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A Look Inside Private Placement Memorandums in Dallas, TX

John Worley - Monday, May 22, 2017

The definition of a private placement memorandum (PPM) is simple enough: It’s an important legal document that discloses the objectives, risks, and terms of a proposed investment in your company.

Not to confuse matters, a PPM is also known as an “offering memorandum” or an “offering document.” No matter what term is used, these are vitally important legal documents that will be distributed to potential investors whenever your company sells stock or another type of security in a private placement.

But what does a private placement memorandum actually contain? What information is collected for investors? After all, there’s a lot riding on a PPM.

Quick Overview


A PPM provides important facts and figures about your company and its business to potential investors, including:

  • The company’s industry
  • Descriptions of products sold and/or services provided
  • Product projections
  • Industry and economic projections
  • The company’s financial statements
  • Management biographies
  • Terms of the offering
  • Planned uses for money raised
  • Associated risks

Who Prepares a PPM?


While you can prepare a PPM, it’s highly advisable that it’s created by your attorney or investment bankers or accountants on your behalf.

PPM Distribution


A PPM isn’t like a Prospectus, which is produced when stock or other securities are registered under federal securities laws and become available for purchase by anybody. A PPM is not typically available to the public. It is distributed to a limited number of pre-screened investors to solicit offers to purchase the stock or other securities described in the PPM.  The exception to this rule is under 506(c), which allows offerings through approved internet portals solely to Accredited Investors.

The PPM is usually distributed with the Subscription Agreement and Investor Questionnaire that investors will sign if they agree to the offering’s terms.

A Closer Look


An important advantage that an attorney or other professional provides in preparing a PPM is customization, tailoring the document to your specific company and offering. Even so, a PPM typically includes:

Introduction


As you’d expect, the first pages of a PPM outline the basic terms of an offering including a brief statement about the company, its core business, and all the “legends” required by federal and state laws. An introduction sometimes may be called an “Executive Summary,” depending on the author.

Offering Summary


Information here usually relates to the capitalization of the company prior to and after the proposed investment is made.

Other capitalization-related information, such as liquidation preferences, conversion rights, anti-dilution provisions, voting rights, can also be included.

This section is usually in the form of a term sheet.

Risk Factors


The PPM includes risk factors envisioned by the issuer that may impact an investor’s investment. These include general risks common to similar investments and risks unique to the issue and its securities.

As an example, risk factors could include risks from competition, the dependence on a small number of personnel, or the need for a strategic partnership.

Company and Management Descriptions


Investors like knowing who they are dealing with, and this section provides the company’s history, its products and/or services, and its performance history.

Also included, in no particular order, are:

  • Company goals
  • Intellectual property
  • Marketing strategy
  • Advertising campaigns and strategies
  • Customer descriptions and profiles
  • Suppliers
  • Industry and industry economics/analysis
  • Competition or competitive analysis
  • Management information includes the usual:
  • Business biographical information for all executives and management members
  • Personal biographical information
  • Fiduciary duties
  • Special skills that are important to the company’s success

Use of Proceeds


Investors also like knowing how their investment will be used.

  • A company must describe how it will use the net proceeds raised from the offering and the approximate amount to be used for each purpose.
  • In some instances, companies provide an item-by-item list with descriptions of how it intends to distribute and use the moneys received through the private placement. 
  • A detailed description of any and all compensation to be taken by the founders or any other related parties from the private placement proceeds is also included. Forms of compensation include salaries, consultant fees, asset sales and purchases, and any other forms of direct or indirect compensation. Compensation information must also be disclosed in the SEC Form D filing, which is accessible to the public at large.

A summary of terms should be prepared by your attorney at the end of the PPM to allow for inclusion of all cited terms. This can include rights, restrictions, price, minimum subscription amounts, applicable management fees, withdrawals, investor qualification standards, and others. This summary should be prepared by your attorney at the end of the PPM process to allow for inclusion of all cited terms.

Description of Securities


This section is straight forward. It describes the rights, restrictions, and class of securities being offered.
It should also describe the ability of the company to change its capitalization such as different classes of shares and distribution of dividends.

Exhibits


Exhibits allow a company to provide supplemental information and documents that may be material to an investor's investment decision. Exhibits may include copies of investment contracts, financial statements, organizational documents, key contracts, licenses, among others.

Reasons to Use a Private Placement Memorandum


  • A well-prepared PPM will mitigate risks from potential liability and litigation if your investors lose money on their investments.
  • A PPM can protect your company from liability for possible violations of the federal and state securities laws.
  • Some of your potential investors are not accredited investors.

Reasons to not use a Private Placement Memorandum


Not all offerings require the use of a PPM. Examples of when a PPM is not necessary:

  • When the cost of paying professional fees to lawyers, investment bankers and accountants to ensure legal compliance is prohibitive. 
  • When a company is in its very early stages and potential investors are limited to friends and family or angel investors who are sophisticated enough to conduct their own due diligence and negotiate their own investment deal.

Common Mistakes


  • Executives considering a private placement sometimes believe that they can avoid paying lawyers and investment bankers by drafting the PPM themselves using forms found on the Internet. Such a do-it-yourself approach may expose a company to a much higher risk of legal liability and litigation. A PPM prepared by an expert is much more likely to protect a company if something goes wrong.
  • Issuers include generic investment risk information rather than detailing specific risks associated with a company’s industry (trends, competitive pressures, regulatory issues). A well-prepared, detailed, and accurate risk analysis is crucial to protect your company from potential liability.

Questions


Is a PPM the same as a business plan?
No. A PPM contains similar information to a business plan, but it is intended PPM to provide an objective view of your company. Business plans are usually more oriented towards marketing the company and is less objective.

Is the PPM the Only Document Investors Use to Make an Investment Decision?
Not at all. Sophisticated investors will want to meet with your management, ask questions and conduct other due diligence on their own regarding your business.


Contact John Worley Attorney at Law for any of your Regulation D, Rule 506, and private placement memorandum needs and questions.
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