CALIFORNIA PRIVATE PLACEMENT MEMORANDUM LAWYER
CALIFORNIA SECURITIES LAWYER
Alan Abergel, Esq. is an attorney licensed by both the State Bar of Texas and the State Bar of California.
WE DO NOT PROVIDE PPM SERVICES FOR COMPANIES (ISSUERS) WHO RAISE MORE THAN $10 MILLION DURING A CERTAIN ROUND OF EXEMPT PRIVATE OFFERING.
We can assist your company in legal aspects of raising capital for your business. We provide business structuring, corporate law, and securities law advice. We draft Private Placement Memorandums, Investor Qualification Questionnaires, Subscription Agreements, Operating Agreements, Bylaws, Minutes, and other corporate and capital raising documents. We also file Form D with the SEC and required notices with the applicable states’ securities regulators.
We also assist in formation of private equity funds and hedge funds and in structuring such funds as a “3(c)(1) fund” or a “3(c)(7) fund” in reliance on one of the exceptions from the definition of “investment company” set forth in Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act. These companies are commonly known as “private investment companies.” We also assist to structure such funds’ securities offerings to fall within various private offering exemptions to registration of securities, such as Regulation D, Rule 506 “safe harbor” rule.
We serve many business industries including, lending, financial services, equipment leasing and finance, real estate, technology startups, professional services, music/entertainment, new media, fitness/wellness, manufacturing, restaurants, and apparel.
Regulation D Offerings.
Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D contains three rules providing exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the securities with the SEC. These Regulation D exemptions are available under rules 504, 505, and 506.
Companies relying on a Reg D (17 CFR § 230.501 et seq.) exemption do not have to register their offering of securities with the SEC, but they must file what’s known as a “Form D” with the SEC after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s promoters, executive officers and directors, and some details about the offering, but contains little other information about the company. Companies issuing securities under Reg D or under Regulation Crowdfunding should provide disclosures to their investors through Private Placement Memorandum (PPM).
Rule 506 of Regulation D.
Rule 506 of Regulation D is considered a “safe harbor” for the private offering exemption of Section 4(a)(2) of the Securities Act. Companies relying on the Rule 506 exemption can raise an unlimited amount of money. There are actually two distinct exemptions that fall under Rule 506.
Under Rule 506(b), a company can be assured it is within the Section 4(a)(2) exemption by satisfying the following standards:
- The company cannot use general solicitation or advertising to market the securities;
- The company may sell its securities to an unlimited number of “accredited investors” and up to 35 other purchases. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;
- Companies must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that are generally 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 be available to answer questions by prospective purchasers; and
- Financial statement requirements are the same as for Rule 505.
Under Rule 506(c), a company can broadly solicit and generally advertise the offering, but still be deemed to be undertaking a private offering within Section 4(a)(2) if:
- The investors in the offering are all accredited investors; and
- The company has taken reasonable steps to verify that its investors are accredited investors, which could include reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports and the like.
Purchasers of securities offered pursuant to Rule 506 receive “restricted” securities, meaning that the securities cannot be sold for at least a year without registering them.
Under the Securities Act of 1933, the offer and sale of securities must be registered unless an exemption from registration is available. Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012 added Securities Act Section 4(a)(6) that provides an exemption from registration for certain crowdfunding transactions. In 2015, the Commission adopted Regulation Crowdfunding to implement the requirements of Title III. Under the rules, eligible companies will be allowed to raise capital using Regulation Crowdfunding starting May 16, 2016.
In order to rely on the Regulation Crowdfunding exemption, certain requirements must be met.
- Maximum Offering Amount of $1 Million. A company issuing securities in reliance on Regulation Crowdfunding (an “issuer”) is permitted to raise a maximum aggregate amount of $1 million in a 12-month period. In determining the amount that may be sold in a particular offering, an issuer should count:
the amount it has already sold (including amounts sold by entities controlled by, or under common control with, the issuer, as well as any amounts sold by any predecessor of the issuer) in reliance on Regulation Crowdfunding during the 12-month period preceding the expected date of sale, plus the amount the issuer intends to raise in reliance on Regulation Crowdfunding in this offering.
