Private Placement Memorandum

A private placement memorandum (PPM) is a document given to potential investors that introduces an investment and discloses information about it. The PPM is part of a securities offering process called private placement. Here’s what you need to know about creating and presenting a PPM to investors.

 

Definition of Private Placement Memorandum

A PPM is a document created to sell investments in securities (typically stocks and bonds) to private investors. This type of offering is called a private placement because it’s offered privately to individual investors.
Private placements are regulated by the Securities and Exchange Commission (SEC). They are not required to go through the same registration process as public offerings, but they must follow specific SEC rules to be exempt.

 

What Does a Private Placement Memorandum Include?

Your PPM should begin with an introduction. Here’s an example from a PPM offering common stock: “The offering is made in reliance upon an exemption from registration under the federal securities laws provided by Rule 506 of Regulation D as promulgated by the United States Securities and Exchange Commission (the “SEC” or the “Commission”) under the Securities Act of 1933, as amended (the “Securities Act” or the “1933 Act”). There is currently no public market for our common stock.”

Common sections in a PPM include:

  • Risk factors
  • Conditions and disclaimers, including statements for specific states
  • Use of proceeds
  • Dividend policy
  • Dilution (possible reduction in earnings per share and proportional ownership)
  • Description of the business, including principal product/services and their markets, distribution methods, growth strategy, competition, employees, and property
  • Legal proceedings (pending or current lawsuits the company is involved in)
  • Management (executives), including executive compensation and securities owned by owners and management
  • Description of capital stock
  • Restrictions on investors (resale or transfer)

 

Subscription Agreement and Investor Questionnaire

Along with the private placement memorandum, you must prepare two additional documents for investors to sign: a subscription agreement and an investor questionnaire.
A subscription agreement is the sales agreement between your business and the investor. It includes:

  • Details of the offer along with the number of shares and the price for each one
  • Representations by the subscriber (buyer) that they have knowledge and experience in financial and business matters and are able to evaluate the risks and merits of the investment
  • Acknowledgements that the subscriber is aware of the investment’s risk and restrictions, and that no government entity has passed on or reviewed the offering

Each investor must also complete a questionnaire to determine whether they qualify as an accredited investor. The questionnaire asks about educational background, net worth, and their financial and investment advisors.