As a leading practitioner in the Private Placement Memorandum (PPM) preparation industry, I speak to lots of people about PPMs. In the course of this work, I am asked a broad array of questions about PPMs, the law, crowdfunding, and raising capital. I am happy to answer these questions, and in fact offer everyone a free 15-minute consult. Click here to get your free call.
There is one question in particular that always troubles me. The question is usually prefaced with one of the following statements: “So, I was speaking to another attorney…,” or “My accountant told me…,” or even, “So this guy was telling me….” And then the question: “Do I really need a PPM?” My inclination is to immediately shout, “Of course you need a PPM!” But I always practice restraint. And, it might even surprise you that the technical answer is sometimes that the applicable corporate securities laws may not expressly require a PPM. But how often do technical answers keep us safe or really speak to critical underlying issues?
The best answer, the one virtually any qualified practitioner (lawyer) will give you, is, yes, you almost certainly need a PPM. Here’s why. Whenever you seek to raise money from an investor, this is deemed a securities transaction and it is governed by federal and state securities laws. There is one primary federal act that regulates securities offerings: the Securities Act of 1933 (the “Securities Act”). The basic spirit and premise behind the bulk of the provisions of the Securities Act is that investors can only adequately evaluate the merits of a securities offering if they are provided with accurate and complete information regarding the company and the offering itself. So the general intent of this entire body of federal securities laws is that any time an investor is given the opportunity to invest in a business, he or she should also be given accurate and complete information upon which to make a reasonable decision.
Moreover, there are provisions in the federal securities laws that impose civil and criminal liability when a company (issuer) does not make adequate disclosures when offering securities for sale. In fact, the Securities Act specifically provides aggrieved buyers of securities with several express and implied causes of action. The civil liability provisions can expose issuers to severe sanctions for violating the Securities Act. In other words, your investors can sue you.
Some of these provisions do not apply if the company can utilize one of the exemptions available under the Securities Act to offer securities without a registration statement, including those exemptions contained in Regulation D. However, there are several federal securities laws that can create liability in connection with a company’s offering regardless of whether they use Regulation D or some other exemption. Perhaps the most important provision (although there are definitely others) is Section 17 of the Securities Act.
Section 17 – Antifraud Provision
Section 17 of the Securities Act is the general antifraud provision of the Securities Act and prohibits any person involved in the offer or sale of a security from using material misstatements or omissions to obtain money or property. Note the word “omissions.”
Yes, that’s right, if you omit a material fact about your business when seeking funding from anyone, you could potentially be liable under the US Federal Securities Laws. Moreover, Section 17 specifically applies to offering materials, including a PPM, used in connection with the sale of securities. Claims based on Section 17 are enforced by the SEC. Other provisions may also apply, and are collectively known as the antifraud provisions of the US securities laws.
So, although technically under Regulation D you may not be required to have a PPM, you and your company may still be liable under the antifraud provisions. To be clear, the intent to defraud is not a requirement for being charged under these provisions. So, you are potentially on the hook if you don’t provide your potential investors with material information that typically comes from a complete and properly prepared PPM.
Now, a quick word about the meaning of “material information.” Material information is a legal term, which in this context is generally defined as any information that, if a reasonable investor knew about it, such investor would not have invested. It also could apply to information that is provided to an investor, such as in a business plan or investor slide deck, that presents something that is misleading or inaccurate. For example, statements such as “we are the first…,” or “we are the only…,” or “our product is the best…” are almost always inaccurate and misleading material information that could get you into a lot of trouble. A properly drafted PPM will supersede any statements made or missed in a business plan and keep you and your business safe.