When Do I Need a Private Placement Memorandum?

By - September 25, 2023 - Corporate & Business

What is a Private Placement Memorandum?

A Private Placement Memorandum (PPM) may also be called an Offering Memorandum (OM), Confidential Offering Memorandum (COM), or Confidential Information Memorandum (CIM) and can sometimes be thought of a business plan with a highly detailed legal focus, emphasizing both transparency and privacy from the issuer. Its primary role is to reveal investment terms and immediate risks to potential investors, including extensive details about the business opportunity, structure, use of funds, and management. PPMs, unlike traditional business plans, are typically crafted by legal experts.

As the name suggests, PPMs are confidential and pertain exclusively to non-public transactions not registered with the U.S. Securities and Exchange Commission. They help protect the issuer selling unregistered, private securities, including stocks, equity interests, or various debt instruments. PPMs offer investors a company overview, financial details, and offering terms associated with restricted securities offerings. In contrast, public offerings or publicly traded securities typically employ prospectuses rather than PPMs.

In essence, PPMs are all about disclosure within the context of private transactions.

Do I Need a Private Placement Memorandum?

When Do-I-Need-a-Private-Placement-Memorandum

Technically, when raising funds under Regulation D or any other SEC exemption, there’s no strict requirement to utilize a Private Placement Memorandum (PPM). However, federal securities laws and SEC regulation require providing investors with accurate information regarding investment risks, details, and fees to prevent fraud.

If opting not to use a PPM, it’s crucial to ensure that all specific risks, fees, investment criteria, and related information required are disclosed in a Subscription Agreement or a similar legal document. Nonetheless, securities lawyers at Stevens Law Firm typically recommend using a PPM to comprehensively disclose all information related to your fund or business, ensuring future protection.

Whether establishing a hedge fund, private equity fund, real estate investment group, or seeking capital for your business, crafting a customized PPM for your investors is a prudent choice.

PPMs vs. a Business Plan?

A business plan and a Private Placement (PPM) serve distinct roles within the world of corporate finance. A business plan is a marketing tool meticulously crafted to promote your company vision and potential. Its core purpose is to showcase the future prospects of your company and growth potential. Within the pages of a business plan, you’ll find forward-looking information that delves into market demand, customer profiles, growth opportunities, the competitive landscape, revenue streams, and the possibility of strategic partnerships. It’s designed to persuade and inspire confidence in potential stakeholders.

On the other hand, a PPM is fundamentally a disclosure document characterized by a descriptive and non-persuasive style. Its primary objective is to give investors a comprehensive understanding of the investment opportunity, allowing them to make informed decisions based on factual and concrete information. The presentation of a PPM is grounded in transparency and must address the external and internal risks your company faces. While not overtly designed for marketing purposes, a well-crafted PPM can indirectly serve as a marketing tool by virtue of its professionalism and thoroughness. An adeptly composed PPM strikes a balance between fulfilling disclosure requirements and incorporating elements that strategically enhance the appeal of the investment opportunity.

What Components Make Up a PPM?

Most transactions involving securities falls under the purview of several laws, including the Federal Securities Act, state securities laws, and anti-fraud provisions. This means it’s imperative to avoid disseminating false or misleading information about the company, the securities act being offered, or the entire offering itself. The essence of a Private Placement (PPM) lies in its role as a comprehensive information source for investors. It aims to leave no stone unturned, offering a thorough insight into various facets of the business, including its management, historical financial performance, future prospects, and the associated risks.

Some business owners may fret about overloading the document with excessive legalities. However, when dealing with experienced investors, a good lawyer will say it’s worth noting that they are often accustomed to such disclosures and, in many cases, view them as a testament to the business’s professionalism. While the applicable law may provide leeway for different disclosure requirements based on various factors, adhering to best practices for PPMs often involves certain information disclosures, even when not strictly mandated by law.

In practice, most PPMs follow a similar format. Let’s delve into a concise overview of the typical components commonly found within a PPM.

A Summary of the Offering Terms

The “Summary of the Terms of the Offering” lives up to its name by providing a concise yet comprehensive overview of the critical aspects of the offering with the PPM. This section serves as a vital guide for investors or accredited investors, offering valuable insights into the structure of the offering from your company, the intricate details of the securities being offered (such as their class, unique attributes, and more), pricing information, the minimum subscription amount required to participate, investor eligibility criteria, and transparent disclosure of any management fees involved. Additionally, it may include provisions related to withdrawals and, when applicable, placement agent commissions.

Moreover, this section delves into the specifics derived from the issuer and their governing documents, such as the limited partnership agreement or the operating agreement. The intricate web of details within this summary is orchestrated by the private placement attorney, who meticulously assembles this puzzle of information.

