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What Is A Private Placement?

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A Private Placement is a capital transaction between an issuer, the entity seeking to raise capital, and an investor, or group of investors. When discussing a private placement, its usually in the context of a private company raising capital; however, public companies will also seek to raise capital using a private placement. In the latter case, this type of transaction is known as a “PIPE,” which stands for private investment in a private entity.

Private placements fall under what is know as Regulation D, or Reg D of the Securities Act of 1933. Private placements are also sometimes called Reg D offering. Reg D is what provides for the registration exemption under the Securities Act requirement that any offer to sell securities must either: 1) be registered with the SEC, or 2) meet an exemption. The exemptions provided under Reg D are known as Rule 504, Rule 505 and Rule 506.

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Get Professional With A Private Placement Memorandum Template

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Private placements are not just for multi-million dollar deals. Even if you are seeking raise $100,000 to acquire a franchise or a piece of investment real estate, you are still required to present prospective investors with a private placement memorandum, or PPM. The challenge is that PPMs can be expensive to have drafted. A good attorney will cost you $20,000 or more. A PPM consultant will cost $5,000 to $15,000 (and you should still have an attorney to review it). Unfortunately, these costs are either i) out of reach for many businesses and entrepreneurs, or ii) recognized as sunk money if their deal doesn’t close.

A great alternative for many business owners and entrepreneurs is to purchase a Private Placement Memorandum Template. A well-formulated private placement template will help guide the issuer through the process from the term sheet through the business description. Specifically, the template should help the issuer craft the memorandum so that the prospective investor can make an intelligent Go / No-Go decision. Of course the template can only go so far; the issuer must be totally transparent in presenting the business and opportunity – warts and all. There should be no commission of false statements or omission of facts that, had they been presented, would lead the reader to a different conclusion.

Aside from being required to be legally compliant with securities laws, a well-written PPM will present you and your company in a professional manner. Your private placement template should include the same things you would want to see if you were sitting in the seat of the prospective investor. Some of these sections include investor disclosures, a term sheet, risk section, business description, transaction description, capitalization, sources and uses of funds, financial presentation (including discussion and analysis), description of the securities being issued and a tax discussion.

So if you want to save some money and mitigate your risk of ending up with huge busted deal expenses, consider using a private placement memorandum template. Just make sure that its flexible enough to accommodate your transaction and that the template itself is set up to guide you through each section. Finally, regardless of where you purchase your PPM template, make sure that after you get your PPM drafted, have your attorney review it and provide comments.

Raising Capital For Your Business

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Whether your business is a start-up or a mature business, one of the most critical activities you’ll face is raising capital. One of the best, and often the most overlooked sources of capital are private investors. And while often times money is raised through friends and family, my view is to stick with accredited investors that are in the deal business each and every day. If you do tap friends and family for capital, make sure that the relationship  can handle a total loss scenario.

An intergal part of the capital raising process is your “prospectus,” which is different depending on where you go for your capital needs. If you are going to a bank, or a non-bank lender (such as an SBIC), you’ll want to have a crisp executive summary that provides the lender with information about your business and the use of funds. Some points that the executive summary should cover include a short history of the business, overview of the transaction (working capital, purchase new equipment, refinance existing debt, buyout of a partner), what products you sell, who your customers are (if applicable, think top ten customers and the last three years of sales for these customers), who your suppliers are (top five or ten suppliers and amounts purchased over the past three years), manufacturing process (as applicable), industry and competition (a SWOT analysis), sources and uses of funds, capital structured (pre and post financing), and summary of financial performance with applicable discussion and analysis.

If, on the other hand you are seeking to raise some type of junior capital, such as equity or subordinated debt, from private investors, you will need to have a private placement memorandum.

Think of the private placement memorandum as the executive summary on steroids. The private placement memorandum, or PPM, provides your prospective investors with the information that is needed to assess the trade-off between risk and return. You will need to articulate what the “deal” is; i.e. what type of security you are issuing, the terms, restrictions and covenants of the security. The PPM should also articulate the risks of the transaction, which includes risks inherent in the business, industry, potential conflicts of interest, risks specific to the security being issued, and corporate structure. The key to this risk section is to not sugar coat it and to not try to mitigate the risks in this section. Put yourself in the shoes of you prospective investor – what information would you wan to know?

Raising capital is not easy, but can be rewarding, aside from actually raising the money. Going through this process will require to think about and talk about your business in ways that you might not have had to in the past. And while you may think you have the best business or business idea (in the case of a start-up) in the world, when exposed to the the light of seeking capital, you will begin to see and think about your business in news ways.

