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Private Placement Process

Private Placement Process

Offering Commencement and Termination – Let Assist with Private Placement Process

The commencement date of private placement is fixed generally at the date of the availability of the approved offering documents (PPM), for distribution to sales personnel.

The termination date for a private placement is dependent on the type of offering being made. An “all or nothing” offering contains, by its terms, a fixed or defined date for the termination of the offering. A “best efforts” offering may have an indeterminate termination period meaning that the offering continues until the full number of Securities is placed and the subscribers are formally accepted by both the issuer (or a duly authorized representative) and by a Principal of the brokerage firm.

The sales objectives in a best efforts offering, of course, is that all securities will be placed with suitable investors. However, short of all securities being placed, it is required that a minimum amount of money need be raised which shall be sufficient, after the funding of all of the organizational and offering expenses, and giving consideration to the fixed contractual obligations of the issuer, without changing the nature of the investment called for by the general terms of the offering. The issuer may be given the option of funding required issuer obligations by the making of loans or deferral of fees. In such a case where the issuer funds financial requirements prior to the placement of all of the securities, it is the obligation of the brokerage firm to assure itself that appropriate disclosure to all offerees (and subscribers) be made and to assure itself that the basic nature and character of the transaction called for by the terms of the private placement are maintained. If it appears that they cannot be maintained, then the transaction must be rescinded and monies paid by subscribers must be refunded.

Possible Need for a Purchaser Representative

A judgment must be made as to the business “sophistication” of a purchaser. If it is determined that a particular purchaser is not sufficiently sophisticated in business matters to effectively evaluate the investment opportunity, then he or she must be assisted by a “purchaser representative,” i.e., a person possessing the requisite sophistication (chosen by the purchaser) who is able to and does assist in evaluating the investment opportunity and who is not an affiliate of the issuer, not the brokerage firm. Also, State Blue Sky laws impose additional requirements for their investors. Only customers known to registered representative personally should be sent only brokerage firm approved offering materials. If there is doubt about the individual’s need for a purchaser representative, the subscriber should be required to obtain one. This is very common in private placements.

No General Solicitation

  1. Cold Calling is not permitted.
  2. Advertisements, articles, notices, or any other communication cannot be published in any newspaper, magazine, newsletter, or similar media or broadcast on TV, radio, or cable.
  3. No seminars or meetings may be held with regard to any current offering unless each invitee is known and qualified in advance.
  4. No mention of any specific offering or past performance may be made at generic seminars (i.e., seminars to discuss the general concept of such investments).
  5. No fee sharing. Fees may not be split with non-registered persons such as lawyers, accountants or investment advisers.

Investment Intent

Purchasers of private placement securities must purchase for investment purposes and not for the purpose of resale. (Example: do not buy into the private placement offering (PPM) and then the next day turn around and resell the securities, either at the same price, higher price, or even lower price). The typical subscription documents used in private placements contains what is called “investment letter language.” This representation should be personally verified. Consideration should be given as to whether the investment representation makes sense in view of the surrounding circumstances of the proposed purchaser.

Oral Representations

Offerees, having received the private placement memorandum documents, frequently request oral explanations or supplements to the information presented. Great care should be taken in making oral disclosures regarding a private placement. Deviation from the printed material is prohibited. Written notes of conversations with offerees (and their representatives) should be made, dated and placed in the client’s file.

Acceptance Of Offerees As Purchasers

In all private placement offerings, the subscribers must be formally accepted by the issuer. The acceptance of subscribers is based upon a subscriber questionnaire and, possibly, the customers account information (a document signed by the client). A review of the contents of this form by a representative of the firm who is qualified to make such determinations is imperative.

Following the acceptance of the subscribers in a private placement by both the issuer and the principal, the offering shall be terminated by notification to all involved sales persons or entities.

