A private placement is the investment in your company or investment fund by private individuals and/or institutions. The method begins with a private placement memorandum (“PPM”), which is the document that describes the nature of the investment, the enterprise, the opportunity and associated risks of the funding you are seeking from these private investors. The private placement memorandum would be to private investments as the prospectus is to public investments. Whereas a prospectus gets filed with the Securities and Exchange Commission, a private placement memorandum ordinarily doesn’t.
Once you’ve decided to go down this path for your capital needs and are ready to begin working on your private placement, what goes in it? The primary concern of State and Federal securities laws are the protection of your investor. In this context, there’s one cardinal rule – tell the truth, the whole truth and nothing but the truth. This means do not misrepresent material information, and don’t omit material facts where the inclusion of such information would lead the potential investor to a different conclusion.
Aside from being truthful and factual, your PPM ought to present your potential investor with all the information necessary to make an intelligent investment determination. It’s common sense – place yourself in the investor’s shoes and think about what info you would like to have.
And, although the required disclosure will change depending on different elements, for instance size of the offering and whether there are non-accredited investors, I suggest erring on the side of caution. You may run afoul of securities laws by not having the correct disclosure, but there is no harm in the event you “over-disclose”.
Finally, the private placement memorandum is not a marketing document – don’t use it as a sales tool. If you need a marketing document, put together a Power Point presentation.
The following consists of some of the sections that will need to be included as part of your private placement memorandum:
Notices to Investors: The Notice to Investors section includes federal and state disclosure legends, providing specific notices to prospective investors informing them that the securities described in the PPM are not registered. Additionally, some states have specific disclosure language they will require over and above the federal disclosures.
Summary of Terms: The Summary of Terms gives a summary of the “deal”; i.e. purpose of the transaction, who the Issuer is, what form of security is to be issued, individual terms of the security being issued (dividends or interest; current pay or accrued; warrants; collateral), affirmative and negative covenants, conditions precedent, etc.
Risk Factors: This part sets forth the potential issues specific to the Issuer as well as possible negative consequences of investing in the form of securities to be issued. Some examples may include reliance on customer concentration, cyclicality, inability to obtain projections, changes in regulations, etc.
Conflicts of Interest: The conflict of interest section identifies and describes potential conflicts of interest of the Issuer, and its principals or affiliates. As an example, one of the principles may provide you with accounting services for the Issuer, or one of the principles may be a major customer of the Issuer.
Description of the Issuer, its Business and the Business Plan: Describes the business of the Issuer including its products, strategy, clients, sales and advertising and marketing, operations, marketplace and competitive analysis, and discussion of management.
Transaction Description: The transaction area describes the transaction, including a schematic of the deal, sources and uses table and capitalization.
Financial Information: This part involves a presentation of historical financial performance as well as discussion and analysis of the results. The financial info part will also consist of management forecasts and relevant assumptions behind the forecast.
Misc Sections: These sections will usually comprise of tax matters, and a description of the capital stock of the Issuer.
Subscription Section: This section supplies the potential investor with the instructions on how to participate in the offering.
Appendices: The appendices will differ from deal to deal, and really should consist of supplemental details and documents that might be material to an investor’s investment decision. Items that could very well be part of the appendices include things like the letter of intent, audited financial statements, shareholder’s agreement, etc.
Whilst all of this seems complicated, you’ll be able to make it easy on yourself by using a private placement memorandum template. By starting with a template and then having your lawyer review it (always have your attorney sign off on your PPM), you will maximize the value of your legal counsel and save thousands of dollars in the process.