What is a PPM?

So, What Is A PPM (hint: Private Placement Memorandum)?

At PPM LAWYERS, we are dedicated to providing startups with an essential and powerful tool for raising capital. This tool is called a PPM, which stands for Private Placement Memorandum. So, what is a PPM? The PPM is a self-contained disclosure document consisting of everything that an investor will need to fund your business. The PPM also operates as legal protection that allows you to raise capital from investors while closing the loop on legal exposure and regulatory issues.

Why Partnering With A Specialized Attorney Is Crucial For PPM Preparation

When a business is preparing a Private Placement Memorandum (PPM), collaborating with an experienced private placement securities attorney is vital. Here’s why:

• Expert Guidance: A seasoned attorney provides invaluable insights into the complexities of securities laws. This expertise ensures that the PPM complies with all necessary regulations, minimizing the risk of legal repercussions.
• Strategic Structuring: Determining the most suitable structure for your offering is no small task. An attorney will help navigate the numerous decisions surrounding the structuring process, ensuring the offering is built on a solid foundation.
• Proper Exemption Selection: Deciding which exemptions to utilize is crucial. An attorney with specific expertise can identify the best exemptions based on your offering’s unique characteristics, optimizing its performance and compliance.
• Comprehensive Planning: From inception through to execution, an attorney’s involvement streamlines the planning process. Their strategic oversight helps ensure every aspect of the offering is meticulously considered and executed.

In essence, engaging a knowledgeable private placement securities attorney is not just a safeguard against potential pitfalls—it’s an investment in the offering’s success.

It’s All About Raising Money

So, what does all that mean? Well, let’s break it down a bit. To truly understand what we’re talking about, you must first bear in mind the process that a startup must go through to raise capital. Now, I’m not going to go too far into that, which is a topic for another blog (look for it coming soon!), but let’s just start with the premise that in order to raise money, a startup needs to get investors. Investors can come from anywhere, including crowdfunding.

This Is A Securities Transaction

Now, these investors are usually looking for an interest in the company in exchange for their hard-earned cash. Whenever an investor gets an interest in a company, typically in the form of stock or shares, this is called a securities transaction. Debt and promissory notes are also securities. All securities transactions are regulated by the Securities and Exchange Commission (SEC) in accordance with the securities laws. It’s these securities laws that you need to be concerned with whenever you are raising capital for a business. This is where the PPM comes in. Before you take one dollar from an investor, be sure he or she has a properly prepared PPM in hand. Without it, you could get in trouble.

What’s In A PPM?

A properly prepared PPM includes all the important and material facts about your business.

In addition, a properly drafted PPM will contain a complete Summary of the Offering right up front.

What Information Is Included In The Summary Of Offering Terms Section Of A PPM?

The Summary of Offering Terms in a Private Placement Memorandum (PPM) is a crucial component that provides a succinct overview of key aspects of the investment offer. This section is crafted to give potential investors a clear and concise snapshot of the terms they are considering. Here’s what you can typically expect to find:

• Offering Structure: A detailed description of how the investment is organized and structured.
• Securities Information: This includes the type and class of securities being offered, along with any attributes that may affect the investment.
• Pricing Details: The set price for the securities and any minimum subscription amounts required from investors.
• Investor Qualification: Standards and criteria that must be met by potential investors to participate in the offering.
• Fees and Commissions: Disclosure of management fees associated with the investment, as well as any placement agent commissions, if relevant.
• Withdrawal Terms: Details on how and when an investor may withdraw from the investment.
• Governing Documents: Discussion of terms derived from related governing documents, such as limited partnership or operating agreements.
• Estimated Use of Proceeds: Discussion or table outlining how the monies raised will be deployed.

What Is Disclosed In The Estimated Use Of Proceeds/Expenses Section Of A PPM?

When diving into a Private Placement Memorandum (PPM), you’ll find a crucial segment dedicated to the Estimated Use of Proceeds. This section outlines how the funds from the offering are intended to be utilized. Here’s what you can expect to find:

• Deployment Strategy: This part specifies the anticipated allocation of the offering funds. It often includes a detailed breakdown or even a table illustrating how each dollar is expected to be channeled into different categories.
• Forecasting Challenges: It’s essential to recognize that the distribution of funds is not set in stone. Due to the variable nature of business needs and market conditions, the allocations are projected estimates rather than precise figures. Hence, they represent a best-case forecast.
• Differences in Investment Funds: For investment funds, the focus shifts slightly. Rather than providing detailed estimates of proceeds usage, the PPM will discuss the specific expenses the fund will cover. The remaining funds, after expenses, are presumed to be invested following the fund’s strategic agenda.
• Compensation Clarity: Unlike other projections in this section, the compensation for related parties is explicitly detailed. This includes any remuneration or financial benefit derived from the offering, such as salaries, fees, or asset transactions involving founders or associated entities. It’s imperative that this information is transparent and precise, and it is also echoed in the publicly available Form D filing.

When comparing the use of proceeds disclosure for a private placement issuer versus an investment fund, there are key distinctions to consider.

