What Is A Confidential Private Placement Memorandum?

What Is A Confidential Private Placement Memorandum

A Confidential Private Placement Memorandum is a document used in mergers and acquisitions to convey important information about a business that’s for sale including its operations, financial statements, management team, and other data to a prospective buyer.

Who prepares the Offering Memorandum?

When any company goes through a sale process, it hires an investment banker. The first step of the banker is to understand the company and gather as much information as possible from top management to come up with a profile the company. The banker prepares the CIM and uses it as a marketing document, which is intended to make the company look attractive as the objective is “not just to sell, but to sell for maximum value.” The reason an investment banker tries to sell a company at the maximum value is because they represent the best interest of their client (the seller), and that their commission is based on the sale price.
Contents of a Confidential Private Placement Memorandum
An example table of contents for an offering memorandum:
• Executive Summary
• Investment Thesis
• Overview of the Market
• Overview of the Target Company
• Products and Services
• Revenue Profile
• Employee Profile
• Customer Profile
• Financials – Historical and Projections
• Management Structure
Below a detailed analysis of each section.

Executive Summary

This is a 1-2 page summary of the entire memorandum. It contains at least the following:
• Key Business Products and Service Offerings of the Company
• Financial Overview – Revenue, EBITDA Margins, Cash Flow, profitability
• The Nature of the Transaction
• Investment Rationale

Investment Thesis

This section of the CIM contains the investment rationale in detail, i.e. why would the “target company” be a great fit for the acquirer. Typically, it may include the following (as hypothetical examples):
• The company acts as a platform for market entry and growth
• The kind of partnerships it has with leading players, providing best-in-class services and the opportunity to build on them for the acquirer
• Upside opportunity from process optimization, cross-selling, cost optimization, automation, etc.
• Blue chip clients and longstanding relationship with them
• Strong Order Book
• Experience of the management and strong capabilities in business expansion
• Strong position locally with an international foothold
• Potential for synergies

Overview of the Market

It is imperative for the acquirer to know the market size and current market trends. It is the duty of the banker to give an overview of the market and make the company’s case stronger. The investment banker prepares the market overview from credible data sources, such as World Bank, Gartner, IDC, Forrester, Bloomberg, Reuters, etc. Credible sources provide reliability to the data points and help the acquirer to better understand the market and formulate the right strategy.
The overview of the market contains elements like:
• Market size
• Top players in various business segments
• The trend of various product lines
• Growth trends in the market and the driving factors behind them
• Mapping of the competitors with the “target’s ranking”
Overview of the Company
It contains basic details of the company such as:
• Year of establishment
• Company description
• Business segments and its capabilities
• Revenue, EBITDA and net income
• Employee details
• Customers, clients and users
• Place of headquarters with different office locations
• Recent news about the company

Products and Services

This section contains a detailed analysis of the products and services offered by the company in its day to day business operations.For the product categories, the company will include a list of the products it offers under various segments, the differentiating factors of the products, the target segment of each product, etc.
From a service perspective, it shows the company’s various service offerings, the capability of the company, the end-to-end process of the services it offers, revenue models such as Fixed Price projects or those based on Time and Material, etc.

Revenue Profile

It shows the revenue profile of the company from different aspects, which is very important for the acquirer. It shows the revenue mix according to Geo, Product, Business Segments, etc. By showing the information in this manner, buyers can see where the major revenue comes from and if it is aligned with their business strategy.

Employee Profile

Segregation of the employees is shown so that buyer has a fair idea of existing personnel mix and can plan changes that will help them achieve cost optimization, or whatever strategy they plan to execute.An employee profile can be shown in several ways, including by Function, Qualifications, Geography, Pyramid, etc.It’s important to have full profiles on all the key employees.

Customer Profile

For any acquirer, it would be important to know what kind of customers the company would be serving in future. Some of the popular questions the acquiring company would be interested in includes: Will the customers be large enterprise customers or too many small customers, years of relationship with the customers, revenue contribution from Top 5 or 10 customers, etc.

