What Should be in a Private Placement Memorandum

By - December 4, 2023 - Uncategorized

When you want to raise capital through a private placement offering, having a private placement memorandum (PPM) is crucial. This document is essential for marketing to and attracting investors as well as complying with regulations, whether you’re a startup in need of financial investment or an established company that wants to expand. Here’s a look at the key components of a PPM so you can create a document that’s effective and compliant.

What is a Private Placement Memorandum (PPM)?

A private placement memorandum (PPM) is a legal document that a company creates when seeking to raise capital through a private placement offering. Its primary purpose is to provide potential investors with detailed information about the company, its financial health, the terms of the investment opportunity, and the associated risk factors.

While a prospectus describes the terms and conditions of publicly traded issues, a PPM describes those of a private offering. A PPM is used to raise capital via a private offering from investors who are accredited, rather than from the general public.

A PPM provides important facts about the investment as well as a legal framework for the offering. It also serves as a marketing tool by getting investors interested in investing in the opportunity. The private offering memorandum provides transparency into the offering, builds trust between your company and potential investors, and ensures legal compliance. Investors use the information in the PPM to make informed decisions, so it’s crucial to create a well-structured and thorough PPM.

What Should You Include in a Private Placement Memorandum?

A high-quality PPM includes a variety of components that provide the details of the private placement offering, including the terms of the offering, the risk factors associated with the private offering, and financial information like how the capital will be used. The PPM also includes information about the company, such as company history and details about the management team. Including the necessary information in your PPM can help you clearly explain the offering so investors are well informed and can make smart decisions.

Executive Summary

The executive summary of the PPM gives investors an overview of the private investment offering as well as information about your company, your financial goals, and the investment terms. It highlights some of the important details that you expand on throughout the document, so investors have a high-level understanding of the offering before they continue reading. The executive summary typically includes an overview of your company, a summary of the investment opportunity, terms of the private offering and securities, requirements that each investor must meet, a mention of the risk factors, and more.

Risk Factors

In order for an investor to determine if participating in your private placement is the right decision for them, they need to know about the risk factors associated with the offering and securities. The risk factors section of the PPM outlines the potential risks, challenges, and uncertainties that the issuer has determined may impact investors, helping each investor make informed decisions regarding the investment opportunity. The risk factors section typically include risks that your company faces, risks that are typical within your industry, and risks specifically associated with your private offering.

Investors tend to be concerned about the risks associated with the offering, so in addition to explaining the risks, it’s also important to address how you plan to mitigate the risks to protect everyone’s investment. Think of questions that an investor might ask about the risks and provide answers to show you’re being strategic with your private offering and approach.

Business Overview

The business overview section allows you to tell potential investors more about your company, including your company history, mission, and how your business currently operates. You can also talk about the products or services you offer, your target customers, teach investors more about the industry you’re in, and discuss competition and your competitive advantages. While you may want to dive deeper into your company’s financial information in a different section, you can also provide an overview here. Any information about your company that will give each investor a thorough understanding of your business can go in the business overview section.

Capital Fund Structure and Use of Proceeds

In this section, you’ll discuss your goals for the investment fund, your investment strategy, and how you will use the proceeds of the capital raised. Clarify what you want to achieve through the private placement offering, such as raising capital for a real estate syndication. Then, explain your investment strategy for the fund. For example, is it focused on a specific industry, geographic region, or asset class? This is also the time to share how your strategy aligns with your business objectives. Additionally, explain how the capital fund will be will finance your goals and how it will be used, such as for research and development, business expansion, debt repayment, or something else. It’s also important to outline any fees associated with the private offering, such as performance fees or management fees. Investors want to know how the capital they’re investing will be used, and providing clarity in this section helps to build investor confidence and trust.

Management Team

Describing your management team can help reassure investors that their money is in capable hands. Take the time to describe the key people on the leadership team or who drive the company’s success. For each person, include a bio, discuss their experience, and list relevant qualifications. If you’re enlisting the help of a broker or other third-party business, mention that business and explain their role.

Financial Information

Providing financial information about your business helps potential investors assess your company’s financial viability and whether or not participating in the private placement offering is a good idea. This part of the PPM should include information about your financial track record, any debt your business has, and your history of achieving return on investment for your investors. It can feature audited financial statements, income statements, cash flow statements, balance sheets, and other documents that showcase your company’s financial health. You might also include a timeline of how long you expect it to take for your business to become profitable. With sufficient financial information about your business, investors can make informed decisions.

