This article goes over the basic information about what a PPM is, when and why you may need one. This information is being provided as a general overview and a basic education of the common terms and federal securities laws involved with a PPM. Each state has its own securities laws and the discussion in this article is not to be used as legal advice, as each circumstance is different and you should consult with a licensed attorney to be sure that any PPM or offering you do complies with all current laws and regulations.

What is a PPM?

A private placement memorandum is an offering document, sometimes called a prospectus, offering circular, or PPM. The majority of early startups, real estate syndications, and emerging growth companies commonly raise money through what are known as private placements. It is simply a sale of equity ownership (or debt) in the company to private investors that become owners (or lenders) in the company. The reason they are classified as private is not because they are private investors, but because the offer and sale of equity (a security) does not involve any public filing or registration of the security with the US Securities & Exchange Commission (“SEC”) and falls under an exemption to the registration requirement. For example, when a stock goes “public” normally through an “IPO”, they are offering stock publicly by filing a detailed registration statement with the SEC. Since most companies don’t have the money or resources to file a registration statement with the SEC, they rely upon selling the equity through exemptions from registration.

The basic principle behind the PPM is to fully inform the investor about all aspects of the business, company, industry, management, prior financial performance, and future prospects, as well as providing certain risk factors involved with investing in a new company, often with no current revenue to sustain it. The SEC and state regulators want to be sure that you disclose what is required and don’t over-hype your company. The biggest threat is the anti-fraud statutes stating that you need to fully disclose everything material so that you are not defrauding or misleading investors.

Both state and federal securities laws impose penalties for non-compliance with securities law, including the filing of any required documents, such as Form D. For example, investors have the right to rescind purchases of securities sold in violation of law and to obtain a refund of the purchase price paid. If the noncompliance involves the failure to qualify for an exemption from registration requirements, it can cause the entire offering to lose its exempt status even if the failure involves only a single requirement or a single investor. Loss of exemption for the entire offering means that all investors may have a rescission right. Penalties for noncompliance with the securities law can be imposed not only on the company issuing the securities but also on those who control the corporation. Criminal penalties can be imposed for willful noncompliance with the securities laws.

If you put something in the PPM that is materially misstating the facts, misleading, failing to include relevant facts or an outright lie, you can end up facing serious civil and criminal penalties, as well as potential investor lawsuits for misrepresentation, breach of contract, or fraud. As an officer, director, sponsor, or manager, you have certain duties and you have to be sure that you have control over what is happening in the fundraising process.

Some common categories that are covered in a PPM are:

Executive Summary– A brief, usually one page or so, an overview of what your company does, how it is different or solves an existing problem, who your team is, and what your plans are to grow the business (i.e. how are you going to make money for the investor)

Summary or Terms of the Securities Offering– This includes things like how much money is being raised, what the investor gets in return, what the requirements are to invest, restrictions on investor’s rights, and other investor-related legal terms of the investment.
Risk Factors– This identifies some of the more common potential risks to an investor that they face by investing in the private offering to fully inform them of risks before deciding to invest.
Management Team– Name, title, and a bio on each top member of the management team (officers and directors) to show what experience or assets they are bringing to the table

Product or Service Description– What do you do and how is it novel or better than something else out there and how do you make money from it?

Intellectual Property Protection– How have you or will you protect your company’s ideas, brand name, developments?

Manufacturing and Operations– How will you produce the product or provide the service, as well as manage and operate the administrative side of things?

Human Resources/Employees– How many people do you have now and how many do you plan to bring on? Any other challenges, such as using independent contractors versus employees? Do you still need to identify and hire certain positions in the company?

The Market/Competition– What market are you targeting and where do you fit into it? What is the landscape and current trends in the market or industry? Who is your competition for your product or service?

Sales and Marketing– How do you plan to get your message out about your product or service?

Company Background and Structure– This covers things like current capitalization (ownership structure), when the company was formed, is it a C corporation, LLC, S-corp, formed in a certain state, etc.

Financial Information– Lists of current, historical, and future projected pro forma financial statements such as balance sheet, statement of cash flows, and profit and loss statement.

Do I need a PPM?

A PPM is required in some cases and recommended in others, which often depends upon the securities law exemption being used. If the offering is covered under the most common exemption Rule 506(b) under Regulation D and it will have anyone invest who is not an “accredited” investor, Rule 502(b)(2) lists the information that must be provided in that instance. “Accredited” investor status is defined under Rule 501 and the most common categories for who is “accredited” are individuals who: (i) have earned over $200,000 (or jointly over $300,000 with a spouse) in the last 2 years (and expects to earn the same the following year); or (ii) have a net worth over $1,000,000 (not including the value of their home or its mortgage). So, if you have investors who may not qualify as “accredited”, you will need a PPM and it must have the information required in Rule 502(b)(2).

Even if all your investors are accredited, you are still subject to securities regulatory oversight on the state and federal level and the potential threat of lawsuits by investors if anything is not properly disclosed about the investment, its terms, and the risks involved in the investment opportunity. The PPM is highly recommended to avoid possible regulatory issues and investor lawsuits and some investors expect to see one. Think of the PPM as your defense in court to show that you disclosed everything in writing to the investors and all the possible risks involved, so the investors were fully aware of what they were getting into. If this isn’t in writing with proper disclosure, you and your personal assets could be at risk.

How do I get a PPM?

There are services online and companies that offer templates for PPMs, but be cautious in going down that path just because it looks a lot cheaper. If you fail to disclose something you should have or file a required document under the Do It Yourself option and lose your exemption from registration, you could end up in a situation where the invested money is gone, but a regulator is telling you to offer to buy back the stock you sold the investor. Guess who can end up holding the bag if the company is out of business at that point? You.

It is always best to hire a local licensed attorney to assist you in this process. Look for someone with experience in securities laws and private placements, which I am. You can save time and money by putting together a good business plan internally, but then having the lawyer add, edit, or clarify the business plan to make it into a full and compliant PPM and help you with the requirements to file various state and federal securities law filings, including a Form D, as this is typically required in all private placements. We specialize in corporate and securities law and can assist with any questions you have in the process.

For any PPM-related queries please contact PLG Attorney, Chris Barsness at cbarsness@patellegal.com.