Financials – Historical & Projections

This is perhaps the most important section from a valuation perspective, as it gives a detailed analysis of the profit and loss account. It contains actual financial information from previous years, as well as financial projections by the management of the target company. The assumptions of such projections are also written so that the buyer understands the rationale for such projections.Since the target company is preparing the projections, it will try to show the company in a very positive position and make it attractive in order to achieve a higher valuation.

Management Structure

A brief profile about key personnel of the company, highlighting their role(s) in the company, years of experience, previous work experience, etc.This section is extremely important, and also one of the most matter-of-fact sections. It typically includes each person’s photograph, name, title, and a multi-paragraph description of what they do, their background and their claim to fame.An organizational chart may also be useful in this section to illustrate the hierarchy and reporting structure.

What a Confidential Private Placement Memorandum is Not

As discussed above, a typical Confidential Private Placement Memorandum will include all of the above information.
But what is also important is to know what it is not about. Confidential Private Placement Memorandum is NOT:
• It’s NOT a Pitch Book. A Pitch Book contains the credentials of the banker (rather than Target) and is used by bankers as marketing material to solicit business.
• It is NOT a legally binding contract between the buyer and seller.
• It doesn’t contain any specific information on the exact valuation. The investment bankers don’t set the sale price at the CIM stage. Instead, they look for potential buyers to place bids and try to achieve the maximum valuation for the company.

Private Placement

The private placement definition is the process of raising capital directly from institutional investors. A company that does not have access to or does not wish to make use of public capital markets can issue stocks, bonds, or other financial instruments directly to institutional investors. Private placement occurs when a company makes an offering of securities to an individual or a small group of investors. Since such an offering does not qualify as a public sale of securities, it does not need to be registered with the Securities and Exchange Commission (SEC) and is exempt from the usual reporting requirements. Private placements are generally considered a cost-effective way for small businesses to raise capital without going public through an initial public offering (IPO). Institutional investors include the following:
• Mutual funds,
• Pension funds
• Insurance companies
• Large banks
You do not have to register private placement issuances with the Securities and Exchange Commission (SEC). In addition, you do not have to provide a detailed prospectus. The issuing company and the purchasing investors negotiates the terms and conditions are negotiated. You cannot trade private placement securities on public markets, but they can be traded privately among institutional investors after they have been issued by the issuing company. A private placement is in contrast to a public offering, which is issued in public capital markets, requires a detailed prospectus, must be registered with the SEC, and can be traded by the investing public in the secondary markets.

Restrictions Affecting Private Placement

The SEC formerly placed many restrictions on private placement transactions. For example, such offerings could only be made to a limited number of investors, and the company was required to establish strict criteria for each investor to meet. Furthermore, the SEC required private placement of securities to be made only to “sophisticated” investors—those capable of evaluating the merits and understanding the risks associated with the investment. Finally, stock sold through private offerings could not be advertised to the public and could only be resold under certain circumstances. In 1992, however, the SEC eliminated many of these restrictions in order to make it easier for small companies to raise capital through private placements of securities. The rules now allow companies to promote their private placement offerings more broadly and to sell the stock to a greater number of buyers. It is also easier for investors to resell such securities. Although the SEC restrictions on private placements were relaxed, it is nonetheless important for small business owners to understand the various federal and state laws affecting such transactions and to take the appropriate procedural steps. It may be helpful to assemble a team of qualified legal and accounting professionals before attempting to undertake a private placement.

Many of the rules affecting private placements are covered under Section 4(2) of the federal securities law. This section provides an exemption for companies wishing to sell up to $5 million in securities to a small number of accredited investors. Companies conducting an offering under Section 4(2) cannot solicit investors publicly, and the majority of investors are expected to be either insiders (company management) or sophisticated outsiders with a preexisting relationship with the company (professionals, suppliers, customers, etc.). At a minimum, the companies are expected to provide potential investors with recent financial statements, a list of risk factors associated with the investment, and an invitation to inspect their facilities. In most respects, the preparation and disclosure requirements for offerings under Section 4(2) are similar to Regulation D filings. Regulation D—which was adopted in 1982 and has been revised several times since—consists of a set of rules numbered 501 through 508. Rules 504, 505, and 506 describe three different types of exempt offerings and set forth guidelines covering the amount of stock that can be sold and the number and type of investors that are allowed under each one.

