Securities offerings -- whether registered or exempt -- must comply with specific disclosure requirements. A private placement memorandum (“PPM”) is the generally accepted formal method of documenting privately placed securities offering and its associated terms and disclosures. PPMs generally include extensive information about the company and all included information must be carefully checked, accurate and consistent. Because of the detail and the importance of getting everything exactly right, companies generally work with lawyers to produce PPMs. If you are considering a securities offering under Reg D or taking advantage of a different exemption to complete an unregistered offering (including to non-accredited investors), a Priori securities lawyers can help you draft the related private placement memorandum.
Defining a Private Placement Memorandum
A private placement memorandum, also called a PPM, offering memorandum, OM, prospectus, or offering document is the legal document that provides the details of a private securities offering for potential investors. The PPM provides information to prospective investors on all aspects of the company, including management, financial performance, and future prospects, as well as the potential risks involved with the transaction and the business overall. The specific disclosures required in any particular PPM depend on many factors, including which registration exemption is being used, contemplated investors, the nature of the company’s business and the complexity of the offering’s terms.
When You Need a PPM
SEC rules mandate that offerings under Regulation D include a Private Placement Memorandum. Other offerings, for example, Reg A or Crowdfunding offerings, do not necessarily need this type of full prospectus, although they typically do include some, generally shorter, disclosure document. Strictly speaking, a full PPM is only necessary when dealing with non-accredited investors.
Key Sections and Provisions of a Private Placement Memorandum
A PPM is a complex and lengthy document. The following are some of the key sections and provisions generally included:
Description of the Company and Management. This section fully details the company, including financial information, corporate structure, and management and executive roles.
Summary of Offering Terms. This section delves into the terms of the offering, such as any provisions to protect the investor and the voting rights conferred by securities.
Liquidation Preferences. These provisions establish which investors will be paid and in what order if a company is liquidated or declares bankruptcy.
Conversion Rights. These provisions dictate the conditions under which shareholders can convert preferred shares into common shares.
Anti-Dilution Provisions. These provisions protect investors dilution resulting from a lower share price on further issuances of securities.
Voting Rights. These provisions establish whether or not the shareholders are also conferred the right to vote on issues such as the Board of Directors.
Risk Factors. This section details all the potential risks that an investor takes on my entering into the transaction.
Use of Proceeds. This section discloses an itemized account of how the proceeds of the offering are expected to be used, including anyone who will be compensated due to the transaction taking place.
Subscription Procedures. This section informs the investor how they can complete the transaction and invest in the offering.
What’s the difference between a business plan and a PPM?
A business plan is a much less formal document than a Private Placement Memorandum. A PPM is a legal document prepared for a securities offering and it requires certain specific disclosures, while a business plan is more of a strategic planning or marketing document. Further, PPMs are much more grounded in past performance than business plans, which tend to be fairly forward-looking and intended to persuade rather than inform.
If all my potential investors are accredited, do I still need a PPM?
A lawyer can help you assess this question. In some cases, it might not be strictly necessary, but even when it’s not required, many companies choose to provide a disclosure document regardless. If you are not sure whether or not you will need this type of an offering document, a securities lawyer can help you better understand the legal requirements and implications in order to help you make an informed decision.