COVID-19 Risk Factors Belong in Your Private Placement Memorandum

Co-written by Karen Balderama, Wendel Rosen LLP Business Practice Group Co-Chair and Mia Butera, Wendel Rosen LLP Business Attorney

The COVID-19 pandemic will have lasting unknown effects on businesses and has already caused delays and cancellations with respect to fundraising efforts and investment transactions planned or already in progress. Although raising capital during a pandemic seems like an impossible task, there are investors and issuers that are carefully progressing through the process of pitching, conducting due diligence, negotiating terms, and even closing rounds of financing. Issuers and investors fortunate enough to move forward on their transactions will have some additional considerations to mull over as they negotiate terms and determine an appropriate valuation for a company at a time when the global economy appears to be on the brink of collapse.

This post will discuss the need for companies thinking about fundraising in a private offering of securities to make additional disclosures to prospective investors regarding the impact of the COVID-19 pandemic.

For non-reporting companies conducting a private offering of their securities to investors, disclosures about how the COVID-19 pandemic has and will continue to impact the issuer should be made in a private placement memorandum (PPM). A PPM is the primary disclosure document provided to prospective investors in private offerings of securities to help investors make an informed decision regarding whether to invest in a particular business. Generally, a PPM will provide information about the issuer, the securities to be issued, the issuer’s business, operations, and the advantages, disadvantages, and most importantly, the risks associated with the issuer and thereby the securities the investors intend to purchase. The COVID-19 pandemic will have a material adverse effect on the global economy and on many businesses. A failure to disclose or adequately describe the investment risk it poses may be a material omission or misstatement that could allow investors to have claims for damages or even rescind their investments.

Not all issuers will be affected equally by the COVID-19 pandemic. For many businesses, the impact of the pandemic will be far reaching and substantial, but it may not be material for others. This is why the risk factors disclosed in PPMs should be specifically tailored to address the issuer’s own unique, or not so unique, set of circumstances. Issuers and investors alike will be confronted with challenges caused by disruptions in the consumer marketplace, government regulations and restrictions in response to the pandemic, and other unknown changes in federal and state law. Disclosures should be made around the significant uncertainties regarding the effect of the COVID-19 pandemic on different aspects of the issuer’s business, such as labor and employment matters, supply chains, distribution and customer demand, and the short and long-term negative impact on the issuer’s operations, financial condition and projections.

Labor and Employment

In addition to the usual risk factors around hiring employees and/or independent contractors such as workers’ compensation, wage and hour compliance, availability of highly skilled workers, immigration laws, harassment claims, and management issues, the COVID-19 pandemic will likely have a major impact on hiring, retaining, paying, and managing workers. Shelter in place orders mean that non-essential businesses are forced to operate almost entirely remotely which will prove challenging for even the most tech-savvy and remote-friendly companies. Essential businesses that still operate during the pandemic must put into place and enforce social distancing policies, and may have additional liability if an employee contracts the virus at the workplace.

Supply Chain

The COVID-19 pandemic will likely have some sort of impact on an issuer’s supply chain. This might be in the form of delays in shipments of supplies, key vendors temporarily ceasing operations, service providers unable to perform their duties in a timely fashion, or distributors and sales teams unable to sell and market the issuer’s products. This could or may already have a negative effect on the issuer’s financial condition.

Closures for Non-Essential Businesses

It will be important to determine if the issuer is deemed an “essential business” in the jurisdictions in which it operates. Whether it is or not should be disclosed. Additionally, an issuer should have a general plan for how operations will continue during and after the pandemic. For businesses that are non-essential and require on-site activities (manufacturing, in-person service providers, etc.) it may prove impossible to carry on operations as normal and there are unknown risks and restrictions for future operations.

Demand and Market Downturn

The COVID-19 pandemic will likely have an adverse effect on the global economy as a whole, resulting in an economic downturn that could impact demand for the issuer’s products or services. Likewise, issuers should let investors know if they are in a position to take advantage of closures or other impacts of the pandemic, for example businesses offering medical supplies, remote collaboration technologies, or delivery services may see an uptick in demand and revenue.

Government Response

Federal, state and local governmental authorities have passed legislation and issued rules and executive orders aimed at blunting the economic impact of lockdowns and shelter in place orders to workers and businesses alike. The costs of such measures such as mandated paid sick leave may be borne solely or partially by businesses, which may have a material adverse effect on their financial condition. Uncertainty around how long the pandemic will last and its continuing effects on the economy may result in further government actions that could adversely impact the business and financial prospects of the issuer. Issuers are advised to monitor new legislation or orders to which they may be subject and assess how such government actions may impact their business. If the issuer’s business will be or might be materially affected, appropriate disclosures to investors should be made.

An issuer may either (1) revise or update its existing risk factor disclosures in its offering materials to address how each area has been or may be affected by the COVID-19 pandemic, or (2) include a new standalone risk factor disclosure regarding the COVID-19 pandemic and its impact on the issuer’s overall business. Either way, it is important to be fully transparent about the pandemic’s effect on the business of the issuer. Because of the rapidly changing nature of the pandemic and government and societal reactions, it is important that an issuer monitor these developments and their impact on its business and update its disclosures as circumstances change.

Issuers or investors with questions regarding COVID-19 risk factor disclosures may contact any member of Wendel Rosen’s Business Practice Group.

“Happy Cows” and Sad Customers? Bill Acevedo Comments on Ben & Jerry’s Milk Sourcing Lawsuit

In a recent interview with Food Navigator USA, Partner Bill Acevedo discusses the recent lawsuit against Unilever that alleges the company misleads customers by representing Ben & Jerry’s ice cream products as being made with milk from “happy cows” in a Caring Dairy Program. The lawsuit states that only a small percentage of the milk and cream used in these products comes from these “happy cows and that the majority originates from regular, mass-produced dairy operations.

Bill looks at the possible strategies Unilever could undertake to defend itself in the lawsuit. He offers one possible defense: “show that the prospective class is undermined by the predominance of individual issues,” questioning whether every customer purchased the product because its milk and cream came from “happy cows.” As Bill says, maybe the customer really likes the ice cream flavor.

To read the full article, please visit Food Navigator USA.

Tillamook Presents Deceptive Image of Milk Sourcing Strategy, Alleges Lawsuit; Tillamook ‘Adamantly Disagrees’

Wendel Rosen attorney Bill Acevedo is quoted in the article “Tillamook presents deceptive image of milk sourcing strategy, alleges lawsuit; Tillamook ‘adamantly disagrees’,” which published on August 20, 2019 in Food Navigator.

To read more, please click here.

See you at Natural Products Expo West 2019

Natural Products Expo WestWendel Rosen food and beverage attorneys William Acevedo, Karen Balderama and Dick Lyons will be attending the Natural Products Expo West tradeshow in Anaheim, California from March 7-9, 2019.  They’ll be there to check in with our clients, see the newest products and trends, catch up with industry partners, and support OSC2. 

Wendel Rosen is proud to sponsor OSC2’s sold out Community Breakfast, which will educate sustainability focused CEOs and business leaders on innovative and collaborative ways that brands can work toward building regenerative business models and agricultural systems.  Even though they’ll be on the run to soak in all that Expo West has on offer, please make it a point to stop Bill, Karen and Dick in the Exhibit Hall and say hello!

No Insurance Coverage for Food Manufacturer’s “False” Advertising

[Special thanks for this guest blog from Wendel Rosen insurance attorney Gary Barrera.]


Last month, a California federal court held that a food manufacturer’s insurers had no duty to defend or indemnify the insured for claims arising out of the manufacturer’s alleged false advertising of its product because the claims were based on the manufacturer’s intentional and deliberate decisions regarding the content of its advertising.

In West American Insurance Co. v. Nutiva, Inc., a class action lawsuit was filed against Nutiva arising out of its alleged misrepresentations about the health effects of its coconut oil products. Nutiva marketed its coconut oil products with statements such as “100% less cholesterol than butter,” “better than butter” and “0g trans fats.” The class action plaintiffs alleged that, contrary to Nutiva’s advertising that coconut oil is healthy, consumption of coconut oil causes adverse health effects, including impaired endothelial function.

Nutiva’s insurers filed a declaratory relief action seeking a judicial declaration that they had no duty to defend or indemnify Nutiva because there was no potential for coverage under their respective general liability policies. The policies insured Nutiva for damages because of “bodily injury” or “property damage” caused by an “occurrence,” which the policies defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The insurers did not dispute that the class action plaintiffs’ allegation of “impaired endothelial function” constitutes “bodily injury,” but argued that the injuries alleged by the plaintiffs arising out of Nutiva’s false advertising of its coconut oil products were not the result of an “accident,” which California courts define as “an unexpected, unforeseen, or undersigned happening or consequence from either a known or an unknown cause.” In response, Nutiva argued that the plaintiffs’ alleged injuries were the result of an “accident” because “an additional, unexpected, independent and unforeseen happening,” such as diabetes, hypertension or smoking, could have been an intervening event that produced the “impaired endothelial function.”

The court held that the insurers had no duty to defend or indemnify Nutiva because the false advertising claims did not arise from an “accident,” but rather, from Nutiva’s “deliberate marketing decisions.” The court reaffirmed that under California law, “accident” in the general liability insurance context refers to the insured’s conduct, and if the insured intends to perform the acts resulting in the alleged injury or damage, there is no “accident” even if the insured did not intend to cause injury. Since the class action complaint alleged that Nutiva intentionally marketed its coconut oil products with positive statements about its products’ health benefits, and these statements misrepresented the products’ health effects, the court held there was no “accident,” regardless of whether Nutiva did not intend the alleged adverse health effects from the use of its products.

The court also rejected Nutiva’s argument that the alleged health effects could have been caused by unintended problems in the manufacturing process that rendered the products defective. The court opined that although Nutiva speculated that its products might have been defective, it did not identify any supporting evidence, nor did it contest that it intended to advertise and sell its coconut oil products as healthy. Since no allegations in the class action complaint raised the possibility that Nutiva’s actions in labeling, advertising, and selling its coconut oil products were accidental, the insurers had no duty to defend or indemnify Nutiva.

The Nutiva case serves as a lesson to product manufacturers and especially food manufacturers that bodily injury or property damage claims arising out of the manufacturer’s alleged false or deceptive advertising of its product will not be covered under a general liability policy if the manufacturer intended to label and advertise its product in a certain manner, even if the manufacturer did not intend to cause injury to its customers via the sale or marketing of its product. Food manufacturers should carefully scrutinize the content and accuracy of their advertising in order to minimize their potential exposure for bodily injury or property damage claims based on false advertising, and scrutinize their insurance policies for possible lack of coverage for such exposure.  It is also critical for food manufacturers to routinely review their coverage with an experienced insurance broker to ensure they have the maximum scope of coverage possible.