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Seed Round Investing: Form D, Risk Disclosures and the PPM

Andrew Thompson • Sep 29, 2023

The Importance of Securities Compliance in Early Stage Fundraising

Securities Compliance — Dallas, TX — Landmark Advisors LLC

The quick response is that it depends, but generally speaking, it is advised and occasionally necessary. Look a little closer.


What is a PPM?


Let's first talk about what a PPM is. A PPM is a document that provides details about the business looking to raise money from investors. It resembles a business plan in several respects, but it has extensive modifications for securities legislation clauses, investment risk elements, and suggested terms of investment. PPMs are referred to by several names, such as offering memorandums and confidential information memorandums (CIMs).


To comprehend the usage of PPMs and when they are appropriate, one must have a fundamental understanding of securities legislation. A firm, commonly referred to as an "issuer," is not allowed to sell securities (such as stocks and other types of debt) unless the offering is registered or meets an exemption from registration requirements under federal and state law. It is important for an issuer to meet an exemption since it is costly and not appropriate for the majority of enterprises to register a securities offering.


The esoteric nuances of the law point us to the Securities Act of 1933's Section 4(a)(2) as the most widely used exception to registration of securities. For deals that don't include a "public offering," it offers an exception. That text of the law may not seem, well really isn’t, particularly helpful at first glance. 


Nonetheless, the SEC has offered a number of safe havens for the "public offering" requirement. If your offering satisfies one of the safe-harbor requirements, it has fulfilled an exception and complies with Section 4(a)(2) and does need require registration with the SEC. But exemption from registration does not impute exemption from filing, nor exemption from state law documentation requirements.


Two of the most popular safe harbors are described here, along with recommendations on when using a PPM is suggested.


504 Safe Harbor Regulation


An issuer may sell up to $5 million worth of securities over any given 12-month period according to Rule 504. Accredited and non-accredited investors may participate in the offering, but the issuer may not use any kind of “general solicitation”. Rule 504 does not supersede state securities laws, in contrast to Rule 506. As a result, an issuer must verify that a state exemption is met in each state where an investor resides. Rule 504 is frequently the preferred exemption if the issuer intends to sell securities to non-accredited investors because it does not demand that certain particular information (such as audited financials) be given to non-accredited investors.


Safe Harbor Rule 506(b)


Because Rule 506(b) eliminates the requirement for an issuer to satisfy a state securities registration exemption in each state where an investor resides, it has historically been the most frequently used securities registration exemption. An issuer may sell as many securities as they want to accredited investors and as many as 35 securities to non-accredited investors under Rule 506(b). Sourcing in general is prohibited.  Rule 506(b) allows issuers to sell to non-accredited investors, however because of the onerous disclosure requirements, i.e. the dissemination of audited financial statements, it is often best to steer clear of non-accredited investors.


When a PPM is Needed


If the issuer is onboarding non-accredited investors under Rule 506(b)—note that Rule 506(b) is generally not encouraged for non-accredited investors—a PPM is necessary. In theory, Rule 506(b) offerings to accredited investors alone and Rule 504 offerings to both accredited and non-accredited investors will not trigger the need for a PPM.


Even in situations when it is not technically necessary, a PPM is frequently advised. The PPM should be regarded by the issuer as a kind of insurance. It does not totally insulate you from liability, but it does provide a significant layer of protection. When the PPM is properly and thoughtfully drafted, it guarantees that every investor receives written notice of all relevant information about the issuer.


This is a great defense against future investor lawsuits, especially if the investment does not perform as expected and if the investors are not close friends or relatives of the issuer (i.e., more inclined to sue). PPMs are fairly standard in some industries: small manufacturing, real estate (syndications), restaurants and food service, some tech, entertainment and film, any places where the field of investors becomes fairly widespread in the earliest stages of fundraising. 


Securities law presents tricky waters for you to navigate. You are well advised to seek experienced advisory council through groups like Landmark Advisors. As soon as you are seriously contemplating raising seed capital, contact us to schedule an appointment.


