A private placement memorandum (PPM) is a document that businesses share with prospective investors looking to buy debt or equity from a company. It is used in an offering of unregistered securities rather than a public offering, meaning the transaction is exempt from applicable state and federal securities offering registration requirements. The basic goal is to comply with any applicable disclosure obligations and give prospective investors a detailed and accurate picture of the securities offered and the related business.
What a PPM includes
While a business plan may be used to secure a loan, a PPM is used to raise capital. Along with an intro and overview, this complex and detailed legal document often provides such information as:
- Description of the company
- Description of the management
- How investment proceeds will be used
- Terms for the potential investment
- Risk factors and disclaimers
- Subscription procedures
- Strategy and other details
- Financial information about the issuer of the securities
- Other key details
All securities offerings are subject to antifraud laws, which means the issuer cannot make false or misleading statements.
Types of PPMs
Securities that can be offered using a PPM include many types of instruments and equity forms. Some common examples are:
- The offering of common stock or preferred stock
- Limited liability company (LLC) equity interests
- Debt such as promissory notes
- Other documents accompany PPMs
If the investors like what they see, they can fill out and sign these additional documents that often accompany the PPMs:
Subscription agreement: This is the sales contract between the investor and company, including the description of the securities and prices. The buyer must indicate that they understand the transaction’s terms, its risks and that no government identity has reviewed the offering.
Investor questionnaire: This determines if the potential investor is eligible to buy the securities, often by confirming their accredited status. The document asks questions about the investor or organization’s net worth, investment experience and background.
Next level investing: Private offerings have many regulatory guardrails designed to protect investors. The federal and state governments provide exemptions from public offering requirements to specific types of offerings and specific groups of investors. The company that plans a private offering must navigate carefully all the applicable requirements to be sure the offering is in compliance.