Finding investors for your company is not a simple task. You have to demonstrate to people that your company is deserving of not only their faith in your company’s potential, but even more importantly, their hard-earned money. In addition, seeking out investment dollars from others can potentially put your company and you and the other selling principals at risk if an investor feels that he or she was misled or that you failed to inform them of information that would have impacted their decision to invest in your company. So how exactly can you go about convincing investors of your company’s worthiness for investment while also protected yourself from the inherent risks?
One essential tool to use is the Private Placement Memorandum (PPM). In today’s blog we will provide answers to some common questions about PPMs, how they work, and why they are important.
What exactly is a PPM?
The Private Placement Memorandum, also known as an offering memorandum, is a written disclosure document providing a wealth of details about a company. It’s used to assist principals and companies with the fundraising process by providing disclosure of material information. A traditional business plans typically only lays out a company’s ideas and strategies for the future. A PPM, on the other hand, in addition to the business strategy, discloses the material elements of the company such as risk factors, the securities offered, the terms of the offering, related party transactions, the use of proceeds from the offering, etc.
Depending on the facts and circumstances related to the offering (including the amount sought, the types of investors sought, the methods of soliciting investment, etc.), a PPM may be required by law. But even if it isn’t required, it is almost always a good idea. Perhaps even more important than the PPMs role in convincing investors to buy securities in the company is the protection a PPM can provide against potentially disgruntled investors. PPMs serve as a risk mitigation tool for the company’s principals by providing clear evidence of their material disclosures. Thus, if an angry investor attempts to rescind their investment, “poke holes” in the offering, or otherwise try to seek some compensation from the company, the principals themselves will have some degree of protection. Unfortunately, when disgruntled investors go after the companies in which they invested, they generally also assert their claims against the principals who were responsible for selling the securities, and in this case the principals would not have the standard limited liability protection of the corporate veil. A PPM will create a clear line of evidence to prove the material information about the company actually provided to the investor who is taking legal action against them.
What is included in a PPM?
The PPM includes a wide variety of material information about the company, and the disclosures will be unique to the deal. A thorough PPM will include the terms and structure of the offering, the types of securities offered (e.g., equity, preferred equity, debt, warrants, or some combination), how the proceeds of investment will be used, notices to investors, risks of investment as it relates to the industry and many other potential risk factors, a summary of the business, a summary of management and compensation, a summary of ownership and capitalization, a summary of related party transactions, and other relevant and material information that a reasonable investor would want to know before making an investment decision.
Who needs to use a PPM?
PPMs are used by companies who are offering investment shares of their company. Generally, PPMs are only used for private offerings that fall under an exemption from being registered under state and federal securities laws.
In some circumstances, the PPM may be required by law for an offering. Other times a PPM may be optional. However, even in cases when the PPM is not legally mandated, principals should still consider utilizing one in order to mitigate their personal risk in offering the securities to investors.
Are there legal regulations and requirements?
In situations where a PPM is required by law, the SEC has set forth specific expectations of what types of information should be disclosed and the manner in which it should be disclosed.
In situations where a PPM is not required, there is no specific prescription for form, style, or inclusions. Nonetheless, under such circumstances it is still a good idea to create a thorough PPM that adheres to the SEC’s expectations for disclosures, rather than omitting information or categories and potentially leaving one’s self open to legal risks. If you are going to create a PPM, do it right.
Are PPMs expensive?
PPMs must be very professional and usually very thorough in order to achieve their intended purpose, and thus there will be relatively significant fees for using professionals like attorneys and accountants to help you draft an effective PPM. The cost will depend on the size and structure of the offering, and the amount of information to be disclosed. However, in many cases, our firm (after learning about the scope of the disclosures required) is typically willing to prepare the PPM on a flat fee.
How do investors act on a PPM?
The PPM will generally include what’s known as a “Subscription Agreement” (or some other form of purchase agreement). This is essentially an agreement whereby the investors agree to purchase the securities being sold. The investor will provide a significant amount of information on the subscription agreement, including an accredited investor questionnaire, that will demonstrate they are an “accredited investor” and that they have the requisite “sophistication” to purchase the securities. Generally, the subscription documents will be returned to your company along with the investment.
If your company is seeking investors and you need assistance drafting an effective Private Placement Memorandum that will mitigate your personal risks and thoroughly disclose relevant investment information about your company, contact the Doida Law Group to discuss your situation and your options.