By Andrew Thompson 12 Apr, 2024
As a longtime consultant to entrepreneurs and startup founders at Landmark Advisors , not to mention a student of ancient scripture, one of the areas that fascinate and drives my efforts for funding and innovation most, is the prospect of improving human health. My interests lie both in the arena of increasing longevity as well as improvements to the quality of life of individuals as they occupy planet earth, and I see these two goals marching forward together rather than in conflict, at least most of the time. In this article, my focus lies more directly on longevity, as it provides a more objective target and there is more historical data from which we can discern what can be done to continue the progression. In the future though, I will dive into topics that address quality of life ("QofL") factors on their own terms, as I find this equally fascinating and of general concern to the human population at large. There are many ways to consider the possibility frontier, history and the hope for human longevity. Because our earliest recordings of human lifespan come from the ancient texts of the Hebrew scriptures, those texts are a great place to start. From Ancient Times to the Present This article is meant to encourage greater entrepreneurial thought around medical advancement and the capacity of for people to live their lives more abundantly, and not meant as an apologetic of Christian or Judaic faith, but as a good frame of reference for this discussion, it's helpful to consider that the patriarchs of the book of Genesis were said to have had very long lifespans compared with today, and then wihin several generations of the longest lifespans ever recorded few, if any people were living beyond the age of 100 years. Today, we see more people living beyond the age of 100 than at any time since teh earliest recorded human histories, but again, almost none are living beyond 120. Nonetheless, the prophets of the Old Testament found reason to believe that this would not always be the case, and the prophet Isaiah, in particular, didn't hesitate to proclaim what he foresaw for the future of human longevity. Interpreting Isaiah 65:20 In the Bible, Isaiah 65:20 mentions people living to be "100 years old," a verse often interpreted symbolically by Christian scholars as a sign of blessings and abundance, but not a literal increase in longevity. Hank Hanegraaff , a prominent Christian apologist, has discussed this verse in the context of biblical prophecy and its symbolic representation of a blessed and fulfilling life. It is difficult to find respected scholars who view this passage as meant to have a literal application, on the other hand, some who interpret it more figuratively seem to suggest that it foreshadows improving life expectancies and better health. In order to resolve an inherent contradiction in this passage, one must either conclude that there is an incremental progression of longevity as the cosmos approaches the new heavens and new earth (the "Whole of Scripture"), or that within the new heavens and new earth, there are people who still die, even if at a hundred years of age (the "Sudden Change"). In the context of Bible scholarship, the latter seems to make no sense. There is a near universal acceptance in the interpretation of the Bible that once the new heavens and earth are fully consummated, there shall or at least maybe a final judgment, but whatever death will occur at that time, the process of aging and death thereafter, will cease. "The last enemy to be defeated is death", etc. This is important because it creates a promise from the ancient scriptures that, understood from the Whole of Scripture, prophesies precisely what has been occurring in the last hundred years of human existence. Revisiting the Genesis Genealogies The genealogies in the book of Genesis, including Methuselah's 969 years, are subject to many different interpretations. Scholars like Dr. Elizabeth Johnson, who favors a symbolic approach to understanding the ages of Bibe patriarchs, suggest these ages may represent the importance of individuals rather than their literal lifespans, however, there is little evidence of how that importance would have been discerned over and against a description of the actual life span thought to be known for each of the patriarchs. Some scholars do debate, however, debate the reasons for a pattern of decreasing life expectancies in Old Testament times. Factors like environmental changes, dietary shifts, and genetic influences could have contributed to variations in lifespans over generations. The general theological supposition about this pattern is that sin had an impact over time that eventually settled in and hit a natural bottoming out, according to God's providence. Historical Stagnation in Life Expectancy Throughout history, factors like infectious diseases, limited medical knowledge, poor nutrition, and high infant mortality rates contributed to stagnant life expectancy, highlighting the challenges of the past. Infectious Diseases: Infectious diseases have historically been a significant contributor to mortality and reduced life expectancy. Documentation from sources like historical medical records, epidemiological studies, and anthropological