CAPITAL FUND LAW BLOG
John S. Lore, Esq. | Capital Fund Law Group, PC
A Private Placement Memorandum (“PPM”), also known as a private offering document and confidential offering memorandum, is a securities disclosure document used in a private offering of securities by a company or investment fund. From an investor’s point of view, the purpose of a PPM is to obtain needed information about the security and the company, both good and bad, to allow investors to make an informed decision about whether to purchase the security. From the company’s perspective, the purpose of a PPM is to provide the necessary disclosures about the company and its securities to protect the company against claims of misstatements or omissions.
Components of a Private Placement Memorandum
A PPM contains a number of sections, some of which have greater importance than others. The following are among the key sections of a PPM:
Summary of Offering Terms
The summary of the terms of the offering is just as its name suggests, a condensed description of the offered terms, including the description of the securities (such as the class of securities, securities attributes, etc.), price, minimum subscription amount, investor qualification standards, disclosure of applicable management fees, withdrawals, placement agent commissions (if applicable) and discussion of the terms from the company’s governing documents (limited partnership agreements, operating agreements, etc.). The private placement attorney prepares the summary of the terms of the offering last, as it has the most moving parts.
Perhaps the most important component of the PPM is the risk factors. Risk factors are considerations that investors should consider that could lead to a loss of the investment. Risk factors must be drafted with specificity, tailored for each industry type, offering structure, and company.
A major mistake that many lawyers make (and even more unwary do-it-yourselfers) is they fail to include detailed, customized risk factors, but rather rely on general risk factors of uniform applicability found in a template. The SEC has indicated the need for specific, relevant risk factors. When the Lore Law Office prepares offering documents, the risk factor section occupies a substantial portion of the time spent on the document preparation. Depending on the industry, we routinely prepare PPMs with 20-35 pages of detailed risk factors specific to the offering.
Estimated Use of Proceeds
A vital component of the private placement memorandum is the disclosure of how the proceeds of the offering are expected to be used. The use of proceeds section contains language describing how the offering proceeds will be deployed, and where possible, we include a table showing item-by-item how much is anticipated to be allocated to each category. It can be difficult if not impossible in many circumstances to determine exactly how much of the proceeds will be allocated to a given purpose. The “estimated” use of proceeds is a best-case forecast of how the proceeds will be used.
One point of caution, however, is that the one item that should not be estimated, but firmly stated is the amount of compensation that any related party will take from the transaction, whether in the form of salary, consultant payment, purchase of a sale of an asset to the company, such as intellectual property, or any other direct or indirect compensation paid to a founder or related party from the proceeds. Note that compensation information will also be provided in the Form D filing, which will be publicly available.
Description of the Securities
One of the sections of the private placement memorandum requiring the greatest need for a skilled private placement attorney is the description of the securities. In this section, the company discloses the attributes of the debt or equity offering. These attributes are prepared in the governing documents of the company (operating agreement, limited partnership agreement, shareholders agreement, etc.), or in a promissory note (with a debt offering). The description of the securities section describes key terms of the governing document (or promissory note). Thus, it is vital to begin with the operating agreement before preparing the PPM.
Business/ Management Section
The business section describes the investment opportunity and the business of the issuing company. The management section contains biographical and background information about the managers, founders, directors key officers, etc. We rely heavily on the company’s management to provide us with the initial narrative for these sections. The most important factor in preparing the business and management sections is to present information that is free from misleading statements and does not overstate accomplishments or opportunities.
Other Offering Documents
The PPM itself does not constitute the “offering.” The PPM is nothing more than a disclosure document describing the offering, including its structure, risks, management company. The offering documents include a several supporting documents that should be prepared in conjunction with the PPM. Other documents include the subscription agreement, the investor suitability questionnaire, and most importantly, the company’s organizational documents (operating agreement, limited partnership agreement, shareholders agreement, etc.), a promissory note (with a debt offering) and others.
In making the PPM disclosures, it is essential that an issuer work closely with an experienced private placement securities attorney. Our firm will help plan and structure each aspect of the offering from the beginning, as there are many decisions regarding how to structure the offering and select the proper exemptions.
Capital Fund Law Group has authored numerous investment fund publications, including instructive eBooks, white papers, blog posts and sample offering document excerpts with illustrative footnotes. These complementary downloads are dedicated to explaining the legal fundamentals of securities offerings and fund formation.
ABOUT CAPITAL FUND LAW GROUP
Capital Fund Law Group is a boutique investment law firm focused on advising private placement issuers and fund managers on all aspects of conducting an offering. We provide predictable flat-fee services for most of our engagements. Our attorneys have extensive experience preparing debt and equity private placement offerings for companies in all major industry sectors throughout the United States. We also advise hedge funds, real estate funds and private equity funds in various structures and strategies.
PREPARING AN OFFERING