A private placement memorandum (PPM) is a document given to potential investors that introduces an investment and discloses information about it. The PPM is part of a securities offering process called private placement. Here’s what you need to know about creating and presenting a PPM to investors.
Definition of Private Placement Memorandum
A PPM is a document created to sell investments in securities (typically stocks and bonds) to private investors. This type of offering is called a private placement because it’s offered privately to individual investors.
Private placements are regulated by the Securities and Exchange Commission (SEC). They are not required to go through the same registration process as public offerings, but they must follow specific SEC rules to be exempt.
A PPM is not required for private placement offerings, and it won’t be reviewed by regulators. But the SEC warns that unregistered offerings can be used for investment scams, and notes that “a legitimate private offering will usually be described in a private placement memorandum.”
- Alternate names: Unregistered offering memorandum, private offering memorandum
Types of Private Placement Memoranda
Private placement memoranda come in many varieties, and many types of businesses can offer unregistered securities for sale. PPMs can be issued for:
- The sale of common stock in a corporation
- Notes (debt) of a mortgage broker business
- Promissory notes (debt) of a limited liability company
- Shares in a mutual fund held by a trust
- Sale of bonds by a county financing authority
How a Private Placement Memorandum Works
If you are considering issuing a private placement offering, you’ll need to know the regulations before you prepare the PPM.
Public offerings of stocks and bonds must be registered with the SEC and must give potential investors detailed information in a document called a prospectus. The registration process is complicated, expensive, and lengthy, so the SEC created Regulation D to allow entrepreneurs to qualify for an exemption from it if they follow certain rules. Because these offerings are exempt from SEC registration regulations, all investors must be financially sophisticated and know the risks they are taking.
The SEC has several rules governing exempt offerings. Rule 506(b) does not allow general solicitation or advertising, while Rule 506(c) does.
A PPM Is Not a Business Plan
Private placement memoranda are sometimes confused with business plans. They are not comparable, because they contain different information for different purposes. A business plan is a document that describes a business, usually for the purpose of getting a loan, while a PPM is used for a securities offering.
What Does a Private Placement Memorandum Include?
Your PPM should begin with an introduction. Here’s an example from a PPM offering common stock: “The offering is made in reliance upon an exemption from registration under the federal securities laws provided by Rule 506 of Regulation D as promulgated by the United States Securities and Exchange Commission (the “SEC” or the “Commission”) under the Securities Act of 1933, as amended (the “Securities Act” or the “1933 Act”). There is currently no public market for our common stock.”
Common sections in a PPM include:
- Risk factors
- Conditions and disclaimers, including statements for specific states
- Use of proceeds
- Dividend policy
- Dilution (possible reduction in earnings per share and proportional ownership)
- Description of the business, including principal product/services and their markets, distribution methods, growth strategy, competition, employees, and property
- Legal proceedings (pending or current lawsuits the company is involved in)
- Management (executives), including executive compensation and securities owned by owners and management
- Description of capital stock
- Restrictions on investors (resale or transfer)
The SEC warns that prospective investors should be on the lookout for potential red flags in PPMs, including sloppy documentation and unverifiable biographies. Make sure your PPM doesn’t include any of these issues.
Subscription Agreement and Investor Questionnaire
Along with the private placement memorandum, you must prepare two additional documents for investors to sign: a subscription agreement and an investor questionnaire.
A subscription agreement is the sales agreement between your business and the investor. It includes:
- Details of the offer along with the number of shares and the price for each one
- Representations by the subscriber (buyer) that they have knowledge and experience in financial and business matters and are able to evaluate the risks and merits of the investment
- Acknowledgements that the subscriber is aware of the investment’s risk and restrictions, and that no government entity has passed on or reviewed the offering
Each investor must also complete a questionnaire to determine whether they qualify as an accredited investor. The questionnaire asks about educational background, net worth, and their financial and investment advisors.
- A private placement memorandum shares information about a securities offering that is exempt from normal SEC regulations with potential investors.
- A PPM isn’t required, but it’s a good idea to give it to all potential investors to make sure they have all the information they need to decide whether to invest. It’s a very different document than a business plan.
- A subscription agreement is the contract between the seller and the investor. Each investor also must complete an investor questionnaire to verify whether they are an accredited investor.
- A PPM is a complicated legal document. If you need to prepare one, get help from an experienced securities attorney.