research showcases the impact of diseases like tuberculosis, smallpox, cholera, and influenza on population health and life expectancy. Research studies provide insights into how diseases shaped human populations and life expectancy over time. Limited Medical Knowledge: Limited medical knowledge in earlier centuries meant that many illnesses and conditions were poorly understood and often untreated. This lack of medical understanding led to higher mortality rates and shorter life expectancies. Historical documents, medical journals, and scholarly articles on the history of medicine offer documentation of the evolution of medical knowledge and its impact on improving life expectancy. Poor Nutrition: Poor nutrition, including inadequate access to nutritious food, deficiencies in essential nutrients, and periods of famine or food scarcity, has been a significant factor in reduced life expectancy. Published studies highlight the link between nutrition and health outcomes throughout history. High Infant Mortality Rates: High infant mortality rates, often due to factors like infections, lack of prenatal care, and poor sanitation, have historically contributed to lower life expectancies. Historical demographic data, mortality records, and studies on child health and survival rates provide evidence of the impact of infant mortality on overall life expectancy averages. By examining historical data, medical literature, and demographic studies, we can gain a comprehensive understanding of how factors such as infectious diseases, limited medical knowledge, poor nutrition, and high infant mortality rates have historically influenced life expectancy trends. Revolutionizing Life Expectancy in the 20th Century Advancements in medical technology, sanitation, clean water access, the use of antibiotics and improved nutrition led to a dramatic rise in life expectancies globally during the 20th century. For most of human history, it’s been estimated that global life expectancy at birth has bounced between 20 and 30 years. Beginning approximately in the year 1820, global life expectancy started its exponential ascent, seeing its most impressive gains after 1950 as modern sanitation and medical advancements began to trickle down to developing nations. Navigating 21st Century Challenges Despite progress, the 21st century faces obstacles such as antimicrobial resistance, rising chronic diseases, healthcare disparities, environmental issues, and global pandemics, impacting life expectancy improvements. During the pandemic, the US saw declining life expectancies for consecutive years, 2020 and 2021, while making a comeback in 2022. It's too early to conclude that this, while directly, is simply a result of the pandemic, or if a reduction was more predictable regardless of the pandemic itself. The two biggest issues connected with longer term trends toward a decrease in life expectancy, however, appear to be mental health and chronic disease, especially diabetes, heart disease and cancer. If you consider mental health to be one of many forms of chronic disease, then every factor contributing to decreasing life expectancies is related to chronic disease. By focusing efforts at improvements in treatment, and most importantly, prevention of these conditions, there is a high probability we can eliminate the negative pressure on life expectancies and return to a long term trajectory of increased life expectancy. Promising Developments for Increased Longevity Exciting advancements in medical technologies, genetics, nutrition research, and healthcare infrastructure, especially in developing nations, provide optimism for extending human life expectancies. We will be developing a series of articles addressing significant innovations that continue to impact both longevity and quality of life as we continue adding content on this subject. There are other remarkable achievements in healthcare: breakthroughs in cancer treatments, cardiovascular disease management, and medical device technology that far exceeds earlier capabilities in all of these areas. All of these advancements in care and prevention have contributed significantly to longer and healthier lives, particularly in regions like Asia and even on the continent of Africa. Anticipating the Future The next 25 year period holds great promise with ongoing medical research, preventive healthcare emphasis, global healthcare accessibility improvements, and efforts to address environmental and social health determinants, potentially extending human life expectancies further. We predict that by 2050, the US will have a life expectancy at birth of between 80-85 years, and that longevity increases in other parts of the world will be even greater than they will be here, more than 10%, for example, in Africa, Latin America and parts of Asia. Conclusion: A Bright Outlook The journey of human longevity reflects a blend of interpretations, scientific advancements, and societal progress. While challenges persist, the trajectory toward longer, healthier lives offers hope for a brighter future, both literally and symbolically. For more information or to discuss scaling an innovative health technology, please contact Landmark Advisors to get started.
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