Preparing and offering disclosure documents

November 18, 2014

document reviewThe October 2014 Business Counselor Update also includes a substantially revised chapter (§§152:1 et seq.) covering the preparation of offering documents for use in raising capital from investors. The materials in the chapter include Master Forms for a confidential offering memorandum and subscription documents. The transaction memorandum discusses the procedures for preparing an offering document, including the key topics commonly covered in such a document, and the informational requirements imposed under the securities laws. The specialty forms library includes a formal confidential offering memorandum prepared for use as the disclosure document in a Regulation D offering involving an investment banker; a form of questionnaire for collecting information from directors, officers, and major shareholders of a corporation; a form of selling agent agreement including provisions relating to the preparation of the offering documents; an executive summary of the key issues relating to preparation of offering documents to be sent to clients as well as a client letter detailing the main issues associated with limited or private offerings; and a Power Point presentation on preparation of offering documents and offering procedures to be used for law firm training purposes,

The format and content of offering documents is driven primarily by the applicable requirements of federal and state securities laws even though a good deal of the content can and should be drawn from the client’s internal strategic and business plan (see §§22:1 et seq.).  Counsel is well advised to search the EDGAR database maintained by the SEC for Securities Act registration statements and Exchange Act periodic reports (i.e., 10-Ks) filed by public companies engaged in business activities similar to those of the client in order to get an idea of how information is presented and the important risks and trends that those companies are highlighting in their disclosures to the investment community.  One the information for the offering documents has been identified counsel should be prepared to oversee the process of preparing the offering documents by following a path that included the following steps:

    1. Hold a preliminary meeting with the principals of the business to determine the potential uses of the information that might be included in the offering document;
    2. Determine the scope of the due diligence investigation (§§292:1 et seq.) which will be required in order to collect the information that will be need to draft the offering documents;
    3. Establish a drafting timetable for preparation of the offering documents and allocate initial drafting responsibilities for sections of the documents among the participants, including the principals, counsel and any investment banker or finder who may be involved in the offering;
    4. Prepare a detailed term sheet setting forth all the material terms and conditions of the proposed offering;
    5. Complete the appropriate drafting and review checklist and provide the principals with a list of the information that must be collected for drafting the offering documents;
    6. Review relevant legal and tax laws and regulations relating to the company and its business activities and the content of disclosures which must be included in any offering document;
    7. Assuming that historical financial information and/or projections of future financial performance are to be included in the offering documents, contact the company’s independent public accountants to coordinate review of the financial discussion and, if necessary, delivery of opinions and other written materials for inclusion in the offering documents;
    8. If subscription documents are to be prepared for use in the offering, identify the group of potential investors, the type of exemption from registration that will be relied upon, and complete the appropriate drafting and review checklist;
    9. If appropriate, obtain copies of offering documents or prospectuses prepared by other issuer’s in the company’s industry area;
    10. Review company’s charter documents and material agreements to determine the disclosures which should be included in the offering documents;
    11. Arrange for one or more “all hands” meetings to discuss and revise interim drafts of the offering documents;
    12. Prepare and circulate a final draft of the offering documents for approval by all parties, including the board of directors, counsel and company’s independent public accountants;
    13. Arrange for printing of the final version of the offering documents and establish procedures for monitoring the distribution of the documents by the company and any investment banker or finder who may be involved in the offering; and
    14. Calendar periodic review of the final version of the offering documents and establish procedures which require the company to continuously identify changes and events which might require modification or amendment of the documents.

The SEC, through its various rules laying out disclosure requirements (i.e., Regulation S-K), also provides counsel with substantive instructions on the types of disclosures that should be made in a client’s offering documents and counsel should make it a regular practice to review some or all of the following whenever he or she is preparing an offering document:

  • Summary Information and Risk Factors: Item 503 of Regulation S-K (17 CFR §229.503)
  • Use of Proceeds: Item 504 of Regulation S-K (17 CFR §229.504)
  • Dilution: Item 506 of Regulation S-K (17 CFR §229.506)
  • Plan of Distribution: Item 508 of Regulation S-K (17 CFR §229.508)
  • Description of Offered Securities: Item 202 of Regulation S-K (17 CFR §229.202)
  • Description of Business: Item 101 of Regulation S-K (17 CFR §229.101)
  • Description of Property: Item 102 of Regulation S-K (17 CFR §229.102)
  • Legal Proceedings: Item 103 of Regulation S-K (17 CFR §229.103)
  • Management’s Discussion and Analysis of Financial Condition and Results of Operations: Item
  • 303 of Regulation S-K (17 CFR §229.303)
  • Directors and Executive Officers: Item 401 of Regulation S-K (17 CFR §229.401)
  • Executive Compensation: Item 402 of Regulation S-K (17 CFR §229.402)
  • Security Ownership of Certain Beneficial Owners and Management: Item 403 of Regulation
  • S-K (17 CFR §229.403)
  • Certain Relationships and Related Transactions: Item 404 of Regulation S-K (17 CFR §229.404)