A Guide to Private Placement Memorandums

If you own a company, and want to increase growth and raise funds without going public or into debt, a private placement memorandum (PPM) might be for you. A private placement is called that because no public means of communications can be used to promote the sale of the securities. A PPM, also referred to as an offering memorandum or offering document, is a legal document used by companies that discloses everything potential investors need to know to make an informed decision about investing in a company. As its name suggests, a PPM is used to provide information about the offering company in order to reach usually a small number of individuals, and it does not need to be registered under federal or state securities laws.

This does not mean, however, that federal or state security laws are not involved. Federal security laws provide for various safe harbor regulations that guide the offering company on how much money can be raised, how many investors can be approached about the offering, and how much/what kind of information must be given to the potential investors. Most importantly, these rules also tell the company how often the regulations can be used to raise funds. On top of the federal laws and regulations, each state has specific regulations that may apply to offers directed to citizens of the various states. Each state also has regulations that may apply to the offering for filings either before or after the company sends a PPM to the state’s citizens, including filings that the state can record how much money the company raised in that state.

Why write one?

A PPM discloses the objectives, risks, and terms of a proposed investment to prospective investors. The goal of a PPM is to fully inform the prospective investor about everything relating to the business, its management, its financial status, future prospects, and risks. As above, a PPM is used so that your company can make a private placement offering. The PPM should represent management’s most reasonable expectations of how the investor’s investment will be spent and what results the company anticipates from that spending. You need a PPM not only to be able to solicit offers from prospective investors but to also provide a kind of safeguard against potential litigation.

A PPM operates as legal protection because it truthfully discloses all material information necessary for investors to decide whether they want to invest. If their investment ends up not paying off, they can’t then turn around and try to sue you for their money back because they were fully aware of all risks associated with their decision to invest.

What’s in it?

All security transactions are subject to anti-fraud provisions of federal securities laws. This means that a business cannot make false or misleading statements regarding their company, the securities being offered, or the offering itself.

Typically, all PPMs include:

  • An introduction which discusses the company and its business
  • Offering terms, including the capitalization (or funding) of the company both before and after the offering
  • Risk factors that could impact the investor’s investment, such as risks from competition
  • The company’s history – including performance history, the industry, competition, advertising strategy, intellectual property, and descriptions of its customers
  • An explanation of how the company plans to use the proceeds raised from the offering as well as describing the rights, restrictions, and type of security being offered
  • Instructions on how to invest in the offering

PPMs are typically drafted by investment bankers or securities lawyers and, as mentioned above, must comply with the securities laws of the Securities and Exchange Commission (SEC).

For over 25 years, Jim Wilson has helped clients buy, expand, and sell businesses. He works with each client personally, getting to know their goals and helping them to understand their options for buying, selling, or expanding. Virginia has firm laws regarding liability and full disclosure for business owners wanting to do such things with their company. If you own a private business and are thinking of raising money, contact the Wilson Law Group today to see how we can help your company grow.

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Wilson Law Group

Jim Wilson is the founder and principal attorney of the Wilson Law Group. For the past 25 years he has been combining legal dexterity with an entrepreneurial mindset to help aspiring and established business owners start, finance, buy, sell, and run their companies.

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