TheCorporateCounsel.net

Given the release last week of updated “exempt offerings” CDIs that hearken back to the SEC’s 2020 amendments to simplify & harmonize the private offering framework, it seemed appropriate to continue the “exempt offering” theme and discuss the tricky question of what disclosures need to be (or should be) provided to investors in a private placement. This Barnes & Thornburg blog provides what it calls the “continuum of disclosure options.”

– No Disclosures and No Subscription Agreement – Under this option, the issuer provides no written disclosures of any nature to investors. The investors sign the operating agreement, partnership agreement, or similar organizational document of the issuing company and make their capital contributions. This provides no legal protection to the issuer or its control persons for securities fraud liability.

– Subscription Agreement – The issuer prepares a subscription agreement containing the principal terms of the purchase and sale of the securities, and various reps and warranties from the investor, including a representation that the investor has been given a full opportunity to ask questions and receive materials from the issuer regarding the company and the offering. No separate disclosure document is provided to investors. This option provides little legal protection to the issuer and its control persons, but more protection than providing no disclosures or subscription documents.

– Subscription Document Package – The issuer prepares a short disclosure document containing summary descriptions of the offering, company, use of proceeds, capitalization, and rights of the offered securities, along with risk factors. A full subscription agreement and confidential purchaser questionnaire is attached to the disclosure document to establish the investor’s suitability to invest in the offering. This option provides greater legal protection to the issuer and its control persons than the first two options above.

– Stock/Securities Purchase Agreement w/ Full Due Diligence Opportunity – The issuer does not provide a disclosure document to the investors, but rather prepares and enters into a detailed stock/securities purchase agreement with the investor(s) with detailed reps and warranties regarding the investor’s investment intent, suitability, accredited investor status, and other matters. The issuer also opens up a data room and provides the investor(s) with a full due diligence opportunity to review company documentation, have meetings with the company’s board and executive officers, and receive full answers to questions. This option is frequently used by more sophisticated private equity and venture capital investors who are confident in their own due diligence processes and would rather rely on those processes to determine whether to invest, rather than receiving a disclosure document that may not provide them what they desire to know about the company and its business. This option provides a high level of legal protection to the issuer and its control persons.

– Full PPM – The issuer prepares and distributes a full, detailed PPM to prospective investors providing fulsome disclosures regarding the offering, the company’s business, management, capitalization, organizational documents, risk factors, competitors, and other disclosures. This option provides the highest level of legal protection to the issuer and its control persons.

Why does this continuum exist? The blog has a reminder that, in private placements to non-accredited investors, issuers may be required to provide significant disclosures (including audited financial statements); whereas, there are no “absolute disclosures that the SEC requires” be made in writing to investors in a private placement to only accredited investors under Regulation D. So there’s some flexibility, and sometimes good reasons that issuers may not want to prepare a full PPM, given the associated time and cost involved.

– Meredith Ervine