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Originally published in InsideCounsel on June 13,
2012
Companies should take extra precautions to ensure that potential
investors have all relevant information
As has been recently reported, the Jumpstart Our Business
Startups (JOBS) Act has been signed into law. The JOBS Act is
designed to encourage companies to create jobs by lowering hurdles
to going public and complying with the laws governing public
companies, and by facilitating the ability of companies to conduct
private placements to finance their businesses.
One way in which the JOBS Act facilitates private placements is
by requiring the Securities & Exchange Commission (SEC) to
remove the current ban on general solicitation or advertisements,
including social media, in private placements of securities,
provided that all purchasers in the private placement are
"accredited investors."
This change, when it becomes effective, will allow greater
exposure to investments for a wider range of potential investors.
The ability to solicit a wider range of potential investors will
bring with it some additional challenges for companies conducting
private placements. In the past, companies conducting private
placements often solicited investments from a small group of
sophisticated investors who were well versed in making such
investments.
As companies expand their solicitation efforts to investors who
are potentially less sophisticated, extra care should be taken to
ensure that all material information is available to potential
investors, particularly by ensuring that the private placement
memorandum contains the information material to investors'
decision-making process.
In a private placement with all accredited investors, there are
no specific disclosure requirements under the securities law.
However, companies conducting such a private placement must look to
the anti-fraud provisions of the securities law, including related
case law, and to SEC guidance. These sources indicate that in
determining whether information is material and should be disclosed
to potential investors, companies must look at what information a
reasonable investor would need to make an informed decision.
In this regard, the applicable cases make it clear that
companies must look at the total mix of the information, and
consider what total mix of information , either through a
disclosure document, the due diligence process, or just by general
access to the information, the investor needs to make an informed
decision. These same cases decline to provide any bright-line
test.
So, it remains a matter of judgment as to what would be
important to investors, but companies should be particularly
careful to ensure that investors have access to information about
material or recent developments regarding the issuer, and that the
information is up-to-date at the time of the sale.
Companies also should exercise caution around the use of
financial projections in conducting a private placement, as the
desire or advisability of using financial projections will likely
increase as companies act to solicit a broader range of investors.
The use of financial projections subjects companies to increased
risk because companies often fail to adequately disclose the
assumptions related to the projections. Disclosing financial
projections without robust disclosure of the assumptions could be
misleading, and could create liability for companies and their
directors and officers.
In short, companies should ensure that they disclose the
material assumptions and include good risk factor disclosure. Good
risk factor disclosure does not include risk factors that are
merely boilerplate, but requires that companies include those risk
factors that actually describe the issues that may undermine the
financial projections.
While the JOBS Act brings with it enhanced opportunities for
companies to access capital through private placements, companies
will need to be extra vigilant in ensuring that they provide
investors participating in the offering with the information they
need to make a fully informed decision.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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