Raising capital is about more than finding investors and agreeing on a valuation. Before accepting funds, businesses need the right legal documents to explain the investment, establish the terms of the offering, and help ensure the transaction complies with applicable securities laws.
The exact documents required can vary depending on the structure of the offering, the type of security being sold, the investors involved, and the applicable exemption. Understanding the purpose of the key documents can help business owners approach a capital raise with greater confidence.
1. Private Placement Memorandum
A Private Placement Memorandum, commonly called a PPM, provides prospective investors with detailed information about the investment opportunity.
A PPM may explain the company’s business, management team, financial information, use of proceeds, investment terms, and material risks. Its purpose is to give investors information they can consider before deciding whether to invest.
A well-prepared PPM should present the opportunity clearly while addressing the risks and circumstances that could materially affect the investment.
Legal Tip: A PPM should be prepared specifically for the offering rather than copied from an unrelated transaction.
2. Subscription Agreement
The subscription agreement establishes the investor’s agreement to purchase the offered securities.
It typically identifies the securities being purchased, the purchase price, representations made by the investor, and other terms governing the investment.
The document also provides an important record of the investor’s commitment to the transaction and the company’s acceptance of that investment.
Because the subscription agreement forms part of the legal framework for the offering, its terms should be consistent with the PPM and other offering documents.
3. Investor Questionnaire
An investor questionnaire helps determine whether a prospective investor meets the requirements for participating in a particular offering.
Depending on the structure of the raise, the questionnaire may ask about an investor’s financial circumstances, investment experience, or status under applicable securities regulations.
The information collected can help the company and its legal counsel evaluate whether the investor is eligible to participate.
Legal Tip: Investor eligibility should be evaluated before accepting an investment, not after the funds have already been received.
4. Term Sheets and Offering Summaries
A term sheet or offering summary can provide investors with a concise overview of the proposed investment.
It may outline information such as the amount being raised, type of security, purchase price, proposed ownership or economic rights, and other major deal terms.
Although these documents are generally shorter than a PPM, they still need to accurately reflect the offering.
Inconsistent information between a term sheet and formal offering documents can create confusion and potentially increase legal risk.
5. Company and Organizational Documents
Investors often need information about the company itself before committing capital.
Depending on the transaction, this may include formation documents, operating agreements, bylaws, shareholder agreements, capitalization information, and records of previous investments.
These documents can help investors understand who owns the company, how it is governed, and what rights existing owners may have.
They are also commonly relevant during the due diligence process.
6. Financial and Business Disclosures
Investors need meaningful information about the business and the investment opportunity.
Financial statements, projections, information about existing liabilities, material contracts, and other relevant business information may form part of the disclosure package.
The goal is not simply to make the business look attractive. Investors should receive material information necessary to evaluate the opportunity and its associated risks.
Companies should therefore carefully review the accuracy and completeness of information before distributing it to prospective investors.
7. Securities Compliance Documents
The legal structure of the offering determines which securities law requirements apply.
A company may need to determine whether the offering qualifies for an exemption from registration and what conditions must be satisfied to rely on that exemption.
Depending on the offering, this may also involve federal or state securities filings and compliance requirements.
Getting these issues addressed early can help prevent a business from discovering a compliance problem after the raise has already begun.
Legal Tip: Choosing a securities exemption is not just a paperwork decision. The offering needs to be structured and conducted consistently with the requirements of that exemption.
8. Use of Proceeds Disclosure
Investors generally want to understand what the company intends to do with their money.
Offering documents may explain how the proceeds are expected to be used, such as funding operations, hiring employees, purchasing equipment, developing products, expanding into new markets, or paying certain expenses.
Clear disclosure can help investors understand how their capital fits into the company’s broader business strategy.
If circumstances change significantly, the company should consider whether additional disclosure or legal review is appropriate.
9. Consistency Across Every Document
One of the most important aspects of an offering is consistency.
The PPM, subscription agreement, investor questionnaire, financial information, term sheet, and other materials should tell the same overall story.
Differences in investment terms, ownership figures, financial information, risk disclosures, or representations can create unnecessary confusion and legal exposure.
A comprehensive legal review can help identify inconsistencies before documents reach prospective investors.
10. Documents Should Match the Deal
There is no universal set of documents that works for every capital raise.
A startup raising money through a private securities offering may have different requirements from an established company completing a larger financing transaction. The type of security, investor profile, offering structure, and applicable exemption can all affect the documentation.
That is why businesses should determine the legal requirements of their specific transaction before preparing or distributing investor materials.
Conclusion
A successful capital raise requires more than convincing investors to participate. The legal documentation needs to clearly communicate the investment opportunity, establish the terms of the transaction, address applicable risks, and support compliance with securities laws.
Private Placement Memoranda, subscription agreements, investor questionnaires, financial disclosures, organizational records, and securities compliance documents can each play an important role in the process.
Working with experienced legal counsel can help businesses build an offering package that is appropriate for their specific transaction and reduce the risk of costly problems later.
Merchant Law Firm helps businesses navigate the legal side of capital raising, including offering documentation, securities compliance, and investor-related legal requirements.
