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Do you need to quickly and flexibly raise capital for your business or startup?
There are sophisticated investors in the market who want to know everything about your financial performance with a private placement memorandum. Also known as a PPM, a private placement memorandum helps you dodge some regulatory requirements while raising capital and equity with accredited investors quickly.
However, you should approach your PPMs with a comprehensive understanding of how they work. The article below covers everything that you need to know.
What is a Private Placement Memorandum?
A private placement memorandum, also known as an offering document and offering memorandum, is a financial legal documents that companies use to attract prospective investors. It offers information about the company selling securities and related terms and conditions according to the Securities Act of 1993. This information helps investors perform their due diligence towards their stakeholders.
Benefits of private placement memorandums include:
- Issuer not subject to the US Securities and Exchange Commission (SEC) regulations
- Ability to raise capital quickly
- Lower costs versus preparing a prospectus
- Permissible to maintain confidentiality
- Can raise smaller amounts from a large pool of investors
- Private placement markets are considered more stable versus common stock
- Personalized options and flexibility
There are several key advantages associated with private placement memoranda. They can help your organization or startup raise capital. However, there are disadvantages to using PPMs as well, so way your options carefully.
Here is an article about the Securities Act of 1993.
Purpose of a Private Placement Memorandum
The purpose of a private placement memorandum is to help investors understand the investment security or instrument. Smaller and emerging markets, typically involving startups, utilize a PPM when raising capital from a specific group of people. These individuals tend to be high net worth institutional investors.
Examples of when to use private placement memoranda include:
- Example 1 . Raising business capital for a startup
- Example 2 . Taking advantage of fraud protection statutes
- Example 3 . Offerings above $5 million with unaccredited investors
- Example 4 . Soliciting angel investors with a formal approach
- Example 5 . Negotiating with a large group of investors over fixed terms
- Example 6 . Investing with a lead investor or smaller markets
As you can see, a PPM is not right for everything situation. However, they are helpful when raising capital. You should seek immediate, in-state legal advice if you are still trying to decide if this approach is right for you.
Types of Private Placement Memoranda
While private placement memoranda are used to raise capital, they also come in many forms. Several company types can sell unregistered securities versus going through an initial public offering (IPO). For the best result, use the PPM type that is right for your situation.
Types of private placement memoranda include:
- Corporation common stock sales
- Count financing authority bond sales
- Mutual fund shares held in trust
- Limited liability company (LLC) promissory notes
- Mortgage broker business notes
If you are thinking about using private placements to raise money, you must draft a PPM that complies with current regulations. You have the right to use private placements, but only if you meet specific conditions. Otherwise, you could be on the hook for SEC violations.
Key Parts of a Private Placement Memorandum
Private placement memoranda are formal documents. They are not a business plan since they do not address the business entirely. The most critical point to drive home if you draft a PPM is to ensure that it complies with SEC requirements and that you follow them carefully.
Key parts of a private placement memorandum include:
Part 1. Investors’ notice
The investors noticed should outline important disclosures that prospective investors anticipate seeing. Some common investors’ notices include high-degree of risk, securities transfer restrictions, and company rights. These notices are generally offered following the rules and regulations of the SEC.
Part 2. Executive summary
An executive summary is a letter to the investors that summarize the PPM and point out other critical details. The executive summary should be crafted to entice investors. You should share the top three most important information you want to share so that they can refer to them later quickly.
Part 3. Overview and purpose
The overview and purpose section allows you to introduce your organization and describe what you are using the proceeds for. You can also share your market knowledge, planned operations, and SWOT analysis results. This part will give investors an understanding of who you are, your company’s greater purpose, and how you plan to move ahead.
Part 4. Terms and conditions
The terms and conditions of your PPM are critical to learning about how the deal is structured, including your dilution and dividend policy. Other elements to address include voting rights, liquidation rights, and information rights. If you hire an attorney, they will provide you with a checklist of considerations regarding this section of your private placement memorandum.
Part 5. Risk factors
Risk factors are the most component of your PPM. Potential investors may skip to the section immediately to learn about your company’s risk factors. Statements related to risk should be short, simple, and in bold typeface.
Part 6. Financial Statements
Your financial statements and a summary therein share with investors how your company has performed in the past. This section can signal to investors that you can turn a vision into a reality, which is an attractive attribute. Your accountant can provide you with the necessary financial statements that you will need.
Part 7. Use of Proceeds
The second most important section is how you plan to use the capital raised. Break your anticipated expenses down into several categories. These categories should match the ones contained within your pro forma documents .
Also, it is worth sharing that the Securities and Exchange Commission routinely warns investors about the warning signs of a potentially fraudulent investment scam or scheme. If your PPM is poorly written, formatted, or generally sloppy, you could turn prospective investors away. Inattention to detail is a significant red flag to an investor.
Image via Pexels by Lukas
Private Placement Memorandum vs. Prospectus
The difference between a private placement memorandum vs. prospectus is that a private placement memorandum explains the terms and conditions of a private placement. A prospectus is an offering document that performs the same function but for publicly traded issues, such as companies selling common stock or introducing an IPO. Given you can buy the share in the public markets, there is no need for details about the terms and conditions.
Get Help with Private Placement Memoranda
For the best result, draft a PPM with business lawyers . They will help you avoid legal mistakes while maximizing your opportunities. Errors can result in expensive consequences and fines in the future, which means you should seek legal advice before utilizing a PPM, prospectus, or other offering documents.
Knowledge and Skills
Business attorneys are well-suited to guide you through the process. They have the knowledge, training, and skills that you want when approaching investors. Solo practitioners and small firms in your state can offer personalized attention, competitive rates, and institutional knowledge.
Another benefit of business attorneys is that they offer full-service, personalized attention. They can field calls, write letters, discuss your objectives, and answer questions on-demand. Solo practitioners generally can customize their offerings quickly versus large law firms.
Meet some of our Private Placement Memorandum Lawyers
Matan is an experienced M&A, corporate, tax and real estate attorney advising closely held businesses, technology start ups, service businesses, and manufacturers in purchases, sales, and other exit strategies. Matan works with founders and first-and-second generation owners to strategically transition businesses.
I am a business law attorney with over 10 years’ experience and a strong background in information technology. I am a graduate of the University of California Berkeley, a member of the Illinois bar and a licensed lawyer (Solicitor) of England and Wales. I actively partner directly with my clients or indirectly, as Of Counsel, to boutique law firms to streamline business practices and manage legal risks by focusing on essentials such as - business contracts, corporate structure, employment/independent contractor agreements, website terms and policies, IP, technology, and commercial related agreements as well as business risk and compliance guidance.
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Jennifer is an experienced business law attorney who has worked with many startups as well as established corporations. With a strong background in contract creation and review, she will be able to ensure you and your business interests are always protected.
I am a corporate lawyer with expertise working with small businesses, venture capital and healthcare. Previously, I worked at large law firms, as well as head attorney for companies. I graduated from Harvard College and University of Pennsylvania Law School. I speak 5 languages (Spanish, French, Italian and Russian, plus English), visited over 60 countries, and used to compete in salsa dancing!