Offering Terms

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Before investors can make a decision about your private placement offering, they need to know the terms and conditions of the agreement. In this part of the PPM, you’ll provide a term sheet that lists each term, such as which securities are being offered, their prices, the minimum investment required, and more. Terms of the agreement might include:

  • Types of securities: Mention the types of securities you’re offering, such as preferred stock, common stock, convertible notes, or equity or debt securities.
  • Prices: List the price for each unit of securities being offered.
  • Minimum investment: State the minimum investment that’s required of the investor.
  • Maximum offering amount: State how much capital you’re aiming to raise through private placement.
  • Investor rights: Describe the rights and privileges that investors are entitled to by purchasing securities and investing in the private offering.
  • Offering duration: Declare how long the offering will last and include the opening date and closing date.
  • Dividend or interest rates: If the investors will receive dividends or interest, disclose the rate and how often they’ll be paid.
  • Material changes: Describe how you will notify an investor if there are material changes to the offering terms.

The terms included in the PPM are specific to your offering and may look different than this list.

Securities Law Compliance and Tax Information

Remaining compliant with each securities rule and regulation is crucial. In this section of the PPM, you’ll explain how your offering is compliant so that investors feel confident when investing in your private offering. You can also disclose legal or tax information relevant to your business or offering. For example, you can mention if the issuer that’s being used to raise money is taxed as an S-corporation or a partnership. You can also list any pending lawsuits.

Subscription Procedures

The subscription procedures agreement in the PPM outlines the process that investors go through when purchasing securities. The subscription agreement is a legal contract between the security issuer and the investor. The issuing company agrees to sell securities at a specific price, and the investor agrees to pay that price. The information you incorporate into this segment might include:

  • Eligibility criteria: Provide a list of criteria that potential investors must meet in order to be eligible to purchase securities.
  • Subscription process: Explain the subscription process step by step and provide information on how investors can obtain the subscription documents.
  • Subscription agreement: The subscription agreement can be attached as an appendix, or you can provide information on where the investor can obtain the document.
  • Payment methods: List the methods of payment that you will accept from an investor, such as ACH transfers, checks, or wire transfers, and include the relevant banking information.
  • Subscription deadline: Declare the deadline for submitting subscriptions.

The information you include in the subscription procedures segment is based on your specific private placement offering and may differ from what’s listed above.

Intellectual Property and Legal Matters

In this segment of the private offering memorandum, you can mention your intellectual property assets – such as trademarks, copyrights, and patents – and share why each is crucial to your competitive advantage, disclose potential legal matters, and describe how your business plans to protect that intellectual property and the company’s future. You can provide details about the IP assets, such as whether your business owns them or licenses them from third parties, and whether or not there’s any pending litigation regarding the assets. You can also describe any strategies that your business has for mitigating risks and protecting IP.

Additional Information Investors Want to See

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In addition to the above information, investors may also be interested in the ownership structure of your business, including existing shareholders as well as any equity or debt securities you’ve issued. You can also include an analysis of the market and industry in which your business operates, including information like competitors, growth prospects, trends, and more.

Your exit strategy is another great component to consider including in the PPM. Mention the types of exit strategies your business would allow for investors, such as acquisition, initial public offerings, or share buybacks. Additionally, you can list the conditions related to the confidentiality and use of the information in your PPM to help ensure that investors don’t misuse the information.

There are many components that can be included in a PPM, and the information you choose to include depends on the specific details of your private offering. To make sure you include all the necessary information that investors want to know, it’s helpful to work with an attorney who’s knowledgeable in securities law and this type of investing.

Get Help Creating a Private Placement Memorandum

A well-structured PPM can help you raise the capital you need from accredited investors. It serves as a valuable source of information as well as a helpful marketing tool that piques investors’ interest and helps you reach your capital goals. By including the right information in your PPM, you can create a comprehensive and informative document that builds confidence and trust with investors.

Working with an experienced attorney helps ensure you include all the necessary information so you can create an effective PPM. By working with a lawyer, you can benefit from their legal expertise and feel confident that your PPM is compliant with relevant state and federal requirements. Attorneys can also tailor your PPM to your specific business and offering as well as help you identify and address potential risks.

If you’re interested in working with an attorney, contact Stevens Law. We specialize in a variety of business and technology practice areas, including securities law, intellectual property, commercial real estate, real estate syndication, employment and labor laws, and more. Contact us today to learn how we can support your business.

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