BREAKING DOWN A STANDARD PPM

A Private Placement Memorandum (PPM) is a legal disclosure document provided to prospective investors when selling securities in a private company. Its purpose is to outline all material terms of an investment in the issuer, as well as disclose potential risks. While there is no standard form of PPM that companies are required to use, most will mirror or be based upon the information required in SEC Form 1-A normally used for Regulation A offerings, but applied to Regulation D offerings per SEC guidance.. Below is a breakdown of each section typically included in a PPM

1. Brief Summary of Investment

Most PPMs will begin with a brief investment summary to quickly provide investors with a concise description of the investment opportunity. Such summary will typically include basics about the company’s structure, investment objectives, maximum and minimum offering amounts, some of the overarching risks, and standard disclosures.

2. Who May Invest – Investor Suitability Requirements

Near the beginning of most PPMs, there will be an investor suitability section describing who may invest. This section defines the criteria that potential investors must meet to participate in the offering and demonstrates the issuer’s efforts to qualify for securities exemptions. For example, in a 506(c) offering, all investors must meet the definition of being considered an “accredited” investor. The investor suitability section ensures compliance with regulatory standards and protects the issuer by confirming that investors are qualified.

3. How to Invest

PPMs will usually contain a section detailing how investors can invest in the offering. Typically, this section will contain references to the issuer’s subscription agreement, describe the process to invest, and provide information regarding how to fund investment amounts.

4. Summary of the Offering

The summary of the offering highlights all of the main offering terms and provides a high level overview of the investment opportunity. It is included for quick reference to key terms and conditions of the investment. Terms that may be included are investment objectives, company structure, investment criteria and limitations, distributions, fees, investor reports, and other key terms most critical to investors.

5. Management of the Company

PPMs will typically break down the management structure of the issuer, providing information about what different individuals are responsible for. A short biography of each individual manager’s and key person’s background and expertise are also usually detailed in this section.

6. Discussion and Analysis of Financial Condition and Results of Operation

As further disclosure, PPMs will usually detail the methodologies of accounting policies of the Company. This section will detail whether any financial statements currently exist and disclose assumptions underlying financial projections. Furthermore, this section will typically state how the Company plans to prepare future financial statements, including if they will be in accordance with GAAP or if any audits will be conducted.

7. Investment Criteria and Business Plan

The investment criteria and business plan section of the PPM is most critical for disclosing how the issuer plans to make investments, the criteria it will rely on, and strategies used both to generate profits and exit investments successfully. Details that may be included are investment targets, anticipated portfolio allocation, market and submarket overviews, sourcing and acquisition strategies, due diligence procedures, operational processes, and exit strategies.

8. Sources and Uses of Funds

The sources and uses of funds section of the PPM explains how funds between the minimum and maximum offering amount, combined with any debt, will be used by the Company.  Anticipated expenses and fees will be disclosed, along with whether the company expects to conduct future offerings. It is imperative that fund and syndication managers ensure that their underwriting aligns with this section.

9. Capitalization of the Company

The capitalization of the company section is intended to inform prospective investors about the nature and structure of the securities being offered by the Company. It specifies that the Company has authorized the issuance of interests of limited partnership or membership, detailing the different classes. Furthermore, this section explains that holders of interests are limited partners or members of the company with the rights set forth in the partnership or operating agreement. Specifics regarding transfer restrictions and voting rights are also typically included.

10. Summary of the Company/Partnership Agreement

PPMs almost always contain a high level summary of the company or partnership agreement or other organizational documents such as bylaws. This is especially imperative since the PPM is just a disclosure document while a company or partnership agreement is a binding agreement between the company and investors for a limited partnership or limited liability company. Key terms include the process for admitting investors, the term of the Company, details about capital, management authority of the manager or general partner, investor rights, allocation of profits and losses, voting rights, and amendment procedures. It’s important to note that this section is only a summary and investors should always defer to the actual company or partnership agreement.

10. Conflicts of Interest

The conflicts of interest section is designed to openly disclose any conflicts and related party transactions, outline the fiduciary duties of the manager or general partner, and clarify that the manager or general partner has limited liability for actions taken in good faith. This section highlights the inherent conflicts or related party transactions between the issuer and its management, while also affirming the fiduciary responsibilities held by the general partner or manager. Any transactions with management-affiliated entities, such as utilizing a property management company linked to the manager or general partner, will be detailed here.

11. Risk Factors

The risk factors section of the PPM is designed to inform potential investors of the various risks associated with investing in the offering. Its primary purpose is to disclose specific risks that could impact the investment’s performance, the company’s operations, and the investor’s financial outcomes. By disclosing potential risk factors, the issuer and management team protect themselves by offering full disclosure. By reading, acknowledging, and understanding the risk factors, investors can make a fully informed decision whether to invest in the company.

Risks typically disclosed include those applicable to forward-looking statements, market risks, financial risks, operational risks, legal and regulatory risks, and specific industry or business risks. Ultimately, the goal of the risk factors is to ensure transparency and protect the issuer from legal claims by demonstrating they provided full disclosure of risks in investment.

12. Terms of the Offering

This section is similar to the first brief summary of investment section and is included to mirror S-1 filings. It details key terms and conditions under which the issuer is offering its interests to potential investors and exemptions it may qualify for. Furthermore, it specifies minimum and maximum offering amounts, minimum capital commitments, and the offering period.

13. Federal Income Tax Matters

The federal income tax matters section details various tax-related considerations and implications for investors. It typically emphasizes the importance of consulting with independent tax advisors due to the complex nature of tax laws and regulations, as well as an investor’s potentially unique situation. Matters that may be detailed include specific tax risks, partnership classification, allocations, investment by tax exempt entities, ERISA and retirement accounts, ERISA plan asset regulations and IRS audit considerations.

Final Thoughts

PPMs are crucial in private securities offerings, providing essential information on investment terms, conditions, and risks. Well-structured PPMs protect the issuer by demonstrating compliance with securities exemptions and disclosure of material information. Each section is included for a specific purpose and is essential for securities compliance.

For assistance in preparing a PPM or conducting a private offering, feel free to reach out. We are here to help you raise private capital and grow your business ventures.