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What is a PPM?
The Private Placement Memorandum (PPM) is the document that discloses everything the investor needs to know to make an informed investment decision and send you a check. Unlike a Business Plan the PPM details the investment opportunity, disclaims legal liabilities and explains the risk of losses.
This includes: the offering structure, the share structure of the company, SEC disclosures about the shares being purchased, company information, information on company operations, risks involved with the investment, management information, use of proceeds, information on certain transactions that could affect the investor, and investor suitability data.
The PPM also includes the subscription agreement which is the actual "sales contract" for the shares of stock being placed. This is the document that the investor will sign and send in with their investment capital.
The PPM is important because it provides the investor with all of the prescribed data they will need to make an investment decision and includes the actual documentation to effect the investment transaction. PPMs are designed as a stand-alone document - meaning that there need not be other information presented to the investor for them to make an accurate investment decision.
Many companies will attach their business plans, financial statements, articles of incorporation and other documents, to the PPM as supporting documentation. This is an acceptable practice so long as the information in the business plan properly corresponds with the information in the PPM and that the investor is made aware that the business plan alone does not constitute an offer to sell securities - only the PPM can make that offer.
Private Placements or private stock offerings are “private” equity/debt transactions and are considerably less expensive to complete than an initial public offering such as an IPO (for the purpose of raising capital).
The Subscription Agreement
The Subscription Agreement is the “buy” document executed by the investor and returned to the Company. Attached to this document is the Investor Questionnaire; which establishes the investor sophistication and accredited status.
Just as the PPM provides disclosure to the client regarding the company’s financial status,the Subscription Agreement provides full disclosure to the company regarding the investor’s financial status. In the Subscription Agreement the investor provides assurances to the issuing company that an absolute loss of their investment capital will in no way impact their standard of living or jeopardize their financial picture as a whole. These qualified investors are typically referred to as “accredited investors.”
Regulation D Offerings
The Securities Act of 1933 spawned Regulation D or Reg D. Reg D sets forth some of the categories of Private Placements, specifically; 504, 505 and 506 offerings. The purpose of Reg D is to ensure that growing companies are able to be compliant while handling an infusion of fractional investment capital from a group of individual investors.
Simply stated, the company can offer a private equity stake to a group of investors that combine their capital to buy a portion of the company (creating a security in the process because they are buying components of a business structure). Whether companies are seeking start-up capital or need to raise equity with the intention of launching an Initial Public Offering or IPO at a later date, there is no other form of financing as flexible and consistently proven as a Reg D offering.
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Sample list of items needed to develop your PPM: |
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Business Plan |
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Financial Statement |
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Management Photos / Bios |
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Stock / Ownership Records |
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Intellectual Property (if any) |
* Equity offerings = Stock Shares
* Debt offerings = Promissory Notes
| PPM's for Corporations |
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Rule 504 (up to $1mm) |
Equity
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Rule 504 (up to $1mm) |
Debt
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Rule 505 (up to $5mm) |
Equity
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Rule 505 (up to $5mm) |
Debt
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Rule 506 (any amount) |
Equity
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Rule 506 (any amount) |
Debt
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| PPM's for LLC's |
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Rule 504 (up to $1mm) |
Equity
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Rule 504 (up to $1mm) |
Debt
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Rule 505 (up to $5mm) |
Equity
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Rule 505 (up to $5mm) |
Debt
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Rule 506 (any amount) |
Equity
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Rule 506 (any amount) |
Debt
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