Rule 504 covers the Small Corporate Offering Registration, or SCOR. SCOR gives an exemption to private companies that raise no more than $1 million in any 12-month period through the sale of stock. There are no restrictions on the number or types of investors, and the stock may be freely traded. The SCOR process is easy enough for a small business owner to complete with the assistance of a knowledgeable accountant and attorney. It is available in all states except Delaware, Florida, Hawaii, and Nebraska.
Rule 505 enables a small business to sell up to $5 million in stock during a 12-month period to an unlimited number of investors, provided that no more than 35 of them are non-accredited. To be accredited, an investor must have sufficient assets or income to make such an investment. According to the SEC rules, individual investors must have either $1 million in assets (other than their home and car) or $200,000 in net annual personal income, while institutions must hold $5 million in assets. Finally, Rule 506 allows a company to sell unlimited securities to an unlimited number of investors, provided that no more than 35 of them are non-accredited. Under Rule 506, investors must be sophisticated. In both of these options, the securities cannot be freely traded.

Private Placement Memorandums

A Private Placement Memorandum (PPM) provides critical details about the offering. This differs from a business plan, which does not provide information about the technical structure of an offering. A PPM is used to raise capital from a number of investors instead of trying to find one with the entire amount of required capital.
The PPM outlines information such as:
• Purchase price per note
• Number of shares or notes being sold
• Maturity date
• Rate of return
• Risk factors
Additional Private Placement Documents
• Subscription Agreement sets forth the terms and conditions of the investment. This is the document that the investor executes, and to which he or she attaches a check.
• Promissory Note Agreement (for debt only) is the actual loan agreement between the investor and the company.
• Form D SEC Filing is the notification filing that is sent to the SEC in Washington, DC. It notifies the SEC that the issuer is using the Regulation D program and provides basic information on the company and the offering. It is not an approval document. It is merely a filing that notifies the SEC that the offeror has a Reg D offering in place.

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Securities Law

Securities Law

Most small businesses will work with banks at some point in their existence, often for loans but also for initial public offerings or other large transactions. If you want your business to sell stocks, it’s important to become familiar with federal and state securities laws. Securities laws provide a strict set of rules and procedures related to selling shares of stock to the public, and require strict compliance.

What Is Insider Trading?

Insider trading is a type of securities fraud, which is a white collar crime. Basically, insider trading occurs when an “insider” uses confidential information (that is not yet available to the public) to make decisions about buying or selling stocks. An insider refers to anyone who has confidential information about the finances of a corporation. Examples of insiders include high-level employees, such as a Chief Executive Officer (CEO) or a member of the board of directors, and people employed in a corporation’s finance department. Even a family member of an employee with confidential financial information can be considered an insider.

If a person is an insider, it’s important that he or she avoids certain actions and exercises caution when buying or selling stocks. Anyone with inside information should never trade securities based on that information, nor should they share that information with anyone. A person with inside information should keep up to date with all trading laws and the corporation’s policies that apply to a person in his or her position. Finally, if you have doubts or questions about whether your actions could be considered insider trading, you should consult with the corporation’s attorney.

 

What Are Blue Sky Laws?

Blue sky laws refer to the securities laws that are enacted by each state, which are intended to protect society from fraud. These laws work in conjunction with federal securities laws, and cover at least merit review and disclosure. A merit review is a way to regulate disclosure and the fairness of the securities offering to investors. Disclosure laws typically require corporations to fairly and fully disclose all material facts related to an offering. It’s important to note that while securities statutes and regulations may be identical in many states, the interpretation may differ from state to state.

This is the Process of Going Public

The process of taking a company public presents unique challenges best faced with the assistance of an experienced team. A crucial member of that team is an experienced securities lawyer. Each member of the team has key responsibilities to fulfill in guiding the company through the following process.

