Preparing an Adequate Private Placement Memorandum

By Travis Townsend Jr.

In my previous entry, I discussed the risks of running afoul of the securities laws while issuing securities to raise capital for a business. The entry also outlined several exemptions to the registration requirements prescribed by the Securities and Exchange Commission (SEC) in the securities offering process. After publication of the entry I received several inquiries about how to go about providing information to prospective investors in a private offering and manner sufficient to meet the SEC standards. So I thought I’d write a follow-up regarding the primary disclosure document used in many private offerings, the private placement memorandum (PPM). Here’s the quick and dirty on PPMs.

The PPM is a memorandum that is intended to tell prospective investors, both sophisticated and unsophisticated alike, all information that is relevant to making an investment decision in the company that is offering securities for purchase. Thus, the PPM is the key vehicle for informing investors about the company, the people running the company, the securities they are purchasing and, most importantly, the risks associated with giving the company their money.

A thoroughly prepared PPM should include the names and expertise of all of the company’s directors, executives, managers, and other key agents including their work experience and age. The PPM should also include the company’s business plan, and explain the company’s key products and service lines. There should be some discussion about the market in which the company will be implementing its business strategy, the nature of the company’s competition, and the advantages and disadvantages experienced by the company in the implementation of its business. Additionally, every sound PPM details any material contracts held by the company, and also discloses any financial relationship between individuals who are helping the company raise capital through the sale of its securities.

If there is any significant litigation threatened or pending against the company, or any prospective bad company happenings, the company should not be shy about including this information in the PPM. While it is never fun to bare bad news (or potential bad news) to anyone, especially those to whom you are trying to sell, it is important to give the full unadulterated snap shot of the company, bad with the good. Otherwise you may find yourself being chased down by the SEC for making material misrepresentations due to the omission of key information. As mentioned in my previous entry, those material misrepresentations may have you reminiscing on your childhood days playing the Monopoly board game. Do not pass go, do not collect $200; go straight to jail. Except this time it will take more than rolling a double to get out of jail.

Remember, the purpose of the PPM is disclosure, disclosure, disclosure. Therefore, in addition to the items outlined above, the PPM should include anything about the company within the knowledge of company management relevant to making an investment decision. Company insiders stand in a unique position in that they know more about the company than anyone not affiliated. Thus there is an expectation that management should know what is important about the company, and there is an obligation upon management to ensure that information is passed along to investor prospects. This is true even if such information does not fit neatly into the typical category of things disclosed in a PPM.

A properly prepared PPM, when complete, should be in a form such that anyone with basic reading comprehension skills can pick it up, read it, and know everything about the company that may impact their investment. If that’s not the case, the PPM is deficient and tweaking needs to be done until the PPM is an accurate written approximation of the company.


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