What is Private Placement Memorandum (PPM)?PPMs are disclosure documents used by small businesses raising money through private securities transactions. A private placement memorandum (PPM) is a legal document provided to prospective investors when selling stock or another security in a business. It is sometimes referred to as an offering memorandum or offering document. A private placement memorandum may also be called an offering memorandum (OM), confidential offering memorandum (COM) or confidential information memorandum (CIM). A PPM is similar to a business plan, although it focuses much more on legal issues. The primary purpose of a PPM is to disclose to prospective investors the terms of a potential investment and primary risk factors involved in making the investment. A PPM also usually contains a considerable amount of information about the business opportunity, structure and management. It is less sales-oriented than a traditional business plan, partly because business lawyers typically create them. A PPM is used in “private” transactions when the securities are not registered under applicable federal or state law, but rather sold using one of the exemptions from registration. The PPM describes the company selling the securities, the terms of the offering, and the risks of the investment, amongst other things. The disclosures included in the PPM vary depending on which exemption from registration is being used, the target investors, and the complexity of the terms of the offering. A PPM must contain accurate, truthful and current information. While many PPMs share some similarities, they are all completely customized and unique to each investment deal. For example, a well-prepared PPM will avoid using formulaic risk factors. Instead, they will detail the specific risks associated with the company’s industry, such as market trends, competitive analysis, or regulatory and tax issues. In addition, a well-prepared PPM will avoid sales/revenue projections, especially overinflated ones, that are not based on expected reality and that are the exception. Investors will likely expect you to achieve those financial targets, and the SEC will closely scrutinize such performance forecasts set out in the PPM. Whether a company needs to use a PPM or not, and the amount and type of information in the PPM, will, in general, depend on; What to Include in a Private Placement Memorandum (PPM)?All security transactions are subject to the anti-fraud provisions of the federal securities laws – meaning you cannot make false or misleading statements regarding the company, the securities offered, or the offering. The basic notion behind the PPM is to fully inform the prospective investor about all aspects of the business, management, prior financial performance, and future prospects, as well as the risks involved. Some business owners worry about filling up the document with too much “legalese.” However, if the company is engaging with experienced investors they will be familiar with these disclosures and in many cases will expect it as a reflection of the professionalism of the business. Although applicable law may allow for different disclosure requirements based on a variety of factors, best practice for PPMs dictates certain information disclosures even if not required. Most PPMs are drafted in a similar format. Here is a summary of typical components found in a PPM. Meaning of Private Placement UnitsPrivate Placement Units means the Units to be purchased by the undersigned immediately prior to and subject to the consummation of the Company’s IPO, as set forth in that certain Unit Subscription Agreement, dated as of June 21, 2007, by and between the Company and the undersigned or the units, including the warrants and the shares of Common Stock issued in, or issued upon exercise of the warrants included in, any units sold to the Initial Stockholder pursuant to that certain Amended Private Placement Purchase Agreement and any warrants, shares of capital stock or other securities of the Company issued as a dividend or other distribution with respect to or in exchange for or in replacement of such Private Placement Units or underlying securities (the units in the Private Placement and the initial public offering to be identical except that the warrants included in the Private Placement Units provide for a cashless exercise upon redemption of such warrants). Types of Private Placement MemorandumsThere are many varying types of private placement memorandums. The type of offering will determine the specific nature of the PPM. The two-main private placement offering memorandum documents used throughout the world are an equity private placement or a debt private placement. • Equity: In an equity offering, a company will sell an ownership stake. The most common type of equity private placement memorandum is one that sells shares or stock in a company. In addition, a limited liability company (LLC) or a limited partnership (LP) may sell units, or limited partnership interests of the company. Some issue sweeteners, like preferred shares or preferred stock. How much does a PPM cost?$10,000 – $40,000 is the estimated legal fees for preparing a Private Placement Memorandum (PPM) or other formal disclosure document. Besides the obvious answer to your question (that’s what the market will bear), PPMs are generally risky and securities lawyers are some of the most expensive type of lawyer. However, please keep in mind that you might not need a PPM and might be able to reduce some of those legal fees by relying upon another securities law exemption or reviewing some of the factors that affect price, below. Sections of a Private Placement MemorandumThere are many features and sections that go into the writing of a private placement memorandum that is geared for raising capital. Here are just a few segments of the PPM: A Business Plan versus a PPMA business plan and a PPM serve different functions. A business plan is primarily a marketing document created to promote a company. It purposely contains forward-looking information. For example, the plan will outline market demand, customer profiles, growth opportunities, competitive landscape, revenue channels, and potential strategic partners. A PPM is primarily a disclosure document that is descriptive but not persuasive in its style and allows the investor to decide on the merits of the investment. The presentation of the PPM is more factual and concrete. It must address external and internal risks facing the company. A PPM may indirectly serve a marketing purpose if it is professional looking and thorough. A well drafted PPM will balance disclosure requirements with marketing elements designed to sell the deal. Securities LawA private placement memorandum is meant for an issuing company to be compliant with both state and federal laws, no matter where the PPM is issued. A company selling securities wants to ensure they do not break any laws when approaching investors and are exempt for registration requirements. For an investor to make an educated decision the PPM should contain all the noted data above, including financial projections and past financial performance and of course the risk factors of the business and industry. Risk factor information will not scare away experienced investors who are most likely well aware of such language being placed in a private placement memorandum. The important thing is make sure your company is compliant with securities laws and regulations when raising capital. Free Initial Consultation with LawyerIt’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
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