What is a private placement memorandum?

The short answer

A PPM describes a private offering of securities in enough detail for an investor to decide whether to invest. It covers what is being sold and on what terms, how the business works, who runs it, how the money will be used, what could go wrong, and the legal restrictions that come with an unregistered security. Companies and funds use PPMs for offerings under Regulation D and other exemptions from SEC registration.

Why a PPM matters

Exempt offerings skip SEC registration, but not the antifraud rules. Under Rule 10b-5 and Section 17(a) of the Securities Act, it is unlawful to sell securities with a false statement of material fact, or by leaving out a fact that makes what you did say misleading. A well-built PPM is your record of what investors were told. If an investor later says they weren’t warned about a risk, the PPM is where you show that they were.

Some offerings require disclosure outright. If you sell to even one non-accredited investor under Rule 506(b), Rule 502(b) requires you to give that investor specific information, including financial statements, a reasonable time before the sale. States can also require a disclosure document for Rule 504 offerings.

What goes in a PPM

• Notices and legends. Statements that the securities aren’t registered, transfer restrictions and state notices.
• Summary of terms. The issuer, the securities, price, offering size, minimum investment, use of proceeds, distributions and voting.
• The business. What the company does, its plan and its capitalization, or for a fund, its investment strategy.
• Risk factors. Risks of the investment, the business, the securities, taxes and regulation.
• Management and conflicts. Who runs the company, how they’re paid, related-party dealings and outside activities.
• Use of proceeds and expenses. Where the money goes, including offering costs and payments to insiders.
• Terms of the offering. Who may invest, how to subscribe, closings, the plan of distribution and solicitation method.
• Description of the securities. The rights attached to the stock, units or notes, and a summary of the governing documents.
• Tax and ERISA. Federal income tax consequences and points for retirement plan investors.
• Financial information. Financial statements where required or available.
• Subscription documents. The subscription agreement and investor questionnaire.

PPM, business plan or pitch deck?

A business plan or pitch deck sells the opportunity. A PPM discloses it. The deck highlights upside; the PPM states the terms precisely, sets out the risks and limits what investors can rely on to what is in the document. You can share a deck or business plan alongside a PPM, as long as it is consistent with the PPM and makes clear that the offer is made only through the memorandum.

Do you need a PPM?

• Rule 506(b) with any non-accredited investors: yes. Specific disclosure is required.
• Rule 506(b) or 506(c) with only accredited investors: not required by rule, but most issuers use one because the antifraud rules still apply and experienced investors expect it.
• Rule 504: it depends on the states where you sell. States that register Rule 504 offerings usually require a disclosure document.

Even with one or two investors, a PPM protects you for far less than it costs to defend a claim.

Documents that go with a PPM

• A subscription agreement, the contract the investor signs to buy
• An investor questionnaire that establishes accredited status
• The governing documents: charter and bylaws, operating agreement or partnership agreement
• For debt offerings, the promissory note terms
• Form D and state notice filings after the first sale

Common mistakes

• Terms that don’t match across the PPM, subscription agreement and governing documents
• Generic risk factors that skip the risks specific to your business
• Projections or target returns without a reasonable basis or clear cautionary language
• Undisclosed fees or related-party payments
• Advertising a Rule 506(b) offering, which costs you the exemption
• Forgetting Form D and state notices after the first sale