A Private Placement Memorandum
The Most Important Document for Any Private Company Raising Capital
If you are a business looking to raise some cash, one option for you is to seek private investment capital.
This is also known as private placement, and it usually involves money from investment or pension funds, banks, or insurance companies, though individual wealthy investors can also be involved. Private placement can involve an equity or debt offering. Private placement differs from an initial public offering because the company is remaining private.
To seek private placement investment, you’ll likely need a lawyer and present a basic business plan. But perhaps the most key component is a private placement memorandum (PPM) which offers an in-depth look at your business and its operations. It is not designed to be a marketing document. It is thorough, and it’s starkly informational. It is designed to offer everything an investor needs to know before putting money into a company. This document is also referred to as an offering memorandum. In many ways, it serves the same function for private entities as a prospectus issued by public companies.
There are a number of crucial things outlined in a PPM, including.
- The nature of the business. What does the company do? How does it generate revenues?
- The terms of the investment. How much money is the company looking to raise? What’s in it for the investor?
- The potential risks of the investment.
- The management team and structure.
There are no strict rules about how a PPM must be formatted, but they often look very similar because of the information required.
A sample PPM may look roughly like this, though not necessarily always in this order:
Introduction or Executive Summary – A short statement about the company and its main businesses, and brief outline of what the company is seeking in a private placement.
Disclaimers and other Legalese –This is the mumbo jumbo many people will gloss over, but is likely required by law. This can include information for people in specific states in what are known as jurisdictional legends.
Investor Suitability – Usually, a company is seeking capital from a certain type of investor. They may prefer to hear from only accredited investors, or investors based in the United States. The company may also require investors to have a certain level of net worth.
Subscription Procedures – This explains and provides instructions on how someone can take advantage of the offering. This is often placed at the very end of a document.
Summary of Offering Terms- The nuts and bolts of what the company is asking for. This usually looks like a term sheet and should include details about the overall capitalization of the company both before and after the injection of new capital. It will include the number of shares being sold, the price, and the total expected proceeds. Here’s also where the company should explain what investors may receive in terms of voting rights, as well as their rights if the company were to be liquidated.
Business/Management Section – A more detailed explanation of what the company does and how it earns its revenues. This should also include biographical information about each owner and member of the management team.
Financial Information - From a potential investor’s point of view, this may be the most crucial section. It’s time to provide detailed information on the company’s revenues, expenses, profits, and liabilities. All of the hardcore numbers that any investor wants should be included, and this section should have past financial data and future projections. Skimp on this section and you are likely to see investors bow out.
Use of the Investment – This outlines in details why the company needs the money, and what would happen to the company without this injection of capital. This section shows in nitty-gritty detail how the money will be spent. When possible, there will even be an itemized tabled showing how funds will be allocated. This section also includes the compensation owners and executives will receive.
The Risks – This section is often the largest part of the PPM, as the company must outline anything negative that might impact the ultimate return on the investment. Competition. Existing debts. Challenges in finding a qualified workforce. Cybersecurity concerns. Pending litigation. This can include a wide variety of things, and companies should try to be as forthcoming as possible.