Closing Documentation for Private Placement Investments

  • Closing documents include agreements between the Issuer and the Investor wherein the parties commit to participate in the offering and the specific terms of the investment relationship. These documents are executed by the Investor and/or by the Issuer as appropriate to the nature of each agreement (see below per each type of agreement).
  • Closing documents can include the following documentation,

For an equity investment:

  • Private Placement Memorandum (“PPM”) – When used, the PPM is the definitive document for the offering to describe the terms of the offering and relevant background of the issuer.  It is produced by the Issuer and is for informational purposes.  It is not a signed document.
  • Articles of Incorporation (for C Corporations) or Operating Agreement (for Limited Liability Companies) – For equity offerings, the Agreements which establish the framework for a business corporate governance and include the obligations of the issuer relating to the equity being purchased by investors.  If equity warrants are issued in conjunction with debt, the warrants will be identified within this fundamental document of the Issuer.  These agreements also specify the distribution of equity ownership (including options to acquire equity) that will be in effect after the new equity securities are issued.  It is signed by the Investor and the Issuer.
  • Subscription Agreement (or Purchase Agreement) – The agreement wherein the Investor commits to make the investment and the amount invested. The Investor makes representations including their competence and ability to make the investment decision.  The Issuer male representations including that the securities have been authorized within its corporate governance structure.  It is signed by the Investor and the issuer.

For a debt investment:

  • Private Placement Memorandum (“PPM”) – Same as above.
  • Loan and Security Agreement (LSA) – The LSA, if used, specifies the overall loan governance structure and includes borrowing covenants committed to by the Company issuing the debt security.  It is signed by the Issuer and the Investor.
  • Promissory Note – This is the definitive evidence of the terms for the indebtedness, including interest due, principal repayment timeframe, default events, penalty rates and related remedies.  It is signed by the Issuer.
  • Borrowers Certificates – For a debt offering, the Issuer may provide certificates with respect to loan covenant compliance at closing, to be updated periodically as long as the debt security is outstanding. 
  • Subscription Agreement (or Purchase Agreement)  – Same as above.

Due Diligence for Private Placement Investing

  • “Due diligence” is a process whereby investors evaluating a potential investment conduct independent analysis and verification of the information presented to them by the issuer.
  • Due diligence analysis goes beyond simply reading the offering documents, such as a Private Placement Memorandum or other Summary Offering Material, it involves questioning furtherthe information presented in the primary offering documents for a particular offering.
  • Due diligence is a fundamental part of the investment process.  It should be comprehensive and thorough.  All areas of the business and the individuals managing the business should considered and available for review by investors.  
  • Issuers and their broker-dealer agents should ensure such information is readily available so that an informed investment decision can be efficiently made by the investor.  Issuers not willing to discuss the details of their business, even when under the protection of a “Non-Disclosure Agreement” that an investor may be willing to sign, should be treated with great caution by potential investors.
  • Areas for analysis include (in no particular order…all are important):   industry analysis, product market analysis, production processes, financial analysis (cost analysis, financial history statements, financial projections and capital structure), personal backgrounds of key managers, a review of potential liens and legal judgements, intellectual property,  past securities issuance, regulatory compliance, corporate governance, etc.
  • While the emphasis during a due diligence analysis will naturally be more heavily weighted to the specifics of the potential investment, areas that may originally seem less significant can ultimately have a significantly detrimental impact on an investment if they are not addressed properly.
  • Federal and state regulations regarding misrepresentation or fraud apply to information provided to investors in securities transactions.