By UpCounsel Corporate Attorney Mary Obidinski

Outside funding can make the difference between taking your startup to the next level and stalling for lack of operating capital. For many entrepreneurs, the process of seeking out investments is daunting. One of the most intimidating aspects of the funding process for some start-up owners is the private placement memorandum (PPM).

What is a Private Placement Memorandum?

A PPM is a detailed legal document that provides prospective investors with information such as:

  • Company overview
  • Objectives
  • Planned use of investment funds
  • Industry data
  • Risk factors
  • Financial data
  • Economic projections
  • Proposed terms of investment
  • Information about the management team

A properly constructed PPM provides the information potential investors need to make an informed decision, and can also protect the company seeking funding against liability.

The Cost of Preparing a PPM

A PPM is typically prepared by a team of professionals, including an attorney and the company’s accountant, with information or documentation provided by others, such as the company’s bank. The assembly of this document is time consuming and can be expensive—expensive enough that some startups will find professional preparation of a PPM cost-prohibitive.

At the same time, the complex nature of a PPM does not lend itself well to self-preparation, or to the use of forms or adaptation from someone else’s PPM. While a thoroughly-prepared PPM can protect a company against allegations of fraud and certain other liability, an incomplete, inaccurate, or otherwise faulty PPM can have the opposite effect, putting the company at greater risk.

The expertise required and the associated cost is one reason many startups seek alternative routes to seeking investment funds.

When is a PPM Necessary?

PPMs are typically associated with private offerings of stock or security to accredited investors or other sophisticated investors with high net worth, including angel investors. The PPM informs investors, discloses risks for the protection of both the investor(s) and the company, and can be used to draw an investor’s attention to a particular offering.

However, not every limited solicitation of investment capital requires a PPM. It can depend on the type of investors the startup is working with, the securities law exemption the startup is relying on, and even to some extent, the industry the startup is in. For example, an angel investor in the tech industry may not want or expect at PPM for reasons such as these:

  • These investors often have a greater knowledge of the specific industry in which they are investing, and are better equipped to make informed decisions
  • These investors are typically sophisticated investors with high net worth who are generally well-equipped to perform their own due diligence, and understand the need to do so
  • While a PPM typically spells out specific terms of the offering, these investors often want a greater degree of control, and will prefer to negotiate terms versus receiving a set offering

Knowledge is Power in Seeking Investment Funds

Determining the best approach to securing funding to grow your business can be overwhelming, but you don’t have to sort it out alone. Take the time to educate yourself. Draw on available knowledge, whether that means consulting an attorney, seeking mentorship from a non-competing entrepreneur who is further along the path than you, or both. The same professionals who would form your team for assembling a PPM can provide the information and guidance you need to determine the best approach for your company and whether or not a PPM is required.

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About the author

Mary Obidinski

Mary Obidinski

As former general counsel for a large private corporation, Mary has a unique insider's view of how business works and how business decisions are made. She understands the importance of balancing legal objectives with practical business considerations.

Her primary areas of focus include counseling corporate, small business, and start-up clients on business and real estate transactional, contract, and compliance matters.

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