What Is PPM Investment?

What Is PPM Investment

A private placement memorandum (PPM) is a legal document provided to prospective investors when selling stock or another security in a business. It is sometimes referred to as an offering memorandum or offering document. A PPM is used in “private” transactions when the securities are not registered under applicable federal or state law, but rather sold using one of the exemptions from registration. The PPM describes the company selling the securities, the terms of the offering, and the risks of the investment, amongst other things. The disclosures included in the PPM vary depending on which exemption from registration is being used, the target investors, and the complexity of the terms of the offering.

A Business Plan Versus a PPM

A business plan and a PPM serve different functions. A business plan is primarily a marketing document created to promote a company. It purposely contains forward-looking information. For example, the plan will outline market demand, customer profiles, growth opportunities, competitive landscape, revenue channels, and potential strategic partners. A PPM is primarily a disclosure document that is descriptive but not persuasive in its style and allows the investor to decide on the merits of the investment. The presentation of the PPM is more factual and concrete. It must address external and internal risks facing the company. A PPM may indirectly serve a marketing purpose if it is professional looking and thorough. A well drafted PPM will balance disclosure requirements with marketing elements designed to sell the deal.

What to Include in a PPM

All security transactions are subject to the anti-fraud provisions of the federal securities laws – meaning you cannot make false or misleading statements regarding the company, the securities offered, or the offering. The basic notion behind the PPM is to fully inform the prospective investor about all aspects of the business, management, prior financial performance, and future prospects, as well as the risks involved. Some business owners worry about filling up the document with too much “legalese.” However, if the company is engaging with experienced investors they will be familiar with these disclosures and in many cases will expect it as a reflection of the professionalism of the business. Although applicable law may allow for different disclosure requirements based on a variety of factors, best practice for PPMs dictates certain information disclosures even if not required. Most PPMs are drafted in a similar format. Here is a summary of typical components found in a PPM.

Description of the Company and the Management

This section gives the company’s history and describes products and services, performance history, the industry, goals, competition, advertising and marketing strategy, suppliers, intellectual property, customer descriptions, and any other material information that would be relevant to the investor. Management information will include biographical information, special skills, and other background information.

Use of Proceeds

A company must describe how it will use the net proceeds raised in connection with the offering and the approximate amount intended to be used for each purpose. This allows the investor to know how the money they and others are investing will be used.

Description of Securities

This section describes the rights, restrictions, and class of securities being offered. It should also describe the ability of the company to change its capitalization such as different classes of shares and distribution of dividends.

Exhibits To PPMs

Exhibits allow a company to provide supplemental information and documents that may be material to an investor’s investment decision. The exhibits may include copies of investment contracts, financial statements, the organizational documents of the issuer, key contracts, licenses, and so on.
A Private Placement Memorandum (“PPM”), also known as a private offering document and confidential offering memorandum, is a securities disclosure document used in a private offering of securities by a private placement issuer or an investment fund (collectively, the “Issuer”). From an investor’s point of view, the purpose of the PPM is to obtain needed information about the Issuer and its securities, both good and bad, to make an informed decision about whether to purchase the security. The investor wants to know the parameters of investing in the Issuer and the potential rights, risks, and rewards of its investment. For the Issuer, the purpose of the PPM is to provide the necessary disclosures about the risks, strategies, management team, investment criteria and other information about its securities to protect itself and its managers against claims of misstatements or omissions.

Components Of A Private Placement Memorandum

A well-prepared PPM will contain several recognizable sections, some of which have greater importance than others. The following are among the key sections of a PPM:

Summary of Offering Terms

The summary of the terms of the offering is just as its name suggests, a condensed description of the offered terms, including the offering structure, the description of the securities (such as the class of securities, securities attributes, etc.), price, minimum subscription amount, investor qualification standards, disclosure of applicable management fees, withdrawals, placement agent commissions (if applicable) and discussion of the terms from the Issuer’s governing documents (limited partnership agreements, operating agreements, etc.) The private placement attorney prepares the summary of the terms of the offering last, as it has the most moving parts.

Risk Factors

Perhaps the most important component of the PPM are the risk factors. Risk factors are disclosures of the potential risks investors should consider that could lead to a loss of their investment. Risk factors must be drafted with specificity, tailored for each industry type, offering structure, and investment strategy or business plan. The Risk Factors section is one area where an Issuer must be particularly careful in disclosing important items. Accordingly, counsel must thoroughly understand the nature of the offering, its strategies or business plan, conflicts, limitations, exits and more which will allow counsel to deal appropriately with specific aspects of the offering, such as the sponsor’s experience and dependence upon outside parties to the Issuer. It is highly recommended that a conservative approach to risk factors be taken and that, when in doubt, a risk factor should be included on a particular point. The Risk Factors section is included early in the PPM so that it will be one of the first sections a potential investor will read. It provides most of the concerns investors should know about investing in the offering in a single place. A major mistake that many lawyers make (and even more unwary do-it-yourselfers) is they fail to include detailed, customized risk factors and instead, rely on general risk factors of uniform applicability found in a template. The SEC has indicated the need for specific, relevant risk factors. When Capital Fund Law Group prepares offering documents, the risk factor section occupies a substantial portion of the time spent on the document preparation. Depending on the industry, we routinely prepare PPMs with 20-35 pages of detailed risk factors specific to the offering.

