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The Different Stages of a Private Placement Offering

A traditional private placement for a standard Reg D offering generally follows a series of well-worn steps which are outlined here.

The following diagram, which first appeared in ‘Economics of the Private Placement Market,’ a Federal Reserve White Paper, provides a nice visual for the basic flow of these steps from start to finish:

Stages of a Private Placement Offering

 

In summary, the general mechanics of a private offering requires an issuer or their representatives to:

  1. Prepare and track offering documents
  2. Maintain the confidentiality of all documentation
  3. Monitor current sales and their concurrent suitability documents
  4. File Form D in a timely fashion
  5. Comply with Blue Sky state authorities and deal with escrow

From issuer and broker-dealer discussions all the way through the marketing and close of a deal, the length and complexity of each period can vary greatly. What each stage has in common, however, is the existence of a delicate back and forth process between all parties as they navigate through various negotiations and myriad regulatory hurdles. This balance remains no matter how an issuer is choosing to go to market—whether via online portals or through more traditional routes.

As an example of the back-and-forth nature of the process take Stage Two, “Design of major contract terms.” This stage surrounds the preparation of a disclosure document, or private placement memorandum (PPM). The PPM is the central document presenting the company story to potential investors and defining potential terms of investment. While traditionally prepared by a broker-dealer, PPM’s can also be prepared by the company, fund, or law firm. For good summary articles on the PPM see here and here. For a checklist of what the PPM should contain see this article.

Finalizing a PPM is in and of itself a large undertaking for which an issuer usually seeks professional assistance. Yet preparing a PPM is only the first step of this stage.  Once the PPM is created for example, any material changes to the memorandum over the course of a private placement must be communicated to potential investors. This process itself requires various levels of effort and tracking on the part of either the issuer or broker-dealer. Furthermore, if at a later time the PPM is found to be materially misleading the broker-dealer (or issuer) may be deemed to have violated anti-fraud provisions of the federal securities laws.[1] All of this should indicate that not only are the mechanics of a private placement complex, but the litigation, liability, and legal framework surrounding it are fraught with potential issues.

Partly as a result of this complex regulatory environment the entire private placement process has traditionally been labor intensive and subject to uncertainty and risk. Making sure this process is as streamlined as possible while automating key compliance hurdles is part of what we take pride in doing here at ACE.

No matter what avenue one uses to market a private placement, however, a deep understanding of the mechanics of the process and the potential pitfalls within each stage is key to a successful and compliant offering.

 

[1] Generally, courts that review challenges to private placements place a large emphasis on investor access to underlying information.

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