An issuer does not aggregate amounts sold in other exempt (non-crowdfunding) offerings during the preceding 12-month period for purposes of determining the amount that may be sold in a particular Regulation Crowdfunding offering.
- Investors Subject to Limits
Individual investors are limited in the amounts they are allowed to invest in all Regulation Crowdfunding offerings over the course of a 12-month period:
If either of an investor’s annual income or net worth is less than $100,000, then the investor’s investment limit is the greater of:
5 percent of the lesser of the investor’s annual income or net worth.
If both annual income and net worth are equal to or more than $100,000, then the investor’s limit is 10 percent of the lesser of their annual income or net worth.
During the 12-month period, the aggregate amount of securities sold to an investor through all Regulation Crowdfunding offerings may not exceed $100,000, regardless of the investor’s annual income or net worth.
Spouses are allowed to calculate their net worth and annual income jointly.
- Transactions Conducted Through an Intermediary
Each Regulation Crowdfunding offering must be exclusively conducted through one online platform. The intermediary operating the platform must be a broker-dealer or a funding portal that is registered with the SEC and FINRA.
Issuers may rely on the efforts of the intermediary to determine that the aggregate amount of securities purchased by an investor does not cause the investor to exceed the investment limits, so long as the issuer does not have knowledge that the investor would exceed the investment limits as a result of purchasing securities in the issuer’s offering.
Certain companies are not eligible to use the Regulation Crowdfunding exemption. These include:
companies that already are Exchange Act reporting companies;
certain investment companies;
companies that are disqualified under Regulation Crowdfunding’s disqualification rules;
companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement; and
companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.
- 3. Disclosure by Issuers
- Form C
Any issuer conducting a Regulation Crowdfunding offering must electronically file its offering statement on Form C through EDGAR and with the intermediary facilitating the crowdfunding offering. Other required disclosure that is not requested in the XML text boxes must be filed as attachments to Form C. There is not a specific presentation format required for the attachments to Form C; however, the form does include an optional “Question and Answer” format that issuers may use to provide the disclosures that are required but not included in the XML portion.
- Offering Statement Disclosure
The instructions to Form C indicate the information that an issuer must disclose, including:
information about officers, directors, and owners of 20 percent or more of the issuer;
a description of the issuer’s business and the use of proceeds from the offering;
the price to the public of the securities or the method for determining the price,
the target offering amount and the deadline to reach the target offering amount,
whether the issuer will accept investments in excess of the target offering amount;
certain related-party transactions; and
a discussion of the issuer’s financial condition and financial statements.
The financial statements requirements are based on the amount offered and sold in reliance on Regulation Crowdfunding within the preceding 12-month period:
For issuers offering $100,000 or less: Financial statements of the issuer and certain information from the issuer’s federal income tax returns, both certified by the principal executive officer. If, however, financial statements of the issuer are available that have either been reviewed or audited by a public accountant that is independent of the issuer, the issuer must provide those financial statements instead and will not need to include the information reported on the federal income tax returns or the certification of the principal executive officer.
Issuers offering more than $100,000 but not more than $500,000: Financial statements reviewed by a public accountant that is independent of the issuer. If, however, financial statements of the issuer are available that have been audited by a public accountant that is independent of the issuer, the issuer must provide those financial statements instead and will not need to include the reviewed financial statements.
Issuers offering more than $500,000:
For first-time Regulation Crowdfunding issuers: Financial statements reviewed by a public accountant that is independent of the issuer, unless financial statements of the issuer are available that have been audited by an independent auditor.
For issuers that have previously sold securities in reliance on Regulation Crowdfunding: Financial statements audited by a public accountant that is independent of the issuer.
Call a LOS ANGELES CALIFORNIA PRIVATE PLACEMENT MEMORANDUM LAWYER to assist you with your securities offering.