For a private placement issuer, the disclosure typically includes a detailed breakdown of how the funds raised will be allocated. This can include specific categories such as operating expenses, debt repayment, or growth initiatives, with approximate amounts assigned to each.

In contrast, an investment fund’s disclosure focuses less on specific allocations and more on explaining the types of expenses the fund itself will cover. This difference arises because investment funds are expected to use the net proceeds, after covering expenses, to purchase assets aligned with their investment strategy. Essentially, the primary goal of an investment fund is to pool and invest the money in line with its stated strategy, with any remaining funds being reinvested into the portfolio.

This information is the kind of information that any investor would want and need in order to make an informed decision about making an investment. In this way, it’s kind of like a business plan.

But, let’s be clear, a PPM is not a business plan.

A PPM Is Not A Business Plan.

In this regard, one important difference between PPM and business plan often comes in the wording and tone of the document. A business plan is basically a giant brochure for your business. However, the wording in a PPM must be more subdued and reserved. For example, in a business plan, you might say, “We are the best in the business.” This should rarely appear in a PPM because an investor, a court, a state securities commission, or the SEC may very well ask you to prove it! So, a PPM can be thought of as a sort of hybrid between a business plan and a legal contract all in one.

It Is A Legal Document

This brings us to the other major element of a PPM: the legal element. Much of a PPM contains certain legal statements and language that speaks to the SEC and other legal entities about what rules and regulations are being relied upon in connection with the proposed securities transaction. A properly prepared PPM will even be organized in a very particular manner for these reasons as well. In addition, the PPM will contain details for the investor about the deal, so she knows exactly what kind of stock or shares she is getting and how much of the company that translates into. In the Description of the Securities section, the Issuer outlines the specific attributes of the debt or equity offering. These attributes are meticulously prepared based on the governing documents, such as an operating agreement, limited partnership agreement, or shareholders agreement.

Key terms from these documents are clearly described, ensuring that the investor understands what she is acquiring. For debt offerings, a promissory note might be involved, detailing the terms of repayment and interest.

When it comes to a Private Placement Memorandum (PPM), it’s also crucial to clearly specify any compensation related to the transaction. This includes detailing the exact amounts that any connected parties will receive from the offering’s proceeds. Whether the compensation is in the form of a salary, consulting fees, or through the purchase or sale of assets like intellectual property, it’s essential to distinctly outline these figures. Additionally, any direct or indirect payments made to founders or related parties must be transparently disclosed. This level of clarity helps maintain transparency and trust with investors.

Most importantly, the PPM will contain statements about the risks that investors face if they make such an investment. In fact, there’s an entire section of a PPM devoted to that called…you guessed it, “Risk Factors.”

The Critical Role Of Risk Factors In A PPM

Perhaps the most vital component of the PPM is the Risk Factors section. This section is crucial because it provides a comprehensive disclosure of potential risks that could lead to a loss of investment, enabling investors to make informed decisions.

Why Specificity Matters

Risk factors must be drafted with specificity, tailored to the industry type, offering structure, and business strategy. This customization is not just a best practice but a requirement, as generic templates fail to address the unique risks associated with different investments.

The Regulatory Angle

The importance of this section is underscored by regulatory expectations. The SEC emphasizes the need for specific, relevant risk factors, making it essential for issuers to comply with these standards. This ensures that investors are aware of all potential concerns in a single, accessible location.

Common Pitfalls to Avoid

A major mistake that many make is relying on generalized risk factors. Instead, a conservative approach should be taken, with detailed and customized disclosures. By doing so, issuers not only protect themselves but also provide clarity and transparency to investors.

Strategic Placement

Positioned early in the PPM, the Risk Factors section is one of the first things a potential investor will read. This strategic placement highlights its importance, ensuring that all significant concerns are addressed upfront.

Incorporating a thorough and well-structured Risk Factors section is not just a formality; it’s a critical aspect of investor communication, risk management, and regulatory compliance.

Key Questions:

1. What does the SEC recommend regarding risk factors?

The SEC advises that risk factors should be specific and relevant, emphasizing the importance of crafting customized risk assessments rather than using universally applicable templates.

2. What is a common mistake in drafting risk factors?

A frequent error is the reliance on generic, template-based risk factors instead of creating detailed, customized ones that address the unique risks pertinent to the specific business or investment.

3. How should risk factors be drafted?

Risk factors need to be specifically tailored to the unique aspects of each industry, structure, investment strategy, or business plan to ensure they are relevant and effective.

What Other Offering Documents Should Accompany A PPM

When preparing a Private Placement Memorandum (PPM), it’s crucial to understand that it serves as just one part of a broader collection of offering documents. These supporting documents play an essential role in detailing the investment opportunity and ensuring all legal bases are covered.

Key Documents to Include:

• Subscription Agreement: This is a vital document where investors agree to purchase securities. It outlines the terms of the investment and any specific conditions that apply.
• Investor Suitability Questionnaire: Designed to assess whether potential investors are suitable for the opportunity, this questionnaire gathers information about the investor’s financial status, experience, and investment objectives.
• Issuer’s Organizational Documents:
  • Operating Agreement: For LLCs, this document describes the company’s management structure and financial arrangements.
  • Limited Partnership Agreement: Details the relationship between general and limited partners in a partnership setting.
  • Shareholders Agreement: Specifies the rights and obligations of shareholders within a corporation.
• Promissory Note (in debt offerings): This document is necessary when the offering involves a debt component. It outlines the terms of repayment and interest.

