Term Sheet

A sponsor prepares two versions of a private placement pitch: a detailed institutional term sheet that includes a full section on liquidity risk, and a shorter retail one-pager that omits the liquidity risk section entirely, on the theory that retail materials should be simplified. A representative uses the retail one-pager with an individual customer. Is omitting the liquidity risk section from the simplified version acceptable?

1. A.Yes, because tailoring the level of detail in a communication to the sophistication of the audience is always permissible regardless of what is included or left out.Wrong. This overstates the tailoring principle; format and depth can be tailored, but material risk content still has to appear.
2. B.No, tailoring the format and level of detail to a retail audience is permissible, but liquidity risk is material to a private placement recommendation and cannot simply be dropped because the audience is less sophisticated.Correct. Simplification is permitted, but dropping a material risk category because the audience is retail is not.
3. C.Yes, because liquidity risk is only material for institutional investors, who are the only audience expected to understand it.Wrong. Liquidity risk is arguably more critical for retail investors, who may have less capacity to absorb an inability to access funds, not less.
4. D.No, but only because the two versions of the document must be word-for-word identical regardless of audience.Wrong. This overcorrects; tailoring format and depth is fine, the problem is specifically dropping a material risk category, not any difference between the two versions.

Why: Tailoring the format and level of detail in a communication to the sophistication of the audience is permissible, but liquidity risk is material to a private placement recommendation and cannot simply be dropped because the audience is retail rather than institutional. Simplification can change how something is explained; it cannot eliminate a material risk category from the communication altogether.

A broker-dealer begins actively soliciting investors for a private placement based on a term sheet and verbal understanding with the issuer, before the formal placement agency agreement has been signed by both parties. What issue does this raise?

1. A.There is no issue, since a term sheet and verbal understanding are always legally equivalent to a fully executed placement agency agreement.Wrong. Informal preliminary understandings are not functionally identical to a signed agreement.
2. B.The issue is solely that the broker-dealer cannot be paid any compensation for solicitation before the agreement is signed, but its authority to solicit is otherwise unaffected.Wrong. This narrows the concern to compensation timing when the more fundamental issue is whether authority to act as agent exists at all.
3. C.The issue is that soliciting before the agreement is signed automatically constitutes an unregistered public offering, voiding the offering's exempt status entirely.Wrong. The timing of the agreement's execution does not itself convert an otherwise properly structured exempt offering into an unregistered public offering.
4. D.The issue is whether the broker-dealer actually has the issuer's authority to act as its agent, since the agreement is generally what establishes and defines that authority.Correct. This is the actual concern raised by soliciting before the agreement is signed.

Why: Soliciting investors before the placement agency agreement is finalized raises the issue of whether the broker-dealer actually has the issuer's authority to act as its agent in soliciting those investors at all, since the placement agency agreement is generally what establishes and defines the scope of that authority.