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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
I have been practicing law for 35 years. In addition to my law degree, I hold an MBA. I've created six companies, currently act as outside counsel to another 12, and have been an advisor to more than 500 startups and entrepreneurs.
I am a licensed and active Business Attorney, with over 20 years of diverse legal and business experience. I specialize in contract review, drafting, negotiations, ecommerce business transactions, breach of contract issues, contract dispute and arbitration. I am licensed to practice in New York and Connecticut. I am a FINRA and NCDS Arbitrator. My experience includes serving as General Counsel to small businesses. I negotiate, draft and review a wide array of commercial contracts; provide business strategy and employment advice and assist in the sale of businesses entities. I work extensively with various kinds of contracts. In reviewing agreements, I conduct risk analysis of contract and interpret the terms and conditions so that clients understand exactly what their obligations are under the agreement and are protected as much as the law requires. I am detailed and thorough in my review and drafting of agreements. Additionally, I advise clients on how to limit their liability and lower their contractual risk. I specialize in breach of contract issues and arbitration. I have been a Hearing Officer, presiding over cases and rendering written decisions; a Civil Court Arbitrator presiding over cases in contract law, commercial law, etc., a Judicial Clerk in Civil Court; a Vice President at an Investment Bank and an Attorney at top AML law firms.
Carlos Colón-Machargo is a fully bilingual (English-Spanish) attorney-at-law and Certified Public Accountant (CPA) with over twenty years of experience. His major areas of practice include labor and employment law; business law; corporate, contract and tax law; and estate planning. He is currently admitted to practice law in Georgia, Florida, the District of Columbia and Puerto Rico and currently licensed as a CPA in Florida. He received a Master of Laws from the Georgetown University Law Center in 1997, where he concentrated in Labor and Employment Law (LL. M. in Labor and Employment Law) and a Juris Doctor, cum laude, from the Inter American University.
Graduate of Georgetown Law (J.D. and LL.M in Taxation) Injury Claims Adjuster before law school for top insurer Eight plus years of legal experience Past roles: Associate at premier boutique law firm in the DC metro area Policy Associate at a large academic and research institution Solo Practice Areas of Expertise: Contracts Business Formation Trusts and Estates Demand Letters Entertainment Transactions
As a business law attorney serving Coral Springs, Parkland, and Broward County, FL, Matthew has been recognized as “AV” rated, which is the highest rating an attorney can achieve through Martindale’s Peer Review system. Year after year Matthew is listed in the “Legal Leaders” publication as a top-rated attorney in South Florida in the areas of litigation, commercial litigation, and real estate. Matthew is also a graduate and instructor of the Kaufman Foundation’s FastTrac NewVenture Program, presented by the Broward County Office of Economic and Small Business Development.
John Benemerito is the Founder and Managing Partner of Benemerito Attorneys at Law. Admitted to practice in New York and New Jersey, John represents small business owners and startups in the areas of Business and Securities Law. John received his Bachelors Degree at John Jay College of Criminal Justice where he majored in Criminal Justice. Afterwards, he attended New York Law School where he focused his studies on Corporate and Securities Law. John comes from a family of entrepreneurs. From as far back as he can remember he was always involved in his family’s numerous businesses. At the age of fifteen, John entered into a new business venture with his father and managed to grow and maintain that business through high school, college and law school.John is currently a co founder in over five different businesses. After law school, John decided that he wanted to help people like himself. He opened his own law practice and began working primarily with small business owners until he was introduced into the startup world. Ever since that time, John has worked with hundreds of startups and thousands of entrepreneurs from all different backgrounds in helping them achieve their goals. Having been an entrepreneur his entire life, John understands what it takes to create and maintain a successful business. He enjoys sitting down and working with his clients in figuring out each of their unique challenges.
California-based small business attorney handling matters related to securities, mergers & acquisitions, corporate governance, and other business transactions.