It’s essential to recognize that the “Summary of the Terms of the Offering” is often the last piece of the puzzle to be crafted, as it must seamlessly encapsulate all the dynamic elements and nuanced factors inherent to the offering, ensuring that investors receive a comprehensive and coherent portrayal of the investment opportunity.

Risk Factors

In a Private Placement Memorandum (PPM), you’ll typically find an assessment of potential risk factors that could affect your investment. These risks encompass general factors shared by similar assets and those specific to the issuer and its securities. These risk factors can range from reliance on strategic partnerships and a limited number of key personnel to competition-related risks, which are vital considerations for investors to review in your offering.

Disclosure of Use of Proceeds & Expenses

The PPM issuer may have an obligation to articulate a clear plan for utilizing the net proceeds generated from the offering, including specifying the approximate allocation and terms for each purpose. This transparency empowers investors by providing insight into the precise utilization of their investments and funds to their investors.

Moreover, this commitment to transparency extends beyond immediate financial allocation. It also encompasses the issuer’s dedication to ongoing communication with investors. This collaborative approach ensures that investors remain informed about the progress of the investment, any significant developments, and any deviations from the original plan. Regular updates and clear reporting mechanisms are cornerstones of a successful investor-investee relationship.

Furthermore, you should be prepared to address any inquiries or concerns promptly, fostering an environment of open dialogue and trust. This commitment to transparency and accessibility not only satisfies regulatory requirements but also helps create a solid foundation of investor confidence, which is instrumental in attracting and retaining investors in the long run. Ultimately, a transparent and communicative approach benefits both the issuer and investors, reinforcing the integrity of the investment opportunity.

Business & Management Overview

The business section within the PPM document outlines the investment opportunity and details the operations of the issuer. In contrast, the management section furnishes essential biographical and background information about key individuals such as managers, founders, directors, and key officers. To compile these sections, we rely significantly on the initial narrative the issuer provided to their legal team.

The utmost priority in crafting the business and management sections is ensuring that the information is presented transparently, devoid of any misleading statements, and avoids exaggeration of achievements or prospects.

Offering Documents

The Private Placement Memorandum (PPM) itself doesn’t represent the actual “offering.” Instead, it serves as a disclosure document that comprehensively describes the offering, encompassing its structure, strategies, regulation, financing, use of funds, business plan, services, risks, and management. The offering encompasses various supporting documents that should be prepared alongside the PPM. These include the subscription agreement, the investor suitability questionnaire, and most notably, the issuer’s organizational documents (such as an operating or limited partnership agreement, shareholders agreement, etc.), as well as a promissory note (in cases of debt offerings), among others.

When creating the PPM disclosures, it’s imperative for the issuer to collaborate closely with experienced private placement legal services. Talking to a professional about industry regulation is imperative. Our firm is dedicated to assisting in planning and structuring every legal facet of the offering from the outset, as there are numerous decisions to be made regarding the offering’s structure and the selection of appropriate exemptions.

Types of Private Investors/Investors 

There are many types of investors that you can acquire to raise funds for your company. It is important to know the differences between each and what types may benefit from a PPM prior to accepting any outside funds to grow your company.

Venture Capital Fund

Securing venture capital fund often hinges on a robust business plan, with the need for a PPM being case-dependent. The VC typically extends a term sheet upon this decision, crystallizing their investment terms, which may encompass equity distribution, funding amounts, valuation, and vital investment conditions. It’s essential to know that the VC landscape is diverse, with various preferences and legal expectations, underscoring the importance of a compelling business plan and pitch in navigating your dynamic industry. Meeting with a legal professional early on can help you be prepared for the right opportunity ahead of time.

Angel Investors

Angel investors, affluent individuals supporting early-stage companies, usually require no formal PPM or specific disclosures. These are investors are accredited and conduct extensive due diligence, making a PPM mostly a formality. Business plans play a pivotal role in their evaluation process. However, seeking legal services before discussing your need for equity-related documents with an investor showcases professionalism and regulatory expertise. Such preparation can reassure investors about your knowledge of industry law and regulation. For further inquiries, consult one of our service providers.

Family, Friends and Connections

Raising seed capital often begins with friends and family, typically under $100,000, usually not requiring a PPM. However, for investments of $5 million or more, a PPM is vital for due diligence. Seeking funds from non-accredited investors entails more disclosure requirements, while working with accredited investors may reduce legal burdens, potentially eliminating the need for a PPM. It is important to know the law and your rights to ensure you are conducting business and following the law in your state. Your investors have rights as well in their own states.

Involving family and friends as early investors can be risky; they might not grasp the inherent startup risks. Whether or not you provide a PPM to these investors, you must share critical documents like your investor deck, financial statements, business plan, and strategy details to convey your business needs and goals.

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