Private Placement Memorandum: Everything You Need To KnowStartup Law ResourcesVenture Capital, Financing
A private placement memorandum (PPM) is an important legal document that discloses the objectives, risks and terms of a proposed investment in your company.6 min read
2. What is a Private Placement?
3. Why is a Private Placement Memorandum important?
4. What does a Private Placement Memorandum include?
5. Reasons to consider using a Private Placement Memorandum.
6. Reasons to not use a Private Placement Memorandum.
7. Common Mistakes
8. Frequently Asked Questions
9. Support for your PPM
Updated July 13, 2020:
Private Placement Memorandum: What is it?
A private placement memorandum (PPM), also commonly known as an offering memorandum or offering document, is a vitally important legal document that discloses the objectives, risks and terms of a proposed investment in your company. Your PPM will be distributed to potential investors whenever your company sells stock or another type of security in a private placement.
Your PPM will provide important facts and figures about your company and its business that are useful to potential investors, including:
Your company’s industry;
Descriptions of the products you sell and/or services you provide;
Product and economic projections;
Company financial statements;
The terms of the offering and the planned uses for the money raised through the offering;
The risks associated with the proposed investment.
A PPM is normally created by the Company’s investment bankers, lawyers, accountants and other professionals on behalf of a business owner. Unlike a prospectus, which is produced when stock or other securities are registered under federal securities laws and become available for purchase by anyone, a PPM is not normally made available to the public. Instead, you will distribute your PPM to a limited number of pre-screened investors to solicit offers to purchase stock or other securities, as described in the PPM.
Your PPM will normally be distributed along with the Subscription Agreement and Investor Questionnaire that your investors will sign if they agree to the terms of your offering.
What is a Private Placement?
A private placement is an offering of securities, typically to a small select number of potential investors, that is not required to be registered under federal or state securities laws. Private placements are exempt from registration because they consist of high-dollar offerings made to accredited investors or investors that are highly sophisticated with high net worths. Examples of accredited investors include: banks, investment companies, large employee benefit plans and charities, businesses in which all owners are accredited investors, and individuals with a net worth of at least $1 million or annual income of at least $200,000 (or $300,000 with jointly with their spouse).
The most frequently used exemptions from registration applicable to private placements are contained in Section 506, Regulation D of the Federal Securities Act of 1933 and rely on factors such as the private nature of the offering (i.e. not being advertised to the public,) restrictions on the resale of the offered securities, and that all or most of the investors qualify as accredited investors.
Additionally, some of the legal protections that apply to larger offerings made to public shareholders do not apply in the case of private placements.
Why is a Private Placement Memorandum important?
Securities laws prohibit a company (“issuer”) from making false or misleading statements to investors when selling its securities, regardless of whether or not public registration of the offering is required. Specifically, Rule 10b-5 of the Federal Securities Exchange Act of 1934 requires that any information provided to investors “must be true and may not omit any material facts necessary to prevent the statements made from being misleading.”
A properly-written PPM ensures your company’s compliance with these anti-fraud laws by fully informing prospective investors about your company and the offered investment. Potential investors receiving your PPM will learn about your business and management team, as well as your company’s prior performance, future prospects, the terms of the offered security, the planned use of the funds to be raised, and the risks of the investment. A well written and detailed PPM, thus, protects your company and its management from liability.
PPMs typically follow a standard format, and sophisticated investors expect them to be carefully drafted, contain accurate and current information about the company, and provide a balanced, objective description of the potential benefits and risks of the investment.
What does a Private Placement Memorandum include?
Information provided using a standard PPM format will typically include:
A summary of the offering.
Information related to the capitalization of the company, both prior to and after the proposed investment is made, as well as language concerning other capitalization-related issues, such as liquidation preferences, conversion rights, anti-dilution provisions, voting rights, and more.
Risk factors that may impact the investor's investment, including both general risks (those that are found with similar investments) and risks unique the issuer and its securities.
Relevant company facts, including company history and historical performance, product and services descriptions, company goals, advertising and marketing strategies, company suppliers and customers, and other related information.
General industry and competition information.
Management team information, including the business backgrounds, special skills, fiduciary duties, and other relevant biographical information for each team member.
An item-by-item list with descriptions of how the company intends to distribute and use the moneys received through the private placement.
A detailed description (not an estimation) of any and all compensation to be taken by the founders or any other related parties from the proceeds of the private placement. Forms of compensation include salaries, consultant fees, asset sales and purchases, and any other forms of direct or indirect compensation. Compensation information must also be disclosed in your SEC Form D filing, which is accessible to the public at large.
Summary of terms relevant to the offering, including rights, restrictions, price, minimum subscription amounts, applicable management fees, withdrawals, investor qualification standards, and others. This summary should be prepared by your attorney at the end of the PPM process to allow for inclusion of all cited terms.
A detailed description of the securities offered (class, attributes, etc.,) including language regarding the ability of the company to change its capitalization through different classes of shares and distribution of dividends.
Instructions for investing in the offering.
Supplemental information and documents that may influence a potential investor’s decision to invest, including copies of investment contracts, financial statements, and organizational documents, such as operating and shareholders agreements, contracts, licenses, etc.
Reasons to consider using a Private Placement Memorandum.
A well-prepared PPM will mitigate risks from potential liability and litigation if your investors lose money on their investments.
Similarly, a PPM can protect your company from liability for possible violations of the federal and state securities laws.
Some of your potential investors are not accredited investors.
Reasons to not use a Private Placement Memorandum.
Not all offerings require the use of a PPM. Here are a few examples of situations where a PPM is not necessary:
When the cost associated with paying professional fees to lawyers, investment bankers and accountants to ensure legal compliance is prohibitive. For example, PPMs usually include audited financials of the issuer.
When your company is in its very early stages and your potential investors are limited to (1) friends and family or (2) angel investors who are sophisticated enough to conduct their own due diligence and negotiate their own investment deal.
When all of your potential investors are accredited investors. Keep in mind, however, that although securities laws technically do not require a PPM with accredited investors, not using a PPM presents risks. Use of a PPM will likely reduce your liability exposure.
Executives of a company considering a private placement sometimes believe that they can avoid paying lawyers and investment bankers by drafting the PPM themselves using forms found on the Internet. Although such forms are available, remember that the do-it-yourself approach may expose your company to a much higher risk of legal liability and litigation. A PPM prepared by an expert is much more likely to protect your company if something goes wrong.
Issuers sometimes include only generic investment risk information in their PPMs, rather than detailing specific risks associated with the company’s industry (trends, competitive pressures, regulatory issues, etc.). A well-prepared and detailed risk analysis is crucial to protect your company from potential liability.
Frequently Asked Questions
- Is a PPM the same thing as a company business plan?
No. Although it will usually contain similar elements to a business plan, a PPM is intended to provide an objective view of your company, whereas a business plan is usually more oriented towards marketing your company and therefore less objective.
- Is an Offering Memorandum or Offering Document the same thing as a PPM?
Yes. The terms are interchangeable.
- Is the PPM the only information that investors will use to make an investment decision in my company?
No. Most sophisticated investors – particularly institutional investors – will want to meet with your management, ask questions and conduct other due diligence regarding your business.
Support for your PPM
PPMs are very complex - if you need help with your company's PPM, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.