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How Do I Avoid Liability in a Private Placement?

Improperly drafting private placement memorandum (PPM) disclosures can leave a company significantly liable to their investors. The Securities and Exchange Commission (SEC) and state securities commissions have complex disclosure regulations that companies must comply with in order to be sold. Recently, SEC regulations have shifted to respond to the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd Frank) and the Jumpstart Our Business Startups Act (JOBS Act). In this blog, we explain how to navigate these complex and changing regulations to help limit civil and criminal liabilities.

Federal Anti-Fraud Provisions

The Securities Exchange Act of 1934 imposes liability on a person who misrepresents or omits a material fact in connection with the sale of securities. A court can impose fines totaling $5 million dollars and/or imprisonment of up to 20 years, if the SEC proves that the omissions or misstatements were willfully disclosed. Injured investors can also recover damages based on the federal anti-fraud statute as well.

Adequate Disclosure

PPMs require particular disclosures and recitation of known risk factors. Because of this, an attorney must be able to foresee potential contingencies that might result in unfavorable returns. An experienced securities lawyer will protect the issuer from unintentionally making misleading statements and material omissions, and will ensure that proper documentation and disclosure is completed throughout the PPM.

Preparing Ancillary Documents

The PPM will reference other documents in the set of offering documents. Depending on the offering, this can include things like the company’s operating agreement, bylaws, promissory note, security agreement, subscription agreement, and other related documents. Business contracts that are material to the company (such as sales agreements with major customers, existing financing arrangements, or employment agreements with executives) may also be reviewed and mentioned in the PPM. You will need a licensed attorney to ensure that these agreements are properly prepared or amended. A skilled lawyer can identify and resolve issues on your behalf to help eliminate certain conflicts.

Want to learn more about avoiding liability in private placement? Contact our Houston securities attorney, or call (888) 252-8277 today.