Quick Answer
Before sharing details about a private placement, a firm first confirms which contacts are legitimate potential investors for that specific offering. A prospective investor then signs a confidentiality agreement, letting the issuer share sensitive, non-public deal information without triggering a public-disclosure duty that does not bind a recipient who agrees to confidentiality.
Both steps happen before any of the screening or account-authorization documents covered later in this unit come into play.
Why Does a Firm Identify Potential Investors Before Sharing Deal Information?
- A firm identifies which contacts are legitimate potential investors for a specific private placement before a representative shares any non-public details about that offering.
- This identification step happens before the firm discloses sensitive deal information, and before the customer-screening and account-authorization steps covered later in this unit.
What Does a Confidentiality Agreement Protect?
- Confidentiality agreement (non-disclosure agreement, NDA): a document a prospective investor signs before receiving sensitive, non-public information about the issuer or the offering, such as financial statements, business plans, or deal terms.
- Purpose: protects the issuer's sensitive information from being shared or used outside the evaluation of that specific investment opportunity.
- Timing: typically signed before the firm delivers the private placement memorandum (PPM) or other sensitive due-diligence materials, not after the investor has already decided to invest.
Exam Tip: Gotchas
- A confidentiality agreement protects information. It does not make a prospective investor a customer or open an account. Signing one is a step that comes before the customer-screening and account-authorization steps that follow, not a substitute for them.
When Does Regulation FD Apply to a Confidentiality Agreement?
- Legal function: Regulation FD requires certain issuers to publicly disclose material non-public information once they disclose it selectively to particular outsiders. That duty does not apply to a disclosure made to a person who expressly agrees to maintain the disclosed information in confidence.
- A signed confidentiality agreement is what places a prospective investor inside that exclusion, so the issuer can share deal information without triggering Regulation FD's public-disclosure duty.
- Check the issuer first. Regulation FD binds only an issuer with a class of securities registered under the Securities Exchange Act, or an issuer already required to file periodic reports under it. Exchange listing is one route into that registration, not the only one. It includes a closed-end investment company, and it excludes any other investment company, a foreign government, and a foreign private issuer.
- A typical private-placement issuer reports to nobody, so Regulation FD never applied to it in the first place, and the confidentiality agreement is doing something else: protecting the issuer's own commercial information and supporting the private character of the offering.
Exam Tip: Gotchas
- The Regulation FD analysis is live for a private investment in public equity (PIPE), because a PIPE is a private placement by a company that already reports publicly. It is not live for a private placement by a non-reporting start-up. Read the issuer before assuming Regulation FD applies.
What Should You Check on Exam Day?
- Confirm the firm identified the contact as a legitimate potential investor before any deal details were shared.
- Check that the confidentiality agreement was signed before delivery of the offering memorandum or other sensitive materials.
- Watch for a PIPE fact pattern: only a reporting issuer's disclosure triggers the Regulation FD exclusion analysis.
- Remember a signed confidentiality agreement is not itself account opening or customer screening.