Risk Factors in Your Offering Documents

Risk Factors in Your Offering Documents

One of the most important changes in the art and science of PPM preparation is the increased amount of effort and space within the document that is being devoted to the description of risks associated with the underlying business model, the terms of the offering and the specific investment instrument, legal, regulatory and tax matters, and the broader socio-political environment in which the issuer is operating.

Related Article: The PPM – What It Is and Why You Need One for Your Capital Raise

This trend can be observed in securities offerings across all sectors; however, it is particularly challenging for issuers raising capital to engage in activities relating to emerging technologies such as artificial intelligence and blockchain. A comparable expansion of disclosure obligations with related risk factors is occurring for issuers raising capital for their businesses through the creation and offering of cryptocurrencies.

Finally, as companies rely more heavily on foreign investors they need to frame their PPM disclosures to conform to the expectations of potential funders in different cultures and regulatory environments, a process which often requires extensive collaboration with local legal and accounting professionals in each jurisdiction where the company expects to raise significant amounts of capital.

PPM Regulatory Environment Challenges

The regulatory environment is a challenging variable for PPM drafters for several reasons. Attitudes and concerns of securities regulators vary from jurisdiction and will impact what is regulated and how regulations will impact issuers.

For example, in the US the reference point for the preparation of disclosures in a PPM is the requirements that apply to prospectuses for registered public offerings even though the PPM is being delivered in the context of a private placement. Given this, it can be expected that the PPM should include disclosures on specified business topics, executive compensation and qualifications and governance matters.

However, the US has not gone as far as European countries in requiring disclosures on sustainability-related matters including actions taken by the issuer with respect to the environmental impact of their operations and in anticipation of future environmental events such as ongoing climate change.

Issuers must also be aware of emerging regulatory issues such as how capital raising using cryptocurrencies will be addressed by securities regulators and other governmental agencies. Regulators in some countries have already demonstrated hostility toward cryptocurrency offerings, so-called “ICOs”, and disclosures and risk factors regarding such offerings in the US must be detailed and extensive given uncertainties as to where the law will eventually land.

Risk Factors of PPM’s

Issuers generally lay out risk factors in a separate section of the PPM; however, it is recommended that risk factors also be mentioned in the context of specific discussions of a particular issue or term elsewhere in the PPM.

When developing the risk factors discussion attention should be paid to:

  • Issuer risk factors,
  • Risks related to the issuer’s specific business model and the resources necessary to execute the model;
  • Industry risk factors, which is an opportunity to address risks and trends such as new technologies,
  • Changes in customer preferences and the like;
  • Securities law risk factors, such as the lack of liquidity for the securities;
  • “Recent developments” risk factors, which is the place for the issuer to discuss relevant factors in the socio-political environment that might be relevant to assessing the issuer’s performance and ability to achieve the business goals and projected return on investment outlined in the PPM.

The risks related to the issuer’s business and industry, as well as recent developments, should be used as prompts for additional disclosures elsewhere in the PPM to explain how they might impact ongoing projects. If the PPM includes financial projections they need to be supported by a robust discussion of assumptions that also takes into account relevant risks.


PPM drafters should resist the traditional temptation to view the PPM as a template full of standard language that appears in every deal.

While PPMs used in comparable transactions can be used as points of reference, every word and line in the PPM needs to be carefully vetted to ensure that they reflect the company’s actual situation and the attendant risks to offerees considering an investment in the company and the specific investment instrument.

Still another factor to consider is the due diligence requirements of outside professionals involved in the offering such as legal counsel, accountants, and investment bankers.

They will proactively question statements in the PPM to reduce the company’s liability and their own. At times their participation may seem burdensome; however, they are also value assets in the drafting process and should be called upon to participate fully in drafting risk factors that also make clear the consequences to the company in the event that certain events occur.

Your California Business Law Firm  

At The Royse Law Firm our team of dedicated corporate and business legal professionals can help direct your company through all of its legal challenges. Contact us today and let us put our experience to work for you.

Disclaimer: This blog and website are public sources of general information concerning our firm and its lawyers, as well as the information presented. They are intended, but not promised or guaranteed, to be correct, complete, and up-to-date as of the date posted. This blog and website are not intended to be, and are not, sources of legal opinion or advice. The materials, information, and communications on this blog and website do not apply to any particular person, entity, or situation, and do not apply to you or to your specific situation. You will need to consult with an attorney and/or other appropriate professional about your specific situation. Thank you.
Alan Gutterman

Alan Gutterman has over three decades of experience as a partner and senior counsel with with internationally recognized firms, including Cooley, and Pettit & Martin, counseling small and large business enterprises in the areas of general corporate and securities matters, venture capital, mergers and acquisitions, international law and transactions, strategic business alliances, technology transfers and intellectual property, and has also held senior management positions with several technology-based businesses including service as the chief legal officer of a leading international distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an emerging broadband media company.
Read My Full Bio | Contact Me