Private Placement Due Diligence: What to Expect

Investors considering your private placement offering will inevitably have their own due diligence process. Rather than seeing this as a source of contention and a lack of trust on their part, you should welcome this process as an opportunity to build understanding with the investors and to strengthen your private placement memorandum (PPM) and business plan going forward. These are a few of the major areas investors are likely to check.

References

One simple way of checking on the solidity of your business and offering is to speak with given references. Investors may want to speak to customers or vendors to hear first-hand about your way of doing business. If you haven’t started operations yet, they may need to speak to previous employers, banks, partners, and other contacts of your firm’s leaders.

Financial Statements

If actual financial statements exist, investors will look to see that they have been audited by a CPA to show their authenticity. If they are projected, investors will want to understand how the projections were made, what real information and what assumptions they were based on, and whether the returns shown by the statements meet their personal financial requirements. The more of this information that is included in the documents at the outset, the easier the process is for investors.

Risk Mitigation

Readers will examine the risks you have outlined and your plans for mitigating or limiting those risks. They may have questions related to your plans or to what they see as necessary steps to take to further limit risks (such as additional insurance). They may approach you with these questions, but if they see your omissions as a lack of management expertise they may simply end their consideration here.

Continue To Develop Your Documents

Your PPM and business plan are not set in stone, and you should carefully consider the type of questions and concerns you hear from potential investors time and again. As the capital raising period may stretch over six months to an entire year, you will have opportunities to release renewed drafts of the documents. When you do, they must be released to everyone who has received the documents to date so that they have the full understanding that those old documents have been superseded. When these documents are both complete and accurate, it greatly reduces the need for investors to undergo their own due diligence process and makes your shares more attractive to them.

 

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Private Placement Due Diligence: What to Expect
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