Now that you have made the decision to use a Private Placement Memorandum, what goes in it? The main concern of State and Federal securities laws are the protection of the investor. In this context, there is one cardinal rule – tell the truth, the whole truth and nothing but the truth. This means do not misrepresent material facts, and do not omit material facts where the inclusion of such facts would lead the prospective investor to a different conclusion.
Aside from being truthful and factual, your PPM should provide your prospective investor with all the information necessary to make an intelligent investment decision. It is common sense – put yourself in the investor’s shoes and think about what information you would like to have.
And, while the required disclosure will vary depending on various factors, such as size of the offering and whether there are non-accredited investors, I recommend erring on the side of caution. You may run afoul of securities laws by not having the right disclosure, but there is no harm if you “over-disclose”.
The following includes some of the sections that should be included in your Private Placement Memorandum:
• Notices to Investors: The Notice to Investors section includes federal and state disclosure legends, providing certain notices to prospective investors informing them that the securities described in the PPM are not registered. Additionally, some states have specific disclosure language they will require over and above the federal disclosures.
• Summary of Terms: The Summary of Terms provides a summary of the “deal”; i.e. purpose of the transaction, who the Issuer is, what type of security is being issued, specific terms of the security being issued (dividends or interest; current pay or accrued; warrants; collateral), affirmative and negative covenants, conditions precedent, etc.
• Risk Factors: This section sets forth the risks specific to the Issuer and the risks of investing in the type of securities being issued. Some examples include reliance on customer concentration, cyclicality, inability to achieve projections, changes in regulations, etc.
• Conflicts of Interest: The conflict of interest section identifies and describes potential conflicts of interest of the Issuer, and its principals or affiliates. As an example, one of the principles may provide accounting services for the Issuer, or one of the principles may be a significant customer of the Issuer.
• Description of the Issuer, its Business and the Business Plan: Describes the business of the Issuer including its products, strategy, customers, sales and marketing, operations, industry and competitive analysis, and discussion of management.
• Transaction Description: The transaction section describes the transaction, including a schematic of the deal, sources and uses table and capitalization.
• Financial Information: This section includes presentation of historical financial performance as well as discussion and analysis of the results. The financial information section will also include management forecasts and relevant assumptions behind the forecast.
• Misc Sections: These sections will typically comprise of tax matters, and a description of the capital stock of the Issuer.
• Subscription Section: This section provides the prospective investor with the instructions on how to participate in the offering.
• Appendices: The appendices will vary from deal to deal, and should consist of supplemental information and documents that may be material to an investor’s investment decision. Items that may be part of the appendices include the letter of intent, audited financial statements, shareholder’s agreement, etc.
While all of this seems complicated, you can make it easy on yourself by using a Private Placement Memorandum template. Using a PPM template will ensure that you end up with a professional-looking offering memorandum, while easily saving thousands of dollars.