A basic understanding of private placement memorandum

“Small companies that raise funds from private securities transactions use PPMs as disclosure documents.”

 A legal document named private placement memorandum (PPM) is given to potential investors whenever someone is making a transaction with security or stock in an organization. You might have heard it being addressed as an offering document or offering memorandum.

There are certain conditions when PPM is used in private dealings such as when there is no registration of securities done under state law or federal law but preferably sold with the help taken from one of the registration’s exemptions.

This principle labels the risks of the investment, the terms of the offering, and the company selling the securities, amidst some other things. The statements in the private placement memorandum differ relying on the exemption from registration being used, the scope of the offering’s clauses, and the target buyers. 

A PPM versus a business plan

Both the PPM and business plan showcase different usage. A PPM is essentially a disclosure document that is informative but not convincing in tone and enables the shareholder to assess the investment’s merits. On the contrary, a business plan is mainly a marketing tool used to attract potential customers. It includes details that are intended to go ahead. For instance, a business plan will cover potential strategic partners, profitable channels, competitive landscape, growth opportunities, customer profile, and market demand.

The PPM is presented more concretely and factually. It should resolve internal and external threats surrounding the business. If a PPM is well-designed and comprehensive, it can act as an indirect marketing tool.

A well-written private placement memorandum will strike a balance between disclosure needs and marketing elements aimed at reaching an agreement.

What does a PPM contain?

The anti-fraud provisions of the federal securities laws apply to all security transactions, which means you can’t make deceptive or false claims about the firm, the securities provided, or the transaction.

The whole idea supporting the PPM is to create awareness within the investors about all the risks involved, future prospects, prior financial performance, management, and attributes of the business. Some business operators take stress about cramming too much “legalese” into the paper. 

If the company is dealing with highly-skilled investors, however, they will be acquainted with these disclosures and in most scenarios will anticipate them as a sign of the company’s professionalism. Even though applicable law may provide for various disclosure rules depending on several conditions, the standard method for PPMs requires that such information disclosures be made, even though they are not needed. The majority of PPMs follow a common layout.

Following are some of the components summary found in PPM, so do look into them.

Synopsis of a PPM

Introduction

The first sections of the offering document include a detailed description of the company, its main business, and all “legends” needed by state and federal laws.

Summary of offering terms

The capitalization of the business – before the actual and after the offering – should be included in this portion, which is normally in the shape of a term sheet.

A few more aspects that may be included are protective provisions for the investors, voting rights, anti-dilution provisions, conversion rights, and liquidation preferences.

Risk factors

A private placement memorandum will mention all risk indicators imagined by the issuer that may affect the shareholder’s investment, considering both general risks that apply to similar investments and risks specific to the borrower and its assets. For instance, all the risks consist of the dependence on a fewer number of personnel, partnership dependence, or competition risk.

Description of the company and the management

This PPM’s section helps in the provision of the company’s performance history, material information, products, services, suppliers, goals, industry, marketing strategy, industry, competition, intellectual property, advertising strategy, and any other customer description that would turn into fruitful information to the investor.

Moreover, management data will consist of background information, special skills, and biographical information.

Use of proceeds

A business must explain how it intends to use the net proceeds generated from the sale, as well as the estimated sum planned for every task. This enables the investor to see how their capital, as well as that of others, will be utilized. 

Description of securities

When it comes to the description of securities, it entails the class of securities being offered, restrictions, and the rights. However, to amend its capitalization, it should also explain the potential of the organization, for example, the distribution of dividends and different classes of shares.

Subscription procedures

The guidelines for investing in the product are mentioned in this section:

Exhibits

Exhibits permit a business to provide additional documents and information that may be relevant to an investor’s course of action. It may constitute licenses, key contracts, organizational documents of the issuer, financial statements, and copies of investment contracts.