What Are The Units Of A Private Placement Memorandum?
PPMs are disclosure documents used by small businesses raising money through private securities transactions. 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 private placement memorandum may also be called an offering memorandum (OM), confidential offering memorandum (COM) or confidential information memorandum (CIM). A PPM is similar to a business plan, although it focuses much more on legal issues. The primary purpose of a PPM is to disclose to prospective investors the terms of a potential investment and primary risk factors involved in making the investment.
A PPM also usually contains a considerable amount of information about the business opportunity, structure and management. It is less sales-oriented than a traditional business plan, partly because business lawyers typically create them. 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 PPM must contain accurate, truthful and current information. While many PPMs share some similarities, they are all completely customized and unique to each investment deal. For example, a well-prepared PPM will avoid using formulaic risk factors. Instead, they will detail the specific risks associated with the company’s industry, such as market trends, competitive analysis, or regulatory and tax issues. In addition, a well-prepared PPM will avoid sales/revenue projections, especially overinflated ones, that are not based on expected reality and that are the exception. Investors will likely expect you to achieve those financial targets, and the SEC will closely scrutinize such performance forecasts set out in the PPM. Whether a company needs to use a PPM or not, and the amount and type of information in the PPM, will, in general, depend on;
• which exemption from registration is being used,
• the type of issuer,
• the number of investors,
• the level of sophistication and type of investor,
• the amount of money being raised, and
• the complexity of the terms of the offering.
What to Include in a Private Placement Memorandum(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.
Meaning of Private Placement Units
Private Placement Units means the Units to be purchased by the undersigned immediately prior to and subject to the consummation of the Company’s IPO, as set forth in that certain Unit Subscription Agreement, dated as of June 21, 2007, by and between the Company and the undersigned or the units, including the warrants and the shares of Common Stock issued in, or issued upon exercise of the warrants included in, any units sold to the Initial Stockholder pursuant to that certain Amended Private Placement Purchase Agreement and any warrants, shares of capital stock or other securities of the Company issued as a dividend or other distribution with respect to or in exchange for or in replacement of such Private Placement Units or underlying securities (the units in the Private Placement and the initial public offering to be identical except that the warrants included in the Private Placement Units provide for a cashless exercise upon redemption of such warrants) .
Types of Private Placement Memorandums
There are many varying types of private placement memorandums. The type of offering will determine the specific nature of the PPM. The two-main private placement offering memorandum documents used throughout the world are an equity private placement or a debt private placement.
• Equity: In an equity offering, a company will sell an ownership stake. The most common type of equity private placement memorandum is one that sells shares or stock in a company. In addition, a limited liability company (LLC) or a limited partnership (LP) may sell units, or limited partnership interests of the company. Some issue sweeteners, like preferred shares or preferred stock.
• Debt: In a debt offering, a company will sell securities such as a bond or a note. In a debt private placement memorandum, a company will detail the securities being sold, such as the interest rate, maturity date, and other terms of the notes or bonds. In other types of debt issuance offering memorandums a company might offer convertible bonds or convertible notes. In this type of transaction, the debt securities will convert to equity at a pre-determined date.
• Rules: In addition to debt or equity, there are various national and in some cases, international rules that apply to each private placement memorandum. For example, there is Rule 504, 505 and 506 of Regulation D (Reg D). Included in Reg D is also 506b and 506c offerings. There is also Regulation A (Reg A). A popular rule in the equity and debt private placement sphere is Regulation S (Reg S) and Rule 144A.
How much does a PPM cost?
$10,000 – $40,000 is the estimated legal fees for preparing a Private Placement Memorandum (PPM) or other formal disclosure document. Besides the obvious answer to your question (that’s what the market will bear), PPMs are generally risky and securities lawyers are some of the most expensive type of lawyer. However, please keep in mind that you might not need a PPM and might be able to reduce some of those legal fees by relying upon another securities law exemption or reviewing some of the factors that affect price, below.
Sections of a Private Placement Memorandum
There are many features and sections that go into the writing of a private placement memorandum that is geared for raising capital. Here are just a few segments of the PPM:
• Executive Summary: an executive summary is normally a one or two-page summary of the business plan. It’s always suggested to include an executive summary in a private placement offering memorandum document as this help explain what the business does.
• Jurisdictional Legends: the jurisdictional legends are specific country and state regulations governing the sale of securities in each jurisdiction. If it’s a US or Reg D offering, the jurisdictional legend will comprise of various states and rules for raising capital for selling stocks or bonds. If a company is raising capital worldwide they will use international legends that are country specific. Each country has their own rules regarding the flow of capital from outside investors and local investors.
• Terms of the Offering: the terms of the offering will highlight the relevant features of the issuance. Included in the offering term section will be the stock or share price, or bond or note price, investors requirements, use of proceeds, some risks factors, and, if a debt offering, the maturity date and interest rate. The terms of the offering are the main component of a private placement memorandum.
• Investor Suitability: the investor suitability section of a PPM will deal with investor standards. For example, if a company is raising capital and is required to only accept accredited investors then this section would detail that. Or if the suitability standards allow for non-accredited investors, or non-US investors under Regulation S (Reg S), or US investors in a 144A offering, the investor suitability section will detail that, which may include net worth requirements for each investor.
• Risk Factors: the risk factor section will deal with the pertinent risks of the business. Included in the risk factors would be industry specific risks that could materially affect the business, as well as micro and macro risks toward the company, including competitors, and factors outside the control of the company such as natural disasters, recessions and so. Listing the company’s risk factors is important as omissions can come back to haunt entrepreneurs.
• Management Team: the management team section will showcase the team’s skills, including the CEO and the support staff, and possibly even the board of directors or an advisory board. It is wise to include the strengths of the management team as this can help build investor confidence.
• Use of Proceeds: the use of proceeds section is one page or more that details where the company plans on spending the capital they are raising. The use of proceeds is not always the most elaborate chart, but should be a solid breakdown of the plan of where the proceeds from the offering will be spent.
• Tax Implications: the tax section of the private placement memorandum will detail the implications for an investor. Most PPMs will not detail the specific state tax requirements so each investor would be required to speak with their local accountant. For international clients, non-US (or not from the country of one’s offering), the tax implication will be important for profit and loss and each country will have their own rules.
• Subscription Agreement: the subscription agreement is a synopsis of the terms of the entire private placement memorandum and acts as the contract between the issuing company and the investor. The agreement will outline the terms of the offering, and the securities being sold, such as the bonds, notes, stocks, shares, warrants, or convertible securities.
• Exhibits: one of the final sections of the PPM is the exhibits, which are ancillary data related to the business of the company or the securities being sold. Examples of exhibits that go into a private placement memorandum may be an image of a patent granted, or licenses or a company’s incorporation certificate.
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.
A private placement memorandum is meant for an issuing company to be compliant with both state and federal laws, no matter where the PPM is issued. A company selling securities wants to ensure they do not break any laws when approaching investors and are exempt for registration requirements. For an investor to make an educated decision the PPM should contain all the noted data above, including financial projections and past financial performance and of course the risk factors of the business and industry. Risk factor information will not scare away experienced investors who are most likely well aware of such language being placed in a private placement memorandum. The important thing is make sure your company is compliant with securities laws and regulations when raising capital.
When you need a PPM Attorney, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
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