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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
August 25, 2021
Keidi S. Carrington brings a wealth of legal knowledge and business experience in the financial services area with a particular focus on investment management. She is a former securities examiner at the United States Securities & Exchange Commission (SEC) and Associate Counsel at State Street Bank & Trust and has consulted for various investment houses and private investment entities. Her work has included developing a mutual fund that invested in equity securities of listed real estate investment trusts (REITs) and other listed real estate companies; establishing private equity and hedge funds that help clients raise capital by preparing offering materials, negotiating with prospective investors, preparing partnership and LLC operating agreements and advising on and documenting management arrangements; advising on the establishment of Initial Coin Offerings (ICOs/Token Offerings) and counseling SEC registered and state investment advisers regarding organizational structure and compliance. Ms. Carrington is a graduate of Johns Hopkins University with a B.A. in International Relations. She earned her Juris Doctorate from New England Law | Boston and her LL.M. in Banking and Financial Law from Boston University School of Law. She is admitted to practice in Massachusetts and New York. Currently, her practice focuses on assisting investors, start-ups, small and mid-size businesses with their legal needs in the areas of corporate and securities law.
August 18, 2021
Retired Dentist transitioned to Law, with a special interest in Commercial Real Estate, Startup businesses, Asset Purchase Agreements, and Employment Contracts. I love to help dentists and physicians with legal issues pertaining to licensing, credentialing, employment, and general business-legal questions.
August 10, 2021
T. Phillip B.
Attorney creating plans and strategies to help individuals create, build, protect and pass on wealth.
August 13, 2021
Jim Slattery most recently served as General Counsel at Regional News Network, a large owner of broadcast television stations. Jim is an experienced attorney with broad-based expertise. He is a seasoned negotiator who has been involved in negotiations as complex as the Olympic Games. Jim spent 18 years as Vice President for Business and Legal Affairs at NBCUniversal. Previously, Jim worked in the media industry in various roles at All American Television. Jim’s success can be attributed to his ability to properly analyze data, manage projects, lead teams, develop creative solutions for complex problems, focus on strategically optimizing assets, manage/allocate risk and collaborate with divergent constituent groups to achieve objectives. Jim received a J.D. and a B.B.A. from the University of Notre Dame.
September 18, 2021
I’m an attorney focusing my practice on concierge corporate and intellectual property law for startups and high-growth companies. I also serve as outside General Counsel to several businesses in various sectors. Since founding my practice I've worked with hundreds of clients across a variety of industries. My experience as a former General Counsel of a premier edtech company gives me unique insight into the challenges my clients face and how to resolve them efficiently and cost-effectively.
August 18, 2021
The Law Office of George K. Fuiaxis, from the very beginning in 2002, has built a reputation with its clients as an unmatched, diligent, hands on law practice that is always on duty to find the best course of action for its clients. With a supreme pledge of exceptional service to its clients in the areas of Real Estate (Commercial & Residential), Loan Modifications, Intellectual Property, Corporate Law & Business Transactions, Wills, Trusts & Estates, the Law Office of George K. Fuiaxis creates solutions for the many faceted problems faced by its clients. The office represents several various clients, including well known lending institutions, foreign and domestic corporations, sellers and buyers of residential and commercial real estate, residential and commercial landlords and tenants, well known restaurant and business owners, automobile dealerships, airline companies, well known fashion, sports and entertainment industry individuals and corporations, information technology (IT) startups and well known IT companies.
August 22, 2021
I'm a business law generalist with over 24 years of experience, including as in-house General Counsel, as outside counsel through my own firm and as an attorney in an Am Law 100 law firm. My employers and clients uniformly appreciate my ability to (i) negotiate and close transactions quickly and effectively, and (ii) to make the complex simple. Among other things, I can efficiently assist you on entity formation, governance, and structure; HR issues; mergers and acquisitions; and the negotiation and drafting of all types of commercial contracts. I'm the proud recipient of multiple Martindale-Hubbell Client Distinction Awards given only to the top 5% of attorneys for quality of service.