A document which comprises relevant disclosures so
that investors can measure and get to know the risks involved with an
investment and make a fully informed decision for the investment is known as
Private Placement Memorandum (PPM). A formal PPM is made to fulfill all the
disclosure requirement of Rule 502(b) (2) of Regulation D. The rules, though,
take under their jurisdiction only certain type of investment which have
non-accredited investors, almost every private investment where one solicits
more than few investors will need some form of disclosure documents.
Private placement memorandum can at times have some variation in terms
like “Confidential Information Memorandum” or “Disclosure Document”, but these
are all essentially PPM.
A PPM does not have any specific form. It is based on the type of
company which wants to disclose the information to investors. Though there are
usually some boxes that need to be checked, regarding disclosure, but the form
and information are a company and deal specific. There is a need of Financial,
accounting and legal expertise to design a private placement memorandum.
Several
ways can be adopted by a company to offer a private placement memorandum.
§
Attorneys. There are firms who approach an
attorney to prepare the private placement memorandum. After the designing of
PPM is complete, management of the company is responsible for soliciting and
approaching the potential new investors. The cost incurred is the fees of the
attorney who designed the PPM and the time spend by the management team. Preparing a PPM through an attorney can be a good option for companies’
that already have a well built network of potential investors to pitch the
investment opportunity.
§
Investment Banks. The firms can also hire a liaison to
assist in raising capital. This can be tricky, confusing, and time consuming.
When an entrepreneur works towards raising capital, he/she approaches all sort
of institutions offering all kinds of promises to raise money. This can certainly
go wrong and confusing. The entrepreneur should be vigilant and informed to
hire a right investment bank as one wrong step can kill the company.
§
PPM Specialists. Firms specializing in this arena are often a hybrid between legal
counsel and an investment bank
Why Private Placement Memorandum
The PPM should be nice and updated document abiding by all legal
requirements because through this document the company is showcasing its best
picture to investors, disclosing all risks and other information. The PPM should
also be professional, providing all the legal disclosure.
PPM is required to make investors aware
that the entrepreneur is seeking to fulfill the applicable SEC rules. Another
reason for designing PPM is to add some additional protection to entrepreneur
and the company. The private placement memorandum document is drafted to detail
the risk factors and more so that investors while reading the offering memorandum
will understand the company’s risks. This is important if the company raising
the capital ends into bankruptcy. Private placement memorandum is thus a guarantee
to the entrepreneur that the investors were aware of all the risk that the
company may or may not see in the future. Private placement memorandum serves
as the warning to the investors of the risk integrated in the investment and
also helps to protect the seller of the security.
The memorandum provides details about
the business, background information on management, details the terms of
offering (including the number of shares available, the price, and the intended
use for the funds), an overview of the company’s capital structure prior and
after the sale of securities, discloses the opportunities and risks pertaining
to an investment and presents copies of financial statements.
At times, law does not makes written
disclosure mandatory, the statement of the issuer still needs to be in
compliance with the federal and state anti fraud requirements. The issuer
should not make false claims and immaterial facts to the investor. If investor
comes across any such material misstatement, irrespective of it being unintentional,
investors may file a securities fraud claim against the issuer, and if needed
against its directors and officers, as well.
Further, the Securities
and Exchange Commission (SEC)
can enforce civil and criminal
penalties, too. A well-prepared PPM helps to keep away a securities fraud
claim. It creates the record of every communication which was made to the
investors regarding the offering and the company.
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