Raising capital, particularly private capital, can take a long time. Depending on what type of relationships you have and how much initial work you do, expect to take six months or more to complete your offering. Even closing on a simple bank financing can take six to eight weeks from start to finish.

Raising capital can also be expensive. In the case of a traditional bank financing, your costs can often be rolled into your financing. Likewise with private placements, except for any placement fees you may pay, your costs can be paid or recouped out of the proceeds of your closing. The biggest risk, however, is the risk of bused deal expenses – your upfront expenses that get paid regardless of whether your transaction closes or not. As an example, your private placement memorandum can cost as much as $20,000 when prepared by an attorney, and bank financing expenses can include commitment fees, appraisal fees, and environmental assessment fees.

At the end of the day, raising capital is something that can be done. Like a lot of things in life, it takes know-how, persistence, and a little luck.

Reg D – What Is It?

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Reg D, or Regulation D, refers to the SEC exemption provided to businesses for issuing debt or equity securities without going through the SEC registration process. These type of security offerings are targeted at private investors. Within Reg D, the SEC provides three rules that guide the amount of the offering and who the target prospective investors are. These rules are know as rule, 504, 505, and 506.

The document used to comply with Reg D is known as a Private Placement Memorandum, or PPM. The PPM can be thought of as a prospectus for a private offering. A PPM can be accomplished in one of three manners – through a competent securities attorney, a private placement writing service, or through the purchase of a private placement template. Having an attorney draft your private placement memorandum can cost north of $20,000. There are several private placement consultants that will draft your private placement for $5,000 to $15,000. And finally, a private placement template will cost you around $300. However, in the case of writing your own PPM with a template, or using a private placement service, you should factor in the cost of have a good securities attorney review and sign off on your PPM before you hit the streets.

Writing your PPM is not difficult, but will take you some time. While this is a little of an oversimplification – the PPM essentially your business plan with a term sheet. Of course, it more than that, but the bulk of your PPM will be the who, what, where, how and why of your business:

  • who you are
  • what your company does
  • what your company sells
  • why  customer buy what you sell
  • who your customers are
  • how you manufacture or go to market
  • who your competitors are
  • what are the industry drivers
  • how your financial performance has been

I think, based on the calls I receive, the hardest part for business owners is trying to figure out what type of security to issue and what the cost of that security should be. Again, not hard, but if you are not familiar with certain corporate finance terms and concepts, there can be a very steep learning curve.

The other difficult part of writing your offering memorandum, is the risk section. In this section you will want to discuss all of the risks of your company, the industry, and your transaction. You should do this without giving in to the natural inclination of wanting to mitigate each risk (hey, your trying to get a deal done, right?). You should approach this section as coming up with all of the reasons that an investor wouldn’t want to invest in your deal.

Once you have your private placement memorandum drafted and signed off by an attorney, you are ready to start “smiling-n-dialin.”

Regulation D provides companies with a great opportunity to raise private capital for their business needs. A security issued under Reg D can be accomplished by a start-up or a existing mature company.

Do You Need An Attoney To Write A Private Placement Memorandum?

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A question posed by one of my visitors was whether you needed an attorney to write a Private Placement Memorandum. While the question was in the context of someone who wanted to draft a PPM for a client, the answer has broader applications. The short answer is yes and no.

First the ‘no.’ Your PPM has several sections, some of which are boilerplate and some of which require information that is specific to your business, transaction and issuance. The boilerplate sections include the investor legends, the description of the securities and tax discussions, some of which may need to be tweaked depending on your situation, but generally they are boilerplate sections.

Where you will spend most of your drafting time will be the term sheet, risk section and business discussion section. These are aspects of your offering that your attorney can help with by providing input around the edges, but generally will not be drafting for you. Lets look at each of these sections.

TERM SHEET – The term sheet is that section of your PPM that describes the security you are offering to your prospective investors. The main section of the term sheet will describe:

  • the type of security you are offering (debt or equity, and all of the flavors in between);
  • the price you are willing to pay for the capital you are raising (straight interest or dividends, warrants, success fee; convertible provisions, any preferred return provisions);
  • how you will be paying the return to investors (PIK, cash pay);
  • how the issuance ranks relative to other capital in the business (or fund); and
  • affirmative and negative covenants.

You’ll want to spend time on this section first to make sure you have the right capital structure in place and, two to make sure you price the issuance properly. Price it too cheaply and you won’t clear the market (and run the risk of tainting your offering); price it too dear and you’ll leave money on the table.

