![]() In the event that risk factors are not well drafted, and industry- and company-specific, their use could undermine the effectiveness of a PPM in protecting the company and its principals from legal exposure and civil liability. Ultimately, it is of critical importance that risk factors be specific to the company because the “safe harbor” protections under Regulation D do not extend to protect companies from the “anti-fraud” provisions of the federal securities laws, which generally require that offering documents include no material misstatements or omissions of material facts. This is the reason why management should always work closely with legal counsel throughout the process of identifying risks and reviewing advanced drafts of disclosure documents to ensure the most important risks are identified, specifically described, and tailored as much as possible to the company’s business operations. The concerns that keep them up at night are likely those that should be highlighted in the risk factors section. Naturally, the people who have the best insight on what the company needs to worry about are senior management. ![]() ![]() In connection with Regulation D exempt offerings, risk factors are typically included in a separately captioned heading of a PPM, and provide investors with management’s views on the risks the company faces and, if those risks materialize, the effect they may have on the company’s business and the value of company securities held by investors. We may even think of risk factor disclosure as an insurance policy for a company because it can also help mitigate litigation and liability risk. Moreover, risk factor disclosure improves the overall quality of a disclosure document by highlighting for investors the challenges posed by a company’s business. Risk factors are cautionary statements about risks a company may face that could have a material adverse impact on its business, financial condition, and results of operations, and which, in turn, could lead to losses by investors. If you don’t get this right, you are simply diving head first into shark infested waters. So, it is extremely important that your PPM includes custom, industry-specific risk factors in order for you to be protected from investor lawsuits and compliance violations. However, it is critical to note that the Securities and Exchange Commission (SEC) has been clear that boilerplate or PPM template-based risk factors may not be enough to protect a company from the so-called anti-fraud provisions of the securities laws. The risk factors section of a PPM essentially is the part of the PPM that tells investors why and how they could lose part or all of their investment. And, although one primary purpose of a PPM is to present your startup company to private investors and crowdfunding portals, an equally important purpose to the PPM is to protect you and your company from legal exposure. What are PPM Risk Factors and why do I need them?Įvery properly drafted private placement memorandum or PPM has a risk factors section.
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