Not all angel capital deals require issuers to produce private placement memorandums (PPMs). Often a much simpler term sheet is all that the law requires. Even if a PPM is legally optional, however, it is often requested or demanded by sophisticated investors beyond family and friends; and in any case a PPM is a reassuring sign of professionalism, a clue that the issuer has got its act consummately together—not to mention a measure of protection from shareholder disputes and lawsuits.
The trouble is, hiring a lawyer to draft a PPM can cost tens of thousands of dollars, and as much as six figures, in fees.
iDisclose is a new web-based, do-it-yourself, automated PPM generator that is much more than a mere template. iDisclose operates much as TurboTax does: The way you answer one question opens up a customized set of drill-down follow-up questions, so the entire document is granularly customized for each issuer. It works for a range of securities, including preferred and common stock as well as convertible debt.
The creators of iDisclose, Georgia Quinn and Doug Ellenoff, state that their platform produces a PPM draft that is 80 percent complete, with the remaining 20 percent needed for final editing, proofreading, and review by a real-live lawyer. The cost to use the iDisclose platform is less than $5,000, and a lawyer review can be less than five grand as well.
Besides saving money for entrepreneurs, iDisclose represents a somewhat standardized PPM format that helps securities crowdfunding platforms and angel investors make apples-to-apples comparisons of equity offerings.
iDisclose is not the only PPM generator online. RocketLawyer is another, but it generates PPMs for common stock only, and is more like a template where various issuers all fill in the same set of blanks. (Neither RocketLawyer nor Regulation D Resources have responded yet to my request for information or comments. I’ll update this column when they do.)
Suitable for Titles II and III Crowdfunding
The iDisclose platform was developed by securities lawyers Georgia Quinn and Doug Ellenoff, with input from other lawyers in the New York firm of Ellenoff Grossman & Schole [www.egsllp.com]. The platform is not specifically tailored to equity crowdfunding offerings, but it will do just fine for most Title II (Regulation D, Rule 506c) and Title III (true equity crowdfunding) offerings on crowdfunding platforms, based on the Jumpstart Our Business Startups Act of 2012. Quinn and Ellenoff are, in fact, prominent advisers and speakers in the securities-based crowdfunding industry.
Quinn, the CEO of iDisclose, began developing the platform a year ago, and has received positive feedback from not only entrepreneur beta testers but the SEC as well.
Collaborative, Not Puffy
I was fortunate enough to get a demonstration of the iDisclose platform on October 5, and found it not only comprehensive and robust, but surprisingly user friendly—with help screens, collaborative features, and sample text that issuers can adapt as an alternative to (a) composing PPM language from scratch or (b) uploading files already prepared.
In addition to the draft of the PPM—which can be produced in PDF, Word, and other formats—the platform creates a “Red Flag Report” that gives suggestions for resolving inconsistent information, correcting possible math errors (in areas such as use of proceeds), explaining potentially confusing information (like related-party transactions), and minimizing puffy language (hyperbole and exaggeration where words like “unique” and “leading” are used).
The iDisclose team welcomes strategic partners in a few areas:
- Referral partners can earn referral fees.
- White label partners can offer iDisclose-based services directly to issuers.
- Qualified lawyers can be engaged to review PPM drafts, with a maximum $5,000 “in-network” fee.
— David M. Freedman has worked as a financial and legal journalist since 1978. He writes a weekly column on angel investing and crowdfunding for Accredited Investor Markets. Freedman is coauthor of Equity Crowdfunding for Investors (Wiley & Sons, June 2015).