A private placement memorandum (“PPM”) is used by the officers and directors of a private company to describe the securities being sold as part of a private offer, and specifically, to define the terms of the offering, and the risks of the investment. This document is provided to potential investors and its terms vary according to the type and complexity of the business.
PPMs are not business plans. A business plan functions to market and promote a company. Alternatively, a PPM is a descriptive disclosure document that allows investors to decide on the merits of the investment itself by providing not only business details, but other unique factors tied to this specific offering.
First and foremost, PPMs should never make false or misleading statements regarding the company, the securities offered, or the offering itself, as all securities actions are subject to anti-fraud provisions of federal securities laws. PPMs should fully inform the prospective investor about all aspects of the business, management, prior financial performance, future prospects, and risks. The following presents a short description of likely PPM sections to influence investor confidence.
An Introduction that outlines the terms of the offering, a brief statement regarding the company, and its core business.
A Summary of Offering Terms section that includes the capitalization of the company both before and after the offering. Other terms like liquidation preferences, voting rights, conversion preferences and the like may also be included here.
A Risk Factors section to express all conceivable factors that might impact the investor’s investment such as general risks inherent in similar investments and other risks. Dependence of strategic partnerships or other risks from competition can be included.
A Description of the Company and Management section to give investors a performance history, the industry and the goals of the new company. It is also beneficial to provide the investor with a depiction of the intellectual property, customer descriptions, and biographical information of managers.
A Use of Proceeds section that would ideally include at least 4-5 categories (including transaction expenses) that describe how the net proceeds raised by the offering are intended to be used.
A Description of Securities section will describe rights, restrictions, and the class of the securities being offered. The ability of the company to change its capitalization structure or classes of shares or dividend distribution should be included here.
A Subscription Procedures section will help the investor know exactly how to invest, and any Exhibits section is a good idea to attach important exhibits like governing documents, material contracts, and investor questionnaires.
These sections are not extensive. Including others like litigation and tax related matters or other financial matters may also benefit your quest to find investors. Savvy startups can become much more effective in raising capital through creating a comprehensive private placement memorandum and in addition complete required disclosures necessary to abide by both federal and state private placement rules and regulations.
Disclaimer: This post discusses general legal and tax issues and developments, is intended to serve as informational only, and may not reflect the most current law or tax regulations in your jurisdiction. These informational materials are not intended, and should not be taken, as legal or tax advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel or tax professional in the relevant jurisdiction. Archetype Legal PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this blog post.
