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 If it appears that they cannot be maintained, then the transaction must be rescinded and monies paid by subscribers must be refunded.
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.
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.
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.
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.
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.
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 investors’ 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: