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.

Consumer Alert: FTC and FDA Issue Warning Letters to Companies Looking to Capitalize on Coronavirus Fears

The Secretary of Health and Human Services, under section 319 of the Public Health Service Act, 42 U.S.C. § 247d, has determined that a public health emergency exists nationwide as a result of confirmed cases of COVID-19. Unfortunately, it seems that not only must we be vigilant in maintaining our health, but we must also be careful not to let our guards down and be deceived by unscrupulous operators looking to capitalize on the fear and confusion surrounding the Coronavirus. In a move that was exceptional for both its coordination and its swiftness, the Federal Trade Commission and the Food and Drug Administration issued Warning Letters to seven companies selling products that claim to prevent or COVID-19 Coronavirus.

The FDA unequivocally advises that there are no approved vaccines, drugs or investigational products currently available to prevent or treat this virus. As such, the FDA concluded that the challenged products are unapproved drugs that pose significant risks to patient health and violate section 505(a) of the Federal Food, Drug, and Cosmetic Act (FD&C Act), 21 U.S.C. 355(a), are misbranded drugs under section 502 of the FD&C Act, 21 U.S.C. 352, and that introduction or delivery for introduction of these products into interstate commerce is prohibited under section 301(a) and (d) of the FD&C Act, 21 U.S.C. § 331(a) and (d). It is also unlawful under the Federal Trade Commission Act, 15 U.S.C. 41 et seq., to advertise that a product can prevent, treat, or cure human disease unless the advertiser possesses competent and reliable scientific evidence, including, when appropriate, well-controlled human clinical studies, substantiating that the claims are true at the time they are made.

The sellers and their products, which should be avoided, are:

  • Vital Silver – essential oil product offered for sale through company’s website and/or through advertising on Facebook.
  • Quinesssence Aromatherapy Ltd. – essential oil product offered for sale through company’s website and/or through advertising on Twitter.
  • Xephyr, LLC d/b/a N-ergetics – colloidal silver products offered for sale through company’s website.
  • GuruNanda LLC – essential oil product offered for sale through company’s website and/or through advertising on Twitter and Facebook.
  • Vivify Holistic Clinic – tea product offered for sale through company’s website and/or through advertising on Facebook.
  • Herbal Amy LLC – Coronavirus Boneset Tea, Coronavirus Cell Protection, Coronavirus Core tincture, Coronavirus Immune System, and Elderberry Tincture products offered for sale through company’s website and/or through advertising on Facebook.
  • The Jim Bakker Show – products labeled to contain silver, such as “Silver Sol Liquid,” offered for sale through company’s website.

The FDA advises consumers not to purchase or use certain products that have not been approved, cleared, or authorized by FDA and that are being misleadingly represented as safe and/or effective for the treatment or prevention of COVID-19 Coronavirus. Similarly, the FTC has issued a blog post to warn consumers about scams that are being implemented by way of internet, email, text, social media, and direct telephone calls to prey on unsuspecting consumers’ fears about Coronovirus and bilk them of their personal information, money or both. Both the FDA and the FTC have expressly stated that they are prepared to take enforcement actions against any seller who markets such misbranded products, which could include (but are not limited to) injunctive relief, reimbursement of monies paid by consumers, and detention and/or refusal of admission of products to the United States (if the products are being imported).

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!

See You at Expo East!


Wendel Rosen food and beverage attorney William Acevedo will be attending the Natural Products Expo East tradeshow in Baltimore, Maryland from September 12-15, 2018.  He’ll be there to check in with clients, see the newest products and trends, and to support the Plant Based Foods Association.  Wendel Rosen is proud to sponsor the PBFA’s Lobbying Workshop, which will educate brands on how they can advocate for their interests to state and federal legislators.  We hope that you will attend this workshop, but even if you don’t, make it a point to stop Bill in the Exhibit Hall and say hello