Where your attorney can help with the term sheet is to make sure that you capture and think about all of the nuances of whatever type of security you are seeking to issue. For example, if you are raising subordinated debt, you will need to think about intercreditor issues with the senior lenders and what type of standstill provisions need to be in place. A good securities attorney can draw on years of experience across a variety of transactions, deal structures and types of offerings.

As a metric on how long this might take you, I spent about an hour drafting a term sheet for a client earlier this year. This was after we spent about an hour talking about what made sense and I spent some time on my own noodling different scenarios. But the drafting part took about an hour, and I’m comfortable and experienced with writing term sheets.

RISK SECTION – The Risk Section is where you’ll discuss all of the reasons why a prospective investor shouldn’t invest in your offering. It important to be very transparent in this section and not hold anything back. You’ll want to present and discuss all of the risks you would want to know about if you were on the other side of the table. You will also want to resist the temptation to state a risk and then mitigate it, a natural reaction.

The Risk Section is where your attorney can add a lot of value. It is usually just a few word changes that make the discussion more transparent, and by adding certain risks that are related to legal/corporate/security issues, rather than business issues.

BUSINESS DISCUSSION – The business discussion section is where you discuss your business and strategy, as well as discussion why the business is seeking to raise capital. Some of the points you will want to discuss include:

  • history of the company
  • what you sell
  • who your customers are
  • why they buy from you
  • your suppliers
  • manufacturing process (if applicable)
  • capitalization
  • sources and uses of funds
  • historical financial performance with discussion and analysis
  • projected financial performance with discussion and analysis

So at the expense of sounding wishy-washy, the answer to whether you need an attorney to draft a private placement memorandum is both yes and no. ‘No’ in that there is so much of the PPM that only you will be able to write. ‘Yes’ in that your attorney can add value to the process, but after you have the bulk of the PPM written. And, my strong suggestion to all of my clients is to always have an SEC attorney review and comment on your private placement memorandum before you start talking to prospective investors.

Raise Capital With Private Placement Memorandum

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Use a Private Placement Memorandum Template from TransCapital Pro to raise capital for your business – whether its $100,000 or $10,000,000. You can raise capital for your business, private equity fund, or real estate transactions. Our templates are valid in all 50 states and are easy to navigate to  customize for your purpose.

Writing your own private placement is not as daunting an assignment as it sounds. A good template will guide you through all of the various sections. And, at the end of the day, you are essentially articulating your business plan to your prospective investors – and who knows your business better than you.

One of the critical sections of the private placement is the Risk Section. Here you will want to be totally transparent. I advise my clients that they should provide the information that they would want to know if the roles were reversed. You should never commit an intentional lie, or a lie of omission.

The other advice I give clients who choose to write their own private placement memorandum is to not sell. Just stick to the facts of the business and of the transaction. If you need a sale document, prepare a power point presentation.

Finally, make sure you get your attorney to review your PPM. Where I’ve found attorneys to add value is by tweaking the language in the Risk Section. I think its human nature to want to mitigate the risk your are stating (because you want to get your deal funded). But this goes against the grain of what the PPM is all about, and your attorney will take an objective view of this section and make sure its “just the facts.”

Private Placement Memorandum Templates for private equity and debt offerings from TransCapital Pro.

Private Placement Memorandums Help Companies Raise Captial

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A Private Placement Memorandum is required of companies and hedge funds to help them raise capital. The private placement memorandum’s primary purpose is to disclose to the prospective investors all or the necessary information about the company and the transaction.  Years ago business owners were beholden to law firms for the drafting of a private placement memorandum. Today, the business owners have other sources to which they can go to for the drafting of a private placement memorandum.

Reg D is an exemption under securities law that allows for companies to raise capital from private investors; think of it like a private IPO. Companies can raise from $100,000 to $10 million of debt, equity, or preferred stock.

Information about your company, and the transaction at hand is all communicated through the private placement memorandum. This document helps prospective investors understand the nature of your business, as well as the risk involved. There are several web-based firms that provide Private Placement Memorandum Templates to help companies navigate the documentation process.

A reg d offering, or private placement can be run by a company of any size, from a start-up to a mature $100 million revenue business. These offerings can also be done by a C-Corp, S-Corp, or LLC (note that there are some restrictions for the classes of securities that an S-corp can issue).

Companies such as TransCapital Pro help business owners save money and hedge against busted deal costs by offering private placement memorandum templates for a fraction of the cost of an attorney-written document. If you choose to go the route of writing your own private placement memorandum o your own, it is a great idea to have your attorney review and comment on your document before you hit the street.

