A private placement memorandum (also called offering memorandum or PPM) is a legal document which sets out the objectives, risks and terms of a private-placement investment. A PPM aims to provide private security buyers with the information of the offering; and it also provides protection to sellers from the liability generally associated with the sale of unregistered securities.
Outline of a Typical PPM
- Summary of Offering Terms
- Risk Factors
- Description of the Company
- Profiles of the Management Personnel
- Summary of the Operating Agreement
- Use of Proceeds
- Description of Securities
- Financial Statements (if any)
- Appendixes (any other info)
PPM Vs Prospectus
The Securities & Exchange Commission in the USA regulates how securities are sold to the public by the Securities Act of 1933, which aims to ensure that investors receive sufficient information when they buy securities. Generally, if a company wants to issue stocks or bonds to the public, it has to first register with the SEC and then sell securities using a prospectus, which is a highly regulated method and it can be time-consuming and costly.
However, regulation D of the 1933 Act provides an exemption to the prospectus requirement. Rule 502(b)(2) of Regulation D requires an issuer to provide specified information to prospective investors in some offerings and in some situations - for example, where securities are offered to non-accredited investors in an offering under Rule 506(b).
In September 2013, the SEC adopted paragraph (c) of Rule 506 following JOBS Act. Under Rule 506(c), issuers can offer securities through means of general solicitation where securities are sold only to accredited investors under Rule 506(b) or 506(c), the issuer is not required to provide the information described in Rule 506(b)(2). However, where an issuer who fails to provide information, or provides incomplete or inaccurate information, may be liable to disgruntled investors under 17 CFR 240.10b-5, the general anti-fraud rule of Federal securities law, or various state statutory and common law rules. Therefore a PPM can safeguard the issuers from legal claims even if they offer securities to accredited investors. (It is issuer's duty to take reasonable steps to determine that the purchaser is an accredited investor).
PPM Vs Business Plan
A business plan and a PPM serve different purposes. A business plan is primarily a marketing tool created to attract investors' interest. It purposely contains forward-looking information. A PPM is primarily a disclosure document that is descriptive but not persuasive in its style and allows the investor to decide on the merits of the investment. The presentation of the PPM is more factual and concrete addressing external and internal risks faced by the company. However a business plan may go as an an appendix to a PPM.
Business Plan Vs PPM
A business plan can be an attachment of PPM or business plan can be followed by a PPM. Most of the business plans/pitch decks include a legal disclosure page that states that the business plan/pitch deck doesn’t constitute a securities offering. While this isn’t full proof, it can help to reduce claims that you are making a public offering or general solicitation. Once a potential investor is found with the business plan/pitch deck, the issuer can make a PPM to enter into the security transaction. This can be the safest way to raise funds at any stage from any investor.
Angel or Early Stage Investments and PPM
Most of the angel/early stage investments are unlikely to involve PPMs. They may be based only on a business plan/pitch deck or even without any such document. PPMs are most likely to be required in seed-level or later funding rounds. However, having a PPM is always better for a startup.
We have a team of professionals with a wealth of experience in investment banking. We can prepare your PPM as per the SEC regulations and your requirements. Please contact us for the same for an affordable quotation or consultation.