The Securities Law Process

  1. Board approval. The initial public offering (IPO) process begins with a proposal to the company’s board of directors by management of the company. Management presents and discusses in detail the company’s past performance, objectives, business plan, and financial projections. Management then proposes that the company enter the public market. After carefully considering the benefits and detriments of going public, the board of directors makes a decision as to whether the IPO should go forward.
  2. Assembling the team. Upon board approval, management of the company should begin the process of assembling the IPO team. In particular, a securities lawyer and an accounting firm should be retained as soon as possible.
  3. Reviewing and restating the financials. If the board of directors approves the proposal to go public, the company’s financial statements for the preceding five years should be carefully reviewed and, if necessary, restated to comply with Generally Accepted Accounting Principles (GAAP). Certain transactions that are ethical and legally permissible for private companies, such as certain sale-leaseback arrangements, must be eliminated and the financial statements appropriately adjusted. The accounting firm normally assists with the review of the financial statements and the making of appropriate adjustments.
  4. Letter of intent with investment bank. The company should at this point select an investment bank and formalize its arrangement with the investment bank pursuant to a “letter of intent” outlining the investment bank’s fees, the size of the offering, the price ranges and other parameters.
  5. Drafting the prospectus. After the letter of intent is signed, the securities lawyers and accountants begin the process of preparing the prospectus. A prospectus is a written document prepared for presentation to investors as both a selling document and as a legal disclosure document. The prospectus is required to contain the following information:
  • A description of the business;
  • A description of the management structure;
  • Disclosure of management compensation;
  • Disclosure of transactions between the company and management;
  • Names and shareholdings of principal shareholders;
  • Audited financial statements;
  • A discussion of the company’s operations and financial condition;
  • Information on the intended use of the proceeds of the offering;
  • A discussion of the effect of dilution on existing shares;
  • A description of the company’s dividend policy;
  • A description of the company’s capitalization;
  • A description of the underwriting agreement.

Usually the lawyers draft the narrative part of the prospectus and the accountants prepare financial statements.

  1. Due diligence. The company’s investment bank and accountants will perform a detailed “due diligence investigation” of the company. They will examine the company’s management, operations, financial condition, competitive position, performance, and business objectives and plan. Information regarding the company’s labor force, suppliers, customers, and industry will also be reviewed. It is likely that information discovered in the due diligence investigation will result in changes being made to the prospectus.
  2. Presenting the preliminary prospectus to the SEC. The preliminary prospectus must be presented to the SEC and the relevant stock market regulators. Approval of state securities commissions may also be required. The SEC usually provides its comments regarding the prospectus, normally in the form of requirements for additional disclosure or explanation, in one to four weeks.
  3. Syndication. After the preliminary prospectus has been prepared and filed with the SEC, the investment bank should assemble a “syndicate” consisting of other investment banks who will attempt to sell portions of the offering to investors. The assembly of the syndicate often generates useful information as to the market for the shares and helps to narrow the share price range.
  4. Road show. Company management and the investment banker often perform a series of meetings with potential investors and analysts. The road show is a formal presentation by management of the company’s financial condition, operations, performance, markets, and products or services. The potential investors and analysts are then permitted to “kick the tires” by asking questions about the company.
  5. Finalizing the prospectus. The prospectus must be revised in accordance with the comments of the SEC and the relevant stock market. When the SEC declares the registration effective, the company can “go to print” with the prospectus.
  6. Pricing the offering and determining the offering size. On the day before the registration becomes effective and sale commences the offering is priced. The investment banker should recommend a price for the company’s approval, taking into account the company’s performance, the stock price of competitive companies, the success of the road show, and general market and industry conditions. The investment banker will also consult with the company regarding the size of the offering, considering such factors as the amount of capital required, investor demand, and the desired retention of control over the corporation.
  7. Printing. The company should have earlier selected an experienced financial printer who has adequate printing capacity and is familiar with the SEC’s regulations regarding the use of graphics. The final prospectus is sent to the printer for printing on an expedited basis.

 

Free Initial Consultation with a Securities Lawyer

When you need SEC or securities law help, call Ascent Law for your free consultation (801) 676-5506. We want to help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

Ascent Law LLC

4.9 stars – based on 67 reviews


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