Private Placement Memorandum Templates for reg d private offerings, private equity funds and real estate funds.

Private Placement Tutorial – Warrant Pricing

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Most people find that writing their private placement is fairly easy. Where they get hung up is trying to figure out how mush equity to offer their prospective investors.

Well, pricing your equity is easier than you think, because it only takes six simple steps.

Watch the video below:

Easy to do by hand.

But if you want to quickly run through multiple of scenarios, take a look at our Equity Pricing Model.

Writing The Risk Section Of Your Private Placement

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When writing your Private Placement, the risk section is one of critical parts. And given the mindset of seeking investors to invest in your transaction, there is some incongruity in that with the risk section you are telling your prospective investors all the reason they should not invest in your deal.

The reason the risk section is so important for your private placement is two-fold. First is to warn investors of the risk of inverting in the deal. The securities laws are in place to provide protection for the investor. Second, is to protect the issuer and you, the sponsor (the person putting the deal together), from potential claims that material risks were not disclosed.

There are a couple of things to keep in mind as you write the risk section of your private placement. First and foremost is to be totally transparent. Be factual and truthful in articulating the risks of your transaction. Look beyond your role as the one seeking investment capital and put yourself in the shoes of the investor; what would you want to know.

Second, present the risks of the transaction as they relate specifically to your deal. Avoid just stating general risks that would apply to any and all investments. For example, instead of just stating something like “…our business is affected by the economy”, your might instead state that “…our sales are dependent on discretionary income, which would be negatively affected by a slowing economy”. See the difference?

Third, just state the risk. Do not soften or try to mitigate the risk you are stating with commentary on why the risk may not happen. By doing so you are voiding the whole purpose of the risk section.

Finally I want to share a simple method on how to think through the risks in your transaction. Take your income statement and starting with revenue, think about all the things that could negatively affect each line item. For example looking at revenue would focus you on a major customer and the effect the loss of that customer would have on the business. Similarly, looking at the costs of good sold would focus you on the risk of having a single manufacturing facility and the effect that losing your facility would have on the business.

Your private placement is a document that is meant to help prospective investors make prudent decisions. Your role as an honest sponsor is to layout the facts and present your transaction, warts and all, as transparently as possible.

Why A Private Placement Memorandum

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Why would you need to draft a Private Placement Memorandum? Where do you go for capital if you run or own a private company? There are several sources of capital for privately held businesses. One is the capital generated internally by judiciously managing the company’s working capital. Another source is your local bank, which is the one the primary financing vehicles for private companies. And of course, there is always the owner’s pocket.

But where do you go if your capital needs outstrip what is available from a bank, especially if your company is in need of permanent capital to fund long term growth objectives, capitalize a start-up, or finance an acquisition? If you do not have the wherewithal to write checks yourself, you will need to raise outside capital.

Junior Capital
Junior capital is a term used to describe capital that sits below bank debt, and includes mezzanine, or subordinated, debt, and equity. Sources of junior capital include institutional investors, such as insurance companies, hedge funds, private equity funds, mezzanine funds and SBICs.

Individual Investors
Another source of junior capital is individual investors. This class of investor includes friends, family, and high net worth individuals. And if you are issuing securities to individual investors, you may be required by law to write and distribute a private placement memorandum to each of your potential investors.

Protect Yourself Against Securities Fraud Claims
Besides the compliance issues, there are two major reasons for preparing a Private Placement Memorandum. First is to give you cover against securities fraud claims. By writing and delivering a PPM, you are establishing a record of what has been communicated to the investors about the offering and the company. When issuing securities, state and federal law is most concerned with securities fraud issues. Anti-fraud requirements call for the issuer to not make any unture statements of a material fact, or to leave out a material fact, the absence of which would make any statements made misleading; i.e. the issuer must disclose all relevant and material facts of the issuance and the company. A well-prepared PPM will establish a record of the information presented to investors, and will provide a level of protection for the company and issuer against claims of securities fraud.

Professional Image
The other reason for writing a Private Placement Memorandum is that it presents a professional face to the issuance. The image presented to investors by presenting a document that is well-prepared is one of professionalism and competency. Approaching sophisticated investors with a poorly drafted offering document will scream “unprofessional”, “novice”, “don’t know what they’re doing” – the exact opposite of what you are trying to project.

There are many reasons to use a PPM. And now with the availability of PPM templates, the upfront costs of using a PPM are manageable.