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)
- 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.