Mechanics of the Private Placement Offering Process

  1. The offering documents should be numbered. Unnumbered copies should be marked “For Information Only,” “File Copy,” “Memorandum Number,” and other appropriate notation.
  2. A distribution control sheet should be created, and monitored. As private placement offering documents are assigned to particular registered representatives, the number of the offering documents, together with the registered representative’s name, should be placed on the control sheet.
  3. A sales control sheet will be maintained reflecting current sales.
  4. Incoming checks,subscription agreements, and executed suitability documents should be logged on a daily basis or when applicable.
  5. Checks should be reviewed for acceptability by the firm, recorded on the Private Placement’s receipts blotter, and forwarded to the individual bank escrow agent, and where appropriate to the issuer, together with the purchaser’s name, address, social security number, and number of the PPM.
  6. Incoming subscription agreements should be approved by the a firm, recorded on the sales blotter, and forwarded to the issuer for acceptance. A copy must be maintained for the brokerage firm files.
  7. Confirmations should be sent immediately to the subscriber upon acceptance, to the registered representatives, and a file copy should be retained (e.g., a copy of the Subscription Documents.)
  8. The Form D will be filed, on a timely basis, by counsel to the issuer, with the SEC and with those states that require it.
  9. Care should be taken that any other forms necessary to comply with the state Blue Sky authorities will be timely filed. Counsel to the issuer or brokerage firm counsel should generally be consulted as to the required forms in the states where the securities have been sold. Generally, this is accomplished by counsel to the issuer. (Some states require no forms.)
  10. A complete file containing the above-described documents for each private placement should be maintained as part of the brokerage firm’s records.
  11. Escrow Account – Private Placements Only

The federal securities law (the Exchange Act) is very specific with respect to the required treatment of an escrow account maintained in an “all or none” or “part or none” offering.

The rules applicable to “all or none” or “part or none” offerings relating to the maintenance of an escrow account for a given offering are Rules 10b-9 and 15c2-4 of the Securities Exchange Act of 1934. Rule 10b-9 requires, in general, that in an “all or none” or “part or none” offering (as opposed to a “best efforts” offering) monies paid for the purchase of securities must be returned to the investors if the specified number/dollar amount of securities is not sold within a specified time. In other words, the “all or none” or “part or none” private placement offering requires specification of the number of securities and the time of the selling period.

Both Terms Must Be Adhered To

Rule 15c2-4 requires, in general, that the monies received from investors be deposited into a separate segregated bank account (Independent Bank as Escrow Agent) and held for the investor’s benefit until the “all or none” or “part or none” terms have been complied with. If the terms of the offering are met, the money is to be transmitted to the issuer. If not, the monies are to be returned to subscribers.

The specific procedures to be followed in the handling of escrow accounts for “all or none” or “part or none” transactions are as follows:

  1. When an “all or none” or “part or none” offering is commenced, an escrow agreement shall be created. This document should be executed by the brokerage firm and the bank. The brokerage firm is required to keep a copy of all escrow agreements on file to demonstrate compliance with Rule 15c2-4.
  2. An escrow account should be opened by the bank. The escrow account is governed by the escrow agreement. The account typically requires signatures of representatives of both the brokerage firm and the issuer before any checks can be issued from the account.
  3. Incoming monies should be deposited immediately into the escrow account, along with the purchaser’s name, address, social security number and number of shares/units.
  4. Upon the completion of the “all or none” or “part or none” terms of the agreement or upon the expiration of the specified time period, the escrow agent verifies that the terms of the escrow agreement have been or have not been met by the designated date and that the funds should be released from escrow.
  5. The issuer then transmits written confirmation stating that a determination has been made that the conditions of the escrow have or have not been complied with and request a release of the funds.
  6. Upon receipt of the written confirmation described above, the funds are transmitted to the proper entity or persons.
  7. The documentation created by these procedures is then retained in a segregated file for audit or regulatory review.
  8. In a “best efforts” offering, the brokerage firm is contractually bound to use its “best efforts” to place the securities with suitable investors. The brokerage firm will follow the procedures as outlined above regarding placement of subscriber’s funds in an independent bank escrow account.
Read More on PPM or Private Placement Memorandum:
  • PPM
  • Private Placements