These documents, in conjunction with the PPM, provide a comprehensive view of the investment landscape, enabling potential investors to make informed decisions. Always ensure that these documents are prepared in alignment with legal standards and tailored to fit the specific details of the offering.

Let’s Review

In a nutshell, a PPM is a document that provides important and material details about your business, including:

• Plan of Operations
• Marketing and Sales Plan
• Products and Services Offered
• Competition
• Management Profiles
• Financial Statements and Projections

But a properly prepared PPM must also contain:

• Business & Management Section: This section delves deeper into the investment opportunity and the business operations of the issuing company. It is crucial to present an accurate, transparent narrative that avoids misleading statements and does not overstate accomplishments or opportunities.
• Business Overview: In the business portion, detailed descriptions of the company’s operations, market strategies, and competitive landscape are provided. This includes the company’s objectives, growth plans, and how it positions itself within the industry.
• Management Insights: The management section offers biographical and background information about key individuals such as managers, founders, directors, and key officers. This information is essential for illustrating the expertise and leadership driving the company forward.

By providing a well-rounded and precise depiction of your business and its management, you ensure potential investors gain a clear understanding of your company’s potential and credibility.

• Industry and Company-Specific Risk Factor: This section is crucial, as it outlines potential risks that investors should be aware of. It’s tailored to each industry and investment strategy, ensuring that investors have a clear understanding of what could impact their investment. Specificity is key here, as generic risk factors may not adequately inform potential investors.
• Various State and Federal Legal Disclaimers: Legal disclaimers provide the necessary legal context for the offering, ensuring compliance with both state and federal regulations. These are vital to protect both the issuer and the investor by clearly stating legal obligations and liabilities.
• A Description of The Company’s Capital Stock: This part of the PPM describes the attributes of the company’s capital stock, whether it’s equity or debt. It involves detailed legal documentation, such as operating agreements or promissory notes, which outline the rights and responsibilities associated with the securities offered.
• An Investor Subscription Agreement: This agreement is essential as it formalizes the relationship between the investor and the company, detailing the terms of investment and ensuring that both parties are clear on their commitments.
• An Investor Questionnaire or Accredited Investor Representation Letter: This document is used to confirm that potential investors meet the qualifications necessary to participate in the offering. It helps ensure compliance with regulatory standards by verifying investor eligibility.

Additionally, a comprehensive PPM includes sections like:

• Summary of Offering Terms: A condensed overview of the offering, including structure, pricing, and investor requirements, prepared to give investors a quick yet thorough understanding of what the offering entails.
• Estimated Use of Proceeds/Expenses Disclosures: This section forecasts how the proceeds from the offering will be utilized, providing transparency and setting investor expectations regarding financial allocations.
• Business & Management Section: Detailed descriptions of the business opportunity and the management team, highlighting experience and expertise while ensuring all information is accurate and not misleading.
• Other Offering Documents: Supporting documents that accompany the PPM, such as the investor suitability questionnaire and the issuer’s organizational documents, provide further context and ensure the thorough disclosure of all relevant information.

By integrating these elements, a PPM becomes a vital tool for potential investors, offering a comprehensive view of the investment opportunity while ensuring full compliance and transparency.

Key Questions:

1. What is the most important factor in preparing these sections?

Ensuring the information is accurate and free from exaggerations or misleading statements is crucial.

2. Who provides the information for these sections?

The initial narrative for both sections is primarily supplied by the management of the issuing company.

3. What is the primary content of the Management section?

This section includes information on the backgrounds and biographies of key figures such as managers, founders, and directors.

4. What is the primary content of the Business section?

The Business section outlines the investment opportunity and details the operations and scope of the issuing company.

So, that’s it, now you know.

And, don’t forget to read our three-part blog on why it is critical that your PPM have custom risk factors, rather than just template-based or boilerplate risk factors.

When drafting risk factors, specificity is key. These factors should be tailored to align with your industry, offering structure, and investment strategy or business plan. A common pitfall is relying on generic templates which fail to capture the unique risks associated with your particular venture.

The SEC emphasizes the need for detailed and relevant risk factors—ones that speak directly to the specifics of your business. By incorporating such customized elements, you’re not only ensuring compliance but also providing potential investors with a clear understanding of the risks involved.

So, dive into our blog series to explore how tailored risk factors can make a crucial difference in your PPM, moving beyond the one-size-fits-all approach.

About the Author: Erik P. Weingold

Erik P. Weingold is an entrepreneur and corporate securities lawyer with over 25 years’ experience under his belt. He has been practicing law since 1995, and since 1998 has been drafting PPMs that have been used to raise hundreds of millions of dollars for startups and small businesses throughout the U.S. Erik is the founder and owner of PPM LAWYERS.