How do I sell private equity in my business? Do I need to present anything to investors? If you have these questions then keep reading!
Any private equity or debt for sale is a security. The Securities Act of 1933 created the Securities and Exchange Commission (SEC). Securities fall under the Securities Act of 1933 which, in general, require that all securities be registered before sale or marketing for sale. Exceptions to this rule do exist. To claim one of these exceptions, a company needs a Private Placement Memo (PPM) to sell securities.
Private companies are sold through a private offering to a small number of chosen investors. The Memo typically outline the offering, the terms, the value of the offering, the risks, the exemptions to registration that the company relies on, and several disclosures regarding risk, accredited investors, and a disclaimer of liability. In short, Memos offer equity for sale and offer a way to explain to investors what exemptions the company is selling.
To keep from being in violation of securities law, it is prudent for a company to have a PPM in their “investment package.” Generally, an investment package includes:
- Business plan;
- Operating agreement or bylaws;
- PPM; and
- Subscription agreement.
Every page of the PPM needs to be serial numbered and tracked. Each person receiving a package needs to be noted and recorded. If something changes (like the offer is withdrawn or updated), all copies need to come back, and the PPM needs to be reissued. Additionally, the company needs to be able to prove that an investor received the PPM with the required disclosures or risk securities violations or liability on any business loss(es).