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Structuring a private security placement

On behalf of Law Office of Clifford J. Hunt, P.A. on Wednesday, June 13, 2018.

If your startup business has progressed to the point where an infusion of capital is required, one means of obtaining investment capital is to offer a private placement of securities. A private placement may involve an offering of stock, limited liability company membership interests or some other type of investment contract constituting an ownership interest in the company or it can be in the form of a debenture, which is corporate debt.

Many entrepreneurs seek to apply the same “can do” spirit to their offerings and attempt to structure them on their own. This well-intentioned effort can be very risky due to the highly complex nature of state and federal securities laws. Compliance with applicable laws, rules and regulations such as federal Regulation D and various states’ blue sky laws, is not optional.  Having counsel who is experienced in assisting clients with securities offerings is essential to such regulatory compliance and the goal of presenting a professional image for your company.

Transaction structure

The term “structure” is used to describe the document that lays out all of the benefits and liabilities that are part of the sale. It is important that it be thorough and well-organized in order to present the best image of the company to potential investors.

It begins by asking a series of questions, which should be answered in the document. These include:

  • The price of the equity stake and the terms for the buyer
  • Any known tax ramifications for both the buyer and the seller
  • The long-term goals of the buyer with respect to the company
  • The role of the seller after the sale of equity shares
  • The value of all assets included in the equity sale
  • Any liabilities, which the buyer will assume as part of their ownership stake
  • All tangible and intangible assets that will be acquired along with the equity
  • The forms of payment made to both buyer and seller
  • The price of the equity
  • Any known tax consequences of the equity as structured

Full disclosure

This list should be seen as a guide and not a checklist. It outlines full disclosure, which is required under Regulation D. These items need to be presented in an orderly fashion so they are easily understood by potential investors and present the company in the best possible light.

The actual Form D filing with the Securities and Exchange Commission (SEC) is not an approval or a registration of the sale. It is simply a notification that the sale is pending and that the Regulation D program is being used.

Experience counts

It is important to be thorough and well-organized in securities applications. This is why it is essential that an attorney skilled in securities law be used to draft the structure and supporting documents.

A private placement that brings new owners into a startup is a critical point in the development of the company. There is no substitute for setting it up properly to assure that the next critical phase of the company occurs without rancor and according to plan.

Successful entrepreneurship is a matter of employing skill along with the necessary capital to bring something new into the world.

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