When conducting a private placement offering, there is one essential document that companies must draft: a Private Placement Memorandum. This document outlines all of the disclosures required by law and offers investors information so that they make informed decisions about participating in the offering.
A Private Placement Memorandum (PPM) outlines the terms of securities that are to be offered in a private placement. A PPM is used to provide information to potential investors so that they have the opportunity to properly evaluate the merits of an investment in the company. A PPM is not always required by law, but it is a required document if a company is offering securities to investors who are not accredited.
The contents of a PPM might vary based on the particular offering, the circumstances of the company, and whether or not the investors are accredited. Most PPMs contain the following elements:
- A summary description of the security being sold, including the terms of the sale and the associated fees;
- A complete description of the issuer, focusing on organizational structure, the history of the company, a summary of a company’s issued and outstanding securities, and the context of the offering;
- A detailed business plan, including pertinent information related to market opportunity, the company’s products, its valuation proposition, its marketing and sales plans, management structure, financial information, and proposed use of proceeds;
- A list of instructions detailing how to participate in the offer;
- A summary of relevant or possible conflicts of interests of the issuer, its principals, its affiliates, or a combination of any of the above-mentioned;
The numerous risk factors associated with the investment, including risks that are common to similar investments and those risks which are unique to the issuer and its securities.
Creating a PPM, even when it is not required by law, can provide the issuer with a certain level of protection. Statements of an issuer, regardless of whether they are written or oral, are subject to both federal and state anti-fraud laws. As such, a well prepared PPM can help issuers avoid a potential securities fraud claim in the future, since it will provide a record of exactly what was communicated to the investors about the company and the offering.
A professional looking PPM can also work as an effective sales document for potential investors. It demonstrates that the directors and officers of the issuer are serious about their business and know their company and its industry well.
If you are considering holding a private placement, a corporate attorney can help you draft a PPM that will attract potential investors and ensure your company’s future growth.
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