As an attorney who drafts a lot
of private placement memorandums

for my clients who are doing
offerings under Regulation D

Rule 506(b) and Rule 506(c), one
thing that I oftentimes am

thinking about while drafting,
and one thing that as I'm

talking to my clients, and
they're trying to provide me

information about what they're
offering is one of my main

thoughts is where how much is
this puffery? And how much is

this something that goes a
little bit beyond it? So in

today's video on talking about
staying in compliance with the

SEC, staying in compliance with
state regulations, in this

special seven part series, we're
going to talk about puffery.

What is that? Where does it
cross the line? Why is it a

problem? And what's that thought
process?

So what is puffery? Anyway? Law,
puffery is generally defined as

something along the lines of a
statement that's made by a

syndicator or fund or somebody
raising money. That's so

general, but it describes
something that's optimistic and

may induce somebody to want to
want to invest with you, but not

be so specific as to start
crossing the lines. For example,

what probably is okay would be a
slight statement, something like

if it let's say it was a real
estate deal. And so you said,

the, you know, the Austin market
is really hot right now. Okay,

that's nothing. That's just
puffery, right? So it's, it's a

nice, very general statement,
it's nothing that specifically

is going to induce an investor
to to give you money, where it

does start to cross the line is
where there starts being a such

a falsehood note to it. So let
me give you the best example

that I know of it comes from a
case out of the Seventh Circuit,

the seventh federal circuit.
Now, what happened in this case,

and it was called the was called
the maker, let me look at it

real quick. The maker issues and
rights versus Tellabs. In that

case, the was an accusation of
fraud that was going on about

their stock. So Tellabs was
trying to keep value in their

stock, even though they're
facing declining sales. So

declining sales, declining sales
around two of their major

product lines. So what had
happened in that case was there

had been a lot of there had been
a few of the calls with analysts

that were being brought that
were brought in, as well as the

10k report. And what the clerk
ultimately said is, some of the

things were just pure puffery,
right, they it just didn't rise

to the level, like they're
saying, we feel good about our

company's prospects. Okay,
that's totally fine. Right? You

feel good about that. What they
didn't, but they did have a

problem with was about specific
language as it related to some

of their product lines. So for
example, two of their product

lines were flatly declining,
like sales will go straight

down. What when one of the
analysts asked about it, the CEO

had remarked at the time, we're
very confident in the strong

growth of our of our products.
And we know that these two

products specifically have or
are achieving a great deal of

acceptance amongst its
customers. That's where it

started to cross the line.
Because if you have strong

declining sales, saying that you
they, you have strong

acceptance, well, how strong is
it really, if you have a

declining sales? So that's one
point where the court actually

crossed the law and said, No,
the point why I see it as a

problem here is really in
context. So let's think about

how a matter comes before the
State oftentimes, or before the

SEC, when something goes wrong.
So when something falls apart,

like Apple gate, if you look up
that I think it was Apple's gate

in Texas, who lost about $250
million of investor money, and

may or may not go, there may or
may not be lawsuits from it, I'm

assuming there probably will be
but I don't know. And I don't

know any specific any indication
that they committed fraud or

anything like that. But what I
do know because I looked at

their sales material and I
looked at their literature, I

look at all A lot of deals and
there's happened to be something

that I looked at. So they were
not clients. I looked at their

materials. And they were, they
used a lot of puffery type of

language about the growth of the
Houston area, I believe it was

in Houston, the growth of the
Houston area. And then these

assets specifically had up way
under market rents, and would be

enjoying this grand appreciate a
value. To me, that starts

crossing the line on where
puffery is. Now, I haven't seen

any all the facts of the case,
all I've seen is this little

snapshot. And I've looked at the
assets underlying them a little

bit to get kind of a picture of
what it is. But what the assets

appeared to be, to me based on a
cursory look, was that the this

was a lot of puffery being put
in about specific assets that

were okay, they were there
wasn't anything inherently wrong

with the the them. But there, it
was relying on this, this over

puffery of what was going to
happen in the future, that it

went beyond just we believe that
the market is going to be

strong, and that we're going to
be able to command more rents,

it suddenly started to feel a
lot more like these are so under

market that we're definitely
going to be able to achieve

these more rents, and that we're
going to be able to increase the

vacancy, the decrease the
vacancy. That's where things

start crossing line. So back to
our context. So you, as a

syndicator, as a fund manager,
are trying to find investors for

your project. You're putting
things out there into the world

in order to attract those
investors. And when you do that

the language of sales is
oftentimes there is some puffery

that goes on. And that is a
communication of you know why

they should invest. If you don't
do that as part of the sales

piece, it probably would look a
little strange because it would

probably fall your your sales
pitch would probably fall pretty

flat. But the problem that I see
and why it why include puffery

in this section, is because I
see it included in ppm, not in

ppm that I draft, I'm pretty
darn careful to go through and

make sure there's no puffery
whatsoever in there. Because I

don't want somebody relying on
the most important document to

protect you, the syndicator or
the fund manager, that most

important document, I don't want
them relying on whatever can be

considered even puffery and
certainly not over. Right, I

wouldn't want to put any things
like, you know, we know that

we're going to be achieving rent
growth of 200% over the next

quarter. That I mean, that's way
on one extreme, but I don't even

want this is in the best part of
town. Because it doesn't make it

the PPM itself, the private
placement memorandum is job is

to protect you. And it's also to
let the investor know, very

objectively, these are the
risks. These are the conflicts,

these are the terms, it is not
the place of a private placement

memorandum to do selling Its job
is to do protection, not selling

some of the more puffing it
looks like or some people who

put together brochures of people
with the PBM. You know where

they have. It's a private
placement memorandum, but it's

got all these pictures, and it's
got all these other things in it

and it just makes it sound Wow,
why wouldn't I want to invest in

it? That's a little bit too far.
Sometimes what I do, just for

context, is I'll talk about what
the market decisions why it

makes sense. This area is a PRI
is enjoying this kind of growth.

The management believes that by
because of this growth, assets

within this region are going to
appreciate and value and

decrease their vacancy and
probably increase their rents,

which will you know, increase
investor yields. That's the

thought process that occurs.
These buildings appear to be

very good buildings, and we've
identified add value components,

which when done, management
believes will probably turn into

something more valuable for your
investors. That's not puffery,

right. Those are just facts and
the facts thought process that's

going on the manager's head. The
other piece that it does is it

gives the investor Oh, okay,
that that piece of this, there

is a logical reason behind why
these assets were chosen. But

what it's not doing is acting as
a sale, Hey, you gotta buy this

right now, because this
particular investment is gonna

take off like a hockey stick.
It's not doing that. And so what

I see as the problem, and this
is the cautionary note, and I

think that regulators are going
to be picking up on it more and

more is, well, just what does
that private placement

memorandum looked like? What was
being communicated? Not just in

those advertisements, where
there certainly tons of it. But

what was said in the private
placement memorandum, because

it's in the private placement
memorandum. Yikes. Than, you

know, the investor is being sold
quite a bill of goods, and

they're not really being
informed of their risks. And

that's the problem. My name is
Tilden Moschetti.

I am a syndication attorney for
the Moschetti Syndication Law

Group. If we can help you by
putting together a private

placement memorandum, or on all
of the documents and making sure

that your project your your
506(b) or 506(c) offering is

compliant with state regulations
and compliant with federal

regulations. We'd love to talk
with you give us a call and

let's talk about your project.