Private Placement Memorandum (Reg D)

When selling your company's stock you will use an offering disclosure document to inform investors about the pertinent details about the company and the stock offering. This document is the disclosure document, or as popularly known as the "offering memorandum". While the Direct Public Offering program has no prescribed disclosure requirements, it is always recommended that you utilize an offering memorandum to assure proper disclosure of all pertinent corporate details. This disclosure document also protects the company and company principals because it informs investors of all the needed disclosure items before they invest.

Some typical disclosures include information about: the company's business, company management, market for the company's product or services, use of invested proceeds, stock offering details (share restrictions, voting rights, etc.), details about shares held by management, details about risks investors may face (lack of operating history, product development risks, reliance on a single distributor, etc), recent significant transactions, and other disclosures related to the company's overall condition.

The company's offering memorandum will include a Subscription Agreement which is the "stock sales contract" between the investor and the company. This Subscription Agreement comes included with an Investor Suitability Questionnaire which helps the company determine an investors suitability for investing in the offering.

The Private Placement Memordum includes:

  • Execution Documents To Subscribe For Shares/Percentage Interest
  • Memorandum Of Terms For Private Placement 
  • Risk Factors
  • Subscription Agreement
  • Subscriber Qualification Questionnaire
  • Supporting Documentation  

The Practical Issues Satisfied 

Any investor that invests capital into your business, debt or equity, is going to get a security in return for their investment. In an equity situation they will receive stock or a membership unit, in a debt transaction they will receive a note or "debenture". These are deemed "securities" by the SEC and as such you are required to follow the rules and regulations set forth at the State and Federal level when you sell a security to an investor. This is true whether you need to raise $25,000 from 3 investors for a coffee shop or $10,000,000 for a software company. 

The Regulation D Offering programs were specifically designed by the SEC to provide the proper legal framework, rules and regulations that allow a company to sell securities in a private transaction. Using only a business plan to raise capital and the "under the table" illegal securities sales that can result are future trouble for the company owner. 

These problems can be avoided by using the Regulation D programs. The programs are fairly straightforward to utilize; thus the risks of raising capital the wrong way far outweigh the small investment of time you will make preparing a Regulation D Offering and raising capital properly. 

A Regulation D Offering will solve all of the technical issues you will face when dealing with investors (investment structure, investment documentation, etc.) - these are issues that must be addressed at some point in time and they should be addressed before you interact with investors. Not addressing them ahead of time presents a very unprofessional image of you to the investor. 

Internet Marketing to Investors 

The advent of the Internet has provided private companies with a powerful tool that allows the capability to cost effectively introduce their opportunity to a large number of potential investors. There are many web-based services available that are specifically designed to promote private investment opportunities. Internet marketing is a proven way to locate potential investors.

The problem is that most companies are severely hampering their ability to effectively use these Internet resources to raise capital because they are using only a business plan to promote their investment opportunity. Most of the investors that will be contacted via the Internet (whether through your corporate site or on a commercial marketing site) will not have the capability to capitalize an entire transaction - thus being able to accommodate a pool of these investors in a sophisticated and legal manner becomes critical. A Regulation D Offering will allow you to make the most out of marketing your opportunity to investors via the Internet. 

Savvy companies are also providing links to their private placement memorandum and subscription materials on their corporate websites so that interested parties can acquire the investment documents online. These documents are password protected - thus the investor must pass through an investor suitability questionnaire first before they are allowed access to the offering documents. This turns your corporate website - and the traffic that it encounters everyday - into a resource for locating potential investors. 

Individual Investors - Better Than VC's 

Many private companies waste time seeking funding from venture capital groups. Less than 1% of companies that successfully raise private capital do so through a venture capital firm. Think your company will be one of the few in that one percentile?

Most venture capital firms are interested in capital investments exceeding $5,000,000 and companies in ultra high growth industries capable of producing very high annual returns. They also typically seek companies that are "mezzanine" stage - the stage right before completing an initial public offering. This leaves earlier stage companies or companies seeking small amounts of capital with little interest from VC firms.

Most private companies would not want true venture capital in the first place. VC firms typically take a controlling interest in your company and usually want to have a say in day-to-day management. Most entrepreneurs are very hesitant to give up control of their business to outsiders. 

A Regulation D Offering allows private companies the ability to leverage the smaller amounts of equity capital they need by efficiently raising capital from a number of individual investors. Don't waste your time on the VC scene - provide your company with the fundamentals it needs to raise capital from individual investors - the best source of funding for private companies. 

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