Estimated Use of Proceeds/Expenses Disclosures

A vital component of the PPM is the disclosure of how the proceeds of the offering are expected to be used. A private placement issuer includes a use of proceeds section that contains language describing how the offering proceeds will be deployed, and where possible, we include a table showing item-by-item how much is anticipated to be allocated to each category. It can be difficult if not impossible in many circumstances to determine exactly how much of the proceeds will be allocated to a given purpose. The “estimated” use of proceeds is a best-case forecast of how the proceeds will be used. Different than an offering for a private placement issuer, an investment fund does not include specific estimated use of proceeds but instead includes a discussion of which expenses that investment fund will cover. The difference occurs because the presumption is that an investment fund will use all after expense proceeds to invest in the assets that are the basis of the investment fund’s investment strategy. One point of caution, however, is that the one item that should not be estimated, but firmly stated is the amount of compensation that any related party will take from the transaction, or directly from the proceeds of the offering, whether in the form of salary, fees, consultant payment, purchase or sale of an asset to the Issuer, such as intellectual property, or any other direct or indirect compensation paid to a founder or related party from the proceeds. Note that certain compensation information will also be provided in the Form D filing, which will be publicly available.

Description of the Securities

One of the sections of the PPM requiring the greatest need for a skilled private placement attorney is the description of the securities. In this section, the Issuer discloses the attributes of the debt or equity offering. These attributes are prepared in the governing documents of the Issuer (an operating agreement, limited partnership agreement, shareholders agreement, etc.), or in a promissory note (with a debt offering). The description of the securities section describes key terms of the governing document (or promissory note). Thus, it is vital to begin with the operating agreement before preparing the PPM.

Business/ Management Section

The business section describes the investment opportunity and the business of the issuing company. The management section contains biographical and background information about the managers, founders, directors key officers, etc. We rely heavily on the Issuer’s management to provide us with the initial narrative for these sections. The most important factor in preparing the business and management sections is to present information that is free from misleading statements and does not overstate accomplishments or opportunities.

Other Offering Documents

The PPM itself does not constitute the “offering.” The PPM is nothing more than a disclosure document describing the offering, including its structure, strategies or business plan, risks, and management. The offering documents include several supporting documents that should be prepared in conjunction with the PPM. Other documents include the subscription agreement, the investor suitability questionnaire, and most importantly, the Issuer’s organizational documents (an operating agreement, limited partnership agreement, shareholders agreement, etc.), a promissory note (with a debt offering) and others. In making the PPM disclosures, it is essential that an Issuer work closely with an experienced private placement securities attorney. Our firm will help plan and structure each aspect of the offering from the beginning, as there are many decisions regarding how to structure the offering and select the proper exemptions.

Are PPMs Required When Raising Private Startup Capital?

Some founders and startup entrepreneurs believe that a PPM is needed any time capital is raised or securities are issued in a private offering, including early-stage financing, Series A, Series B financing rounds or so on. However, that is not technically true. Whenever you issue securities, you must register them with the SEC or find an exemption for doing so. Most private offerings are done pursuant to Rule 506(b) of Regulation D of the Securities Act of 1933, which is a special type of “safe harbor” exemption. If you comply with the terms of Regulation D of Rule 506(b), you can rest confidently knowing that your transaction is considered a private transaction. This is important because if it were deemed to be a public transaction, you would have to go through the expensive process of registering the securities with the SEC (and possibly state securities boards) before selling them. That is time consuming and expensive process. Don’t be fooled by the term “public offering.” It doesn’t mean only the big initial public offerings (IPOs) that you hear about in the Wall Street Journal. It can be mean any offering where the number of offerees or investors or the type of solicitation (i.e., how wide a net you cast when looking for investors) is such that the SEC would consider the transaction to be a public offering of securities. In a private offering under Rule 506(b) where you raise money from accredited investors, you don’t have an obligation to deliver any specific information to the prospective investors, provided you don’t violate the antifraud rules. Rule 506(b) allows companies to raise money from unaccredited investors, although you’d then be required to provide certain information, which is similar in scope and form as the information required in registered offerings with the SEC.

Do Business Lawyers Advise Preparing a PPM Whenever Raising Startup Capital?

Corporate lawyers know that entrepreneurs and startup founders don’t need a PPM for every capital raise. In a small deal, (raising less than $100,000 for example), it may be difficult for the founders to justify the cost of the PPM. Keep in mind, though, that whether you create a PPM has more to do with the overall risk profile of how you are raising money for your startup than how much capital you raise. The further removed the investors are from your existing personal network, the more you may later wish you spent the time and money to create a private placement memo. That is because when you approach prospective investors that you don’t know, it starts to look like what the SEC calls a “general solicitation.” Also, all things equal, it’s safe to say you are more likely be sued by someone you hardly know than someone who stood up in your wedding. Talk to a Seasoned Securities Lawyer About What Exactly You Need for Your Specific Situation Securities law is a very difficult and nuanced area of the law. It is important to be careful and align yourself with a securities lawyer who knows what they are doing. I am very upfront with clients, happy to tell them when the DIY approach can be effective. It’s rarely a good option when it comes to securities law. Be smart when raising startup capital and talk to a great lawyer. This doesn’t mean you have to spend a ton of money or always create a PPM. It doesn’t even mean you have to engage that lawyer. It means at a bare minimum you talk things through with a seasoned legal professional and figure out the right decision for you, your cofounders and your startup based on the specific circumstances around how much capital you are raising and who will give you those startup funds.

Securities Lawyer Free Consultation

When you need legal hellp with PPM Investments in Utah, please call Ascent Law LLC for your free estate law 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


Recent Posts

Multiple Handguns and Form 3310.4

Personal Injury Attorney

Utah Divorce Mediation

Small Business Owner Liability

Who Is Responsible For Credit Card Debt In A Divorce?

Utah Real Estate Code 57-1-5