Private Placement Offering Memorandum: Key Terms, Legal Considerations

What is a PPM?

A private placement offering memorandum (PPM), also known as a private placement memorandum or offering memorandum (OM), is a legal document used by owners of private businesses when issuing unregistered securities to outside investors in a private placement. The PPM is designed to disclose information about the offering to a group of sophisticated or accredited investors so they can perform their own due diligence.

Purpose of PPMs

Private offering memorandums serve multiple purposes and are necessary to protect the investors and private business since it is not a public offering that is registered with the Securities Exchange Commission (SEC) that requires detailed disclosures through regulatory filings.

The three main purposes of PPMs are below:

Disclosure

Given the securities are being offered to a group of investors privately, the private offering memorandum is designed to disclose information to attract capital. Sophisticated and accredited investors will want to perform their own due diligence on the offering, so the PPM will provide details about the company's business plans, risks involved, financial projections, and how the capital raised in the offering will be used by the business.

Legal Protection

The PPM protects the business raising capital from legal liability by making full disclosures to the group of investors. Without proper disclosures, the company can open itself up to potential law suits if an investor believes the business withheld information or misinformed investors while raising capital.

The goal if the offering memorandum is to make sure investors are well informed and understand the full details of the securities they are purchasing.

Compliance

A PPM will help the issuing company comply with relevant securities laws and regulations related to private placements that are exempt from registration with the SEC.

What's Included in the Private Placement Memo?

There are standard sections included in a PPM document that you should make sure to include. These sections are designed to provide full disclosure to the group of outside investors and legally protect the issuing company.

PPMs normally include the below information:

• Company Name and Overview. The company issuing the securities will provide its full legal name and overview of its history, operations, structure, and management team.
• Securities Being Offered and Terms. Full details and terms about the securities being offered will be provided, which typically includes their type, price, and any restrictions (i.e., subsequent transfers).
• Risk Factors. The issuing company will disclose a detailed explanation on the risks associated with the investment, which typically includes operational risks, financial risks, marketing risks, etc.
• Financial Statements and Information. The issuing company will provide the investors with financial statements (current and future projections), as well as any relevant financial disclosures.
• Use of Proceeds. The issuing company will provide a detailed plan on how they will use the capital raised from the offering, so the investors know how their funds will be used to grow the business.
• Management Bios and Overview. The company will provide further details about their management team and structure, typically including bios of the key team members.
• Subscription Agreement. The PPM will include a subscription agreement, which is the legal agreement the investors will review and sign to participate in the offering.
• Legal Disclosures. The company will include any legal matters that may be relevant to the offering. This may include current or pending litigation, as well as information about regulatory compliance and issues.

Here is a private placement memorandum example.

Who Writes Private Placement Memorandums?

Memorandums of private placement are typically drafted by a team of professionals, including members of the company issuing the securities. Given the complexity of these documents, it will require inputs from lawyers and company executives, as well as financial advisors, bankers, and accountants.

It is common for securities lawyers to take the lead on writing the PPM. However, inputs from all parties are important and explained below:

• Securities Lawyers. Lawyers that specialize in securities law typically take the lead since the PPM needs to comply with securities laws and regulations. They will make sure the document includes all needed legal disclosures, risk factors, and contractual terms (i.e., the subscription agreement) between the issuing company and the business.
• Company Executives. Company executives will provide the relevant information about the company overview, operations, business plan, management team, use of proceeds, and financial projections. Their job is to make sure the company's plan and strategy is clearly articulated to the investors.
• Financial Advisors and Bankers. Financial professionals may help with the specific financial details of the offering and structuring the securities. This may include details on valuation, capital structure, and financial projections. They are also professionals as it relates to raising capital, so can provide inputs on structuring the PPM in a way that is more favorable to investors.
• Accountants (CPAs). Outside accounts on the issuing company's financial team may help in preparing financial statements, projections and accounting data required in the PPM. Financial disclosures need to comply with GAAP accountant standards, so having a tax professional help can be important.

Types of Private Placements Requiring a PPM

Private placements are the sale of unregistered securities and typically require a PPM. Depending on the type of securities being offered, the offerings can take various form.

Below are the types of private placements that require a PPM:

• Equity Offerings. Equity offerings in a private placement means the company is offering shares (i.e., common stock or preferred stock) to private investors for a percentage of ownership in the company. A PPM is required and used to detail the terms of the equity sale, which includes price per share (PPS), number of shares being offered, and investor rights who purchase the shares.
• Debt Offerings. Debt offerings in a private placement also require a PPM, and means the company raises funds using debt (i.e., bonds, notes, or debentures) from private investors. As in equity offerings, the PPM for a debt offering will provide details about the debt being sold, which includes information on interest rates, repayment schedule, etc.
• Convertible Securities. Convertible securities (i.e., convertible notes, etc.) can be offered in a private placement and will also require a PPM. These securities are a combination between debt and equity, and typically start as debt and can be converted to equity at a later stage. The PPM will explain details about the debt and conversion terms, such as conditions the conversion can take place and the conversion ratio.

