Four principal conditions to a private placement memorandum (PPM) “not involving a public offering” of securities under Section 4(a)(2) and Regulation D, Rule 506; namely:
- Offeree suitability (investors must be accredited or sophisticated);
- Availability of material information (all material information about the issuer and its business must be made available to investors);
- Manner of offering (no general solicitation, except under D, Rule 506(c); and
- Absence of redistribution (restrictions on transfer).
Two ways to satisfy condition 2 above (Availability of material information); namely:
- “Disclosure”;
- “Access”.
If a private placement will be offered to non-accredited investors (but nevertheless “sophisticated”), then “Disclosure” is the mandatory means of satisfying condition 2. If a private placement will be offered only to accredited investors, then “Access” is a permitted means of satisfying condition 2. However, in all events it is preferred still to provide a PPM to accredited investors for a variety of reasons, the main one being avoidance of Rule 10b-5 claims against the issuer and possible liability of the issuer (and its directors and officers) under Rule 10b-5.
The reason why “Access” is a permitted means of satisfying condition 2 is that both the SEC and the federal courts (in extensive case law) have taken the position that accredited investors can “fend for themselves” and therefore are able to obtain from the issuer whatever information they deem necessary to make a fully-informed investment decision. A non-accredited investor cannot fend for himself; therefore “Disclosure” is mandatory to a non-accredited investor.
The problem with accredited investors, however, is that they are smart enough to bring false claims against the issuer. They can allege that the issuer stated this or that and/or that the issuer omitted to state this or that. That is all they have to do to commence a lawsuit in federal court. The burden of proof is on the issuer. Without a written PPM that includes the statement in substance that “we are only telling you what is in this PPM, and no one is authorized to communicate any information to you other than what is stated in this PPM,” how can the issuer satisfy its burden of proof? It cannot.
This means basically an automatic rescission right, and, if the issuer already spent the investment capital, then its officers and directors can be held personally liable.
