Private Placement of Equity Shares

1
Private Placement of Equity Shares
2
What is a Private Placement?

• A Private Placement is selling financial
  securities that do not have to be registered with
  the Security and Exchange Commission.
• A Private Placement may be sold to accredited,
  non-accredited, or sophisticated investors.
• A Private Placement must meet exemption
  requirements.
• Requires a Private Placement Memorandum.

3
Accredited Investors-Institutions

• Financial Institutions
• Banks
• Insurance Cos.
• Investment Cos.
• SBICs
• Certain Employee Plans
• Private Business Development Companies
• Non-profit businesses w/ assets gt 5 million
• Trusts of over 5 million in assets
• Entities in which owners are accredited investors

4
Accredited Investors-Individuals

• Directors, executives, or general partners of the
  issuer.
• Persons with individual or joint net worth is
  over 1 million
• Persons with income over 200,000 or joint income
  of over 300,000 during the last two years.

5
Sophisticated Investors

• Individuals with knowledge and experience in
  financial and business matters that render him
  capable of evaluating the merits and
  understanding the risks posed by the
  transaction.
• Either acting alone or in conjunction with his
  purchase representative

6
Advantages of a Private Placement

• Reduced transactional and on-going costs.
• Targeted offering.
• May attract active investors.
• May be quicker than public offerings.

7
Exemptions to Federal Securities Laws

• Rule 504
• Rule 505
• Rule 506
• Small Corporate Offering Registration

8
Rule 504

• Offers and sales of no more than 1 million in
  securities in any 12 month period
• Must file a Form D within 15 days of the first
  sale
• No registration or prospectus required although a
  prospectus may be a good idea

9
Rule 505

• Offers and sales of no more than 5 million in
  securities in any 12 month period
• Unlimited number of accredited investors and up
  to 35 non-accredited investors.
• Must file a Form D within 15 days of the first
  sale
• No advertising or general solicitation allowed.

10
Rule 506

• Offers and sales of more than 5 million
• Unlimited number of accredited investors and up
  to 35 non-accredited investors, sophisticated
  investors.
• Must file a Form D within 15 days of the first
  sale
• No registration or prospectus required although a
  prospectus may be a good idea

11
Small Corporate Offering Registration

• Uses Form U-7, a question and answer form
• Streamlines the process
• Reduces the cost of filing

12
Private Placement Memorandum

• A Private Placement Memorandum describes the
  companys background and the risks of purchasing
  the securities.
• Depends on the level of disclosure required by
  federal law and state law, the sophistication of
  the investors, and the complexity of the issue.

13
Tips in Preparing a PPM

• Prepare a list of targeted investors.
  (individuals with pre-existing relationship)
• Make an attractive and fair offer (it is not
  negotiated later)
• Look for special benefits for the investors
• Make sure it is well-written and gives strong
  supporting documentation

14
Sections of the PPM

• Introduction
• Description of the Company
• Risk Factors
• Capitalization of the Issuer
• Management of the company
• Terms of the Offering
• Allocation of the Proceeds

15
Sections of the PPM

• Dilution
• Description of the securities
• Financial Statements
• Exhibits

16
Subscription Materials

• The Subscription Agreement acknowledges
• Review of the information by the purchaser
• The restricted nature of the offering
• Qualifications of investors
• Awareness of the risk factors
• The advisory role of the purchase representative
• Purchaser Questionnaire
• Evidence of investor accreditation or
  sophistication
• Evidence of investors abilities to evaluate the
  offering

17
Tracking the Offering

• Keep track of
• Offering copy numbers
• Name and address of recipients
• Dates sent
• Make no earnings claims
• Remind the recipients of the high-risk nature of
  the investment

18
Final Tips

• Remember that a check doe not create legal
  acceptance
• Formally update the PPM as needed
• Keep investors informed