Top Legal and Regulatory Considerations

There are many legal and regulatory considerations related to private placement memorandums you should know about to make sure your private placement follows securities laws and protects the issuing company and investors.

Here is a list of five top legal and regulatory considerations for PPMs.

Registration Exemption

A key reason for using a PPM in a private placement is to qualify for exemptions from SEC registration, such as those under Regulation D (Rules 506b and 506c). These exemptions help the issuing company avoid the high costs and extensive disclosure requirements of a public offering.

The issuing company must ensure their offering qualifies under and complies with the chosen exemption.

Accredited Investor Requirements

Most private placements target accredited investors, which is crucial for maintaining exemption status under Regulation D. Accredited investors are considered financially sophisticated and capable of understanding the risks associated with investing.

Under Rule 506(c), the issuing company must carefully verify that all investors meet the accredited investor criteria by taking reasonable steps to confirm their qualifications.

Disclosure Obligations (Anti-Fraud Provisions)

Full and accurate disclosures are important in making sure you comply with securities laws, including in private placements. Misleading statements or omissions of material facts is prohibited in Rule 10b-5 of the Securities Exchange Act, which can lead to legal liabilities for fraud and future lawsuits from investors.

The PPM must be accurate, transparent, and thorough in its disclosures – especially about financial information, risk factors, and operations.

State Securities Laws (Blue Sky Laws)

Private placements are subject to Blue Sky Laws in the state where the securities are being offered, and must be complied with. Issuers must file the required notices and pay fees in each state where securities are being offered.

Failure to comply with these state regulations can result in revoking your exemption status, legal fines, or legal action by state regulators.

Restrictions on Resale of Securities

Securities being sold in private placements can't typically be freely sold or transferred without meeting certain criteria (see Rule 144). Investors need to understand these securities are generally illiquid, and the PPM must clearly disclose resale restrictions to prevent disputes or other legal issues.

Common Mistakes Made in PPMs

There are many common mistakes and pitfalls made in private placement offering memorandums. These can lead to legal and regulatory issues for the issuing company, so it is important to avoid them at all costs.

Here are the top five common mistakes made to watch out for:

• Insufficient Risk Disclosure. The issuing company can fail to sufficiently disclose all material risks associated with the investment. This can expose the company to legal liability by misleading investors under Rule 10b-5's anti-fraud provisions.
• Misleading Financial Projections. If the issuing company provides investors with overly optimistic financial projections without reasonable support, this can lead to legal liability and potential lawsuits from investors.
• Inaccurate or Lack of Material Information. Leaving out important information or inaccurately reporting it can open the company up to legal liability. The information presented to investors will be used for their own due diligence, so you need to make sure it is accurate and thorough.
• Non-Compliance with Securities Laws. Not complying with security laws can lead to legal issues, like the offering being deemed illegal or the company being fined. It is important to make sure all securities laws and regulations are followed and complied with.
• Investor Misclassification. The issuing company selling securities to non-qualified investors can cause the issuer to lose its exemption status, which may lead to regulatory issues. Making sure all investors are accurately classified is imperative.

Frequently Asked Questions

How Much Does a Private Placement Memorandum Cost?

The average cost for a lawyer to draft a PPM is $2210 [1] on a flat fee. The average cost for a lawyer to review a PPM is $920 [2] on a flat fee.

These prices come from recent projects on the ContractsCounsel platform and are averages from across all US states.

If an Offering Memorandum Legally Binding?

Yes, when an investor signs the subscription agreement included in an offering memorandum, the issuing company and investor are legally obligated to adhere to the terms outlined in the offering memorandum.

Conclusion

Private placement offering memorandums are valuable tools for private companies to raise outside capital from investors. It is critical to make sure you comply with relevant securities laws and regulations, to make sure you do not create avoidable legal liability when going through a private placement.

If you need help from a securities lawyer, feel free to post a job in the ContractsCounsel marketplace to get competitive quotes from experts to compare. All lawyers in the ContractsCounsel network are vetted by our team and have reviews from previous clients tagged by project type to help you hire.

References

1. ^ Based on PPM hiring values from ContractsCounsel's platform.
2. ^ Based on PPM hiring values from ContractsCounsel's platform.