SEC wants to ensure Regulation D is not used as part of a scheme or plan to avoid Section 5 registration requirements Information Requirements If an issuer is selling securities to non-accredited investors, the issuer must comply with the information requirements set forth in Rule 502. The required information must be furnished a reasonable time prior to sale. 16
Rule 502 – General Conditions for use of Reg D Manner of Offering Until the recent changes pursuant to the JOBS Act, Rule 502 prohibited the issuer or any person acting on its behalf to offer or sell securities by any form of general solicitation or general advertising, including: ▫ any advertisement, article or other published or broadcast communication; or ▫ any seminar or meeting whose attendees have been invited by general solicitation or advertising Limitations on Resale Regulation D is available only to issuers and applies only to a particular transaction. Rule 502(d) provides that securities acquired in a Regulation D private placement are “restricted securities” and cannot be resold by the purchaser without registration under the Securities Act or compliance with an available registration exemption. 17
Main Regulation D Exemptions ▫ No more than $5MM (recently raised) in any consecutive 12-month period. ▫ No restriction on the number of investors ▫ No restriction on the manner of the offering or resale ▫ Securities may be sold to any type of investor (including unaccredited) Rule 504 ▫ Doesn’t prescribe specific disclosure requirements ▫ No general solicitation ▫ Accredited investors and up to 35 non-accredited investors who meet sophistication requirements (Accredited investor status often confirmed through self-certification) ▫ Rule 506(b) No specific disclosure requirements for accredited investors, but significant disclosure for unaccredited investors (a safe harbor) ▫ Historically, 99% of the Regulation D activity ▫ Removed the prohibition in Regulation D on general solicitation and general advertising in Rule 506(c) offerings and sales under Rule 506, provided that all purchasers of the securities sold in these offerings are accredited investors ▫ Require issuers to take reasonable steps to verify that purchasers are accredited investors, using methods determined by the SEC 18
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