Private Placement Memorandum

What you need to know about Private Placement Memorandums (PPMs).

Have you heard about Private Placements and Private Placement Memorandums? Are you an experienced investor willing to take a higher risk for a greater reward? Are you a business executive or owner looking to raise capital? Are you a start up needing investor funding, but wishing to stay out of public view longer?

If you said yes to any of the questions above, then keep reading to learn what you have been missing.

Background Information on Private Placements.

A Private Placement refers to a securities offering that are only offered to invited investors and are not registered with the Security and Exchange Commission. They are also not put on the open market like a company IPO.

The Securities Act of 1933 included Regulation D which excluded certain securities from the more rigorous SEC oversight. These securities do not have to be registered with the SEC and are not required to include a prospectus or detailed financial information.

These Private Placement Securities are not available to just any investor. Because these securities have less SEC scrutiny, they are considered higher risk. Regulation D stipulates that only accredited investors may purchase Private Placement Securities. The purpose behind this is to ensure that investors in these riskier securities are financially experienced enough to understand, and manage, the risk.

If you are wondering what an accredited investor is, you probably are not one. An accredited investor is a business or person allowed to trade in unregistered securities. The qualifications for this designation are based on meeting at least one of the requirements listed below.

  • img Minimum income
  • img Minimum net worth
  • img Minimum assets
  • img Business size
  • img Business governance status
  • img Individual professional experience

In other words, those invited to invest will be:

  • img Wealthy individual investors
  • img Banks and other financial institutions
  • img Mutual funds
  • img Insurance companies
  • img Pension funds
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What does a potential PPM issuer need to know?

After watching the growing pains of many tech startups who went IPO, PPM’s have become an attractive startup fundraising technique. This provides the option of early major capital fundraising without the pain of public scrutiny and other IPO side effects.

This technique can also save time and money. This is due to the faster underwriting process when avoiding registering with the SEC and no need for a credit rating from a bond agency.

A PPM method of fundraising does come with drawbacks. The investors of private placements demand a higher ROI than they would get on the open market. This is the more risk, more reward rule. Also, the investor is also allowed to demand a higher percentage of ownership in the business or they can demand a fixed dividend payment per share of stock.

How do I make one?

While there is no format or template, there are expectations that certain items or information will be provided. For more information on these items, keep reading.

Notices to Investors

This is the boring legalese for all required disclaimers or local applicable laws.

Offering Summary

The offering summary is your bread and butter and should be a brief summary of what is covered in the rest of the document. This includes information about the business, basic offering terms, risks and instructions on how to invest. This must pique investor interest and give them a reason to sit through the rest of the presentation.

Management

This section should provide enough information about those managing the project to understand their role and expected impact on the project.

A suggested list of items is below:

  • img Biographical sketch
  • img Curriculum vitae or resume
  • img Synopsis of individual successes and failures
  • img Synopsis of individual successes and failures
  • img Conflicts of Interest

Terms of the Offering and Securities

Lay out exactly what you are offering and what the investor gets. This should include voting or dissolution rights, provisions provided to protect the investor, and capitalization before and after the offering.

Risk Factors

This is a thorough description of any project specific known risks, general risks of similar investments, and general risks of the industry.

Use of Proceeds

Here you need a detailed description of how the offering proceeds will be used. AKA, a detailed budget.

Financial Information

Here you must illustrate the financial situation. Include the following information.

  • img The company's financial position.
  • img The historical financial performance.
  • img Provide forward looking financial statements.
  • img Include a management explanation of any relevant historical performance.
  • img Do not forget to include the time frame to profits.

Exhibits

The exhibits will vary by offering but are essentially anything that can help the investor make the decision that was not previously discussed. See a suggested list below:

  • img Instruction on how to invest
  • img Any subscriptions or purchase agreement
  • img Any relevant governing documents
  • img Relevant material contracts
  • img An investor questionnaire (helps determine if the investor is a good match for the security)
  • img Company W-9

Those preparing a PPM should consult a securities lawyer and avoid using a generic PPM template generator. That is unless you enjoy litigation. If you have ever been on either end of a “that is what I said, but what I meant” conversation with your spouse or teenager, imagine telling that to a judge.

With so many differences between industries, businesses, local laws, specific projects and offering terms, a generic form cannot possibly address every needed aspect. It would be extremely easy to overlook something that leads to a different understanding of the terms between the issuer and the investor.