Private Placement from the Issuer’s Perspective- Part 3 Steps to Making an Offer & a Lawyer’s Role

By Vivek Krisnaswamy, for Legal Corner LLP. Vivek is a final year student of NALSAR University of Law and will be graduating in 2021. 

The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) if you need advice and assistance with private offerings in the US so as to get legal advice that is specific to your business needs. 

How to make a Private Offer

The timeline for completing a private placement will vary depending on several factors but generally takes about 6-8 weeks to complete the first transaction. A lawyer would be able to explain the different factors that go into determining how long the process will take.‍

1. Launching the Deal: this is when a clear period of time is demarcated to conclude the buying process.
2. Negotiations: This process will take place from the beginning to the end of the discussions with the investor. Here the specifics of the agreement, like price, legal terms, etc. ironed out.
3. Information Gathering: The investor will do his due diligence – reviewing financial statements, meeting the management team, assessing the company, and then taking a closer at the industry.
4. Investment Risk Analysis: This process is very similar to how rating agencies grade public offerings.
5. Pricing: It is during this step that the rate of interest compensating the risk is determined. As mentioned in the previous article of the series, this could be decided very arbitrarily based on the risk taken on by the investors.
6. Rate Lock: This is when the investor and the company agree to lock-in interest rates based on the agreed upon spread and US Treasury rates.
7. Closing: This is the formal exchange of the securities and the capital offered by the investor.

As you can see the process is similar to obtaining bank financing.

The Lawyer’s Role

Because lawyers actually study how to go about these procedures, they know what details to pay attention to, and have the power to make sure that companies don’t lose their investors, while simultaneously protecting them from being cheated. Here is a list of some of the things that lawyers do for companies trying to make a private offering.

1. Independent Evaluation: Lawyers know how important it is for companies to get an objective un-biased valuation to determine the stock price before even launching the deal.
2. Business Plan/Marketing Document: They can help you create a plan that contains operational information, forward-looking statements, anticipated revenues, information about partners, directors, and any other details that an investor would ask for.
3. Investor Questionnaire: Once investors are identified (keeping in mind the solicitation restrictions), an investor questionnaire is prepared by the lawyer to confirm, self-certification by the investor, whether or not they are accredited, and other details.
4. Private Placement Memorandum (PPM): PPM is a full disclosure document (similar to a prospectus in an IPO) that contains amount to be raised, use of proceeds, risk factors, industry market analysis, description of management chain.
5. Subscription Agreements: These agreements are drawn up to confirm how many securities each investor is subscribing to.
6. Investment/Stock Purchase Agreement: This document is drafted after heavy negotiation and has many other miscellaneous agreements that go along with it depending on the jurisdiction that you are transacting in.
7. Revising Article of Incorporation: Most investors ask for certificates of designation of preferred stockholder rights, which can be issued only after the AoI are revised to reflect such changes.
8. Form D & other Forms: 15 days from the first sale, Ford D and all other necessary form in all states where the investors are located must be filed.

Other than these tasks, lawyers can also help you find investors, negotiate better terms, and actively safeguard your company before, during, and after the entire process of issuing private equity. For more information about how to make a private offering, feel free to contact us through out LinkedIn page.

If you have any questions regarding the incorporation process, please email me at chetana@legalcornerllp.com . I will be happy to set up a free consultation.