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In pursuit of capital, be sure to track your private offering

Editor's note: Matt Storms is writing a series of articles on raising capital from angel and venture capital investors. This installment focuses on managing the offering process after the Private Placement Memorandum has been prepared, and is co-written with Dan Ghoca.

Here's a conversation overheard at a recent conference:

Entrepreneur 1: I have met at least five angel investors since showing up two hours ago. Each of these guys wants to see our PPM!

Entrepreneur 2: Sweet! You know what we should do. We should get a copy of the attendee list and mail a copy of our PPM to all the investor attendees. There's got to be at least 50 angel investors here today.

Entrepreneur 1: Hey, to save costs, we should just e-mail the thing to everyone on that list. Even better, we should post a link to the PPM on our website and indicate that if anyone is interested, they can download the PPM and give us a call if they have questions. Let's do that!
If you're an entrepreneur and you don't see many problems with this exchange, you definitely need to read on.

There is more to securities law compliance than preparing and using a good private placement memorandum (PPM). One step often overlooked is to implement a system to monitor the offering process. As part of a private offering, the issuer must ensure that (1) no advertising has taken place in connection with the offering, (2) the offering is limited to the states where blue sky research and filings will have been completed, and (3) no targeted prospective investors who are not accredited, or a limited number based on the sought-after exemption and the actual disclosures made pursuant to the PPM, are offered securities.

This article provides an overview of the information that should be maintained and tracked through the offering process.

Pre-existing relationship

As mentioned in previous articles on capital raising, there are certain exemptions under federal and state securities laws that allow an issuer to sell its securities without having to endure the time and expense of going through the registration process (i.e., becoming a public company). One of the most fundamental restrictions in qualifying for one of these exemptions is that the issuer (or those engaged to facilitate the capital raise) not use a “general solicitation” or advertising to attract potential investors.

The Securities and Exchange Commission has determined that the ban on general solicitations means that the issuer, or a party acting on its behalf (usually a company officer or placement agent), must have a “pre-existing relationship” with a potential investor before offering to sell that person the issuer's securities.

Legal treatises and SEC interpretive rulings have spent much time and ink tracing the contours of the “pre-existing relationship” requirement. It generally can be broken down into two components: (1) the relationship has to be in place prior to the current offering; and (2) the relationship must be substantive in nature so that the issuer or its agent knows of the general financial circumstances and sophistication of the potential investor. If the issuer or its agent has such a prior substantive relationship with the potential investor, the issuer may solicit the potential investor's interest in the offering. A mass mailing to all accredited investors would likely violate the pre-existing relationship requirement.

Accredited investors

Most private offerings are limited to only accredited investors. For the ones that aren't, most federal and state securities law exemptions require that there only be a very limited number of investors who are not accredited (e.g., 35). If an issuer is offering its securities to investors who are not accredited, an issuer must be aware of the limits on the number of non-accredited investors that may receive those materials, overall and on a state-by-state basis.


For purposes of state securities law compliance (and in limited contexts, federal securities law compliance), it is important to know the state of residency of each prospective investor that receives the PPM. An issuer should be familiar with these restrictions and use some mechanism to confirm that residency requirements are complied with.


So how does a company keep track of what was sent to whom and whether the various securities law requirements have been complied with? A document control sheet, of course. With all of the restrictions on who may receive a PPM, it is important to maintain control over the PPM's distribution in order to ensure that it is sent (and the offer is therefore made) only to permitted prospective investors. To this end, issuers and their representatives would be well advised to develop a record-keeping system to track and control that distribution. Below is a sample

Control sheet for Private Placement Memorandums

PPM No. Name & Address of Recipient Accredited Investors Status Date Documents Rec'd (Subscription, Investor and Joinder Agreements and others) Payment Amount Comments

As you can see, the control sheet creates a record of the recipients of the PPM, thereby making it easier for the issuer to demonstrate that it has targeted the offering in accordance with the securities law requirements under which the offering is being made. The control sheet also allows the issuer to easily request and confirm return of offering packets and subscription materials from the investors upon the closing of the offering, which not only helps demonstrate the issuer's good-faith effort to limit the distribution of the offering materials, but also protects the issuer by reducing unnecessary dissemination of its proprietary information.

While the certified check or money order is often not forgotten, it is not uncommon to have more than one fourth of the investors return materials that are either incomplete or filled out inconsistently. The control sheet helps manage the process and keep track of the status of each of the company's prospective investors.


Finally, what about PPMs and the Internet? Posting a PPM or other private offering materials to a website so that everyone can see it would provide obvious advantages in terms of time, money and other resources; dissemination doesn't get much faster or cheaper. But, DON'T DO IT! Because of the ban on general solicitations in private offerings, the issuer may not allow the materials to be accessible to every person that accesses a publicly available website. There are ways to use the Internet to facilitate your offering, but posting your PPM on your website for everyone to see or advertising the fact that you are in the process of raising capital through a private offering are not among them.

When it comes to reaching out to potential investors in a private placement, the offering may not be accomplished through a general solicitation or advertising. Once a company understands this, and to whom it may safely disseminate its PPM, the mechanics of the placement can be managed so as to efficiently and accurately track the status of the process, while helping to ensure securities law compliance. Using a control sheet helps to ensure that the company fulfills the pre-existing relationship requirement. It also creates a centralized place for monitoring the status of the documentation for the deal.

Previous articles by Matt Storms

Matt Storms: When raising capital, why use a Private Placement Memorandum?

Matt Storms: Capital-raising term sheets for angels and venture capitalists

Matt Storms: Translating the language of capital-raising

Matt Storms: Securities compliance is part of raising capital

Matt Storms: Raising capital through placement agents

Due diligence and corporate clean-up

Matt Storms: The mechanics of raising capital for your business

Sarbanes-Oxley for the Rest of Us

Matt Storms is the president and founder of AlphaTech Counsel, S.C. , which works primarily with high growth companies with operations in the Midwest. In addition to his many articles on WTN News, Matt posts regularly on the AlphaTech blog, which can be found at He can be reached at

Dan Ghoca is a member of the Business Practice Group at Michael Best & Friedrich. His practice focuses on mergers and acquisitions and general corporate law.

The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of the Wisconsin Technology Network, LLC.

WTN accepts no legal liability or responsibility for any claims made or opinions expressed herein.


Rob responded 6 years ago: #1

If you can't post your offering legal documents on the Internet, what are the ways you can use the Internet then? Also, in the entrepreneur discussion you described, is there anything wrong with e-mailing the PPM?

Matt Storms responded 6 years ago: #2


An example of a permissible use of the Internet would be for a company to provide access to its PPM through a password-protected site/extranet to those prospective investors to whom the company (or its officers, agents, attorneys, etc.) has a pre-existing relationship.

As to your second question, generally speaking, there's nothing inherently wrong with a company sending a copy of its PPM via e-mail. The issue, though, is losing control of who has access to the PPM once it's sent. Of course, if someone wanted to create a pdf from a hard copy of your PPM and then circulate that, there's nothing physically preventing them from doing so. However, if you send it via e-mail to a prospective investor, and they innocently (or even well-intending) send it to two friends, and then they send it to two friends, etc. (you’ve seen the old commercials). It does happen. I heard recently of an owner of a local company who almost fell off his chair when a prospective customer he was negotiating with over pricing on a contract pulled a copy of the owner’s PPM out to discuss the owner’s profit margins.

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