With the explosion of interest in energy and clean energy business, it is important for those business owners to understand how best to raise funds for their growth. A private placement memorandum (PPM) is often a first step towards capital raising.
Business Plan Is Not Enough
The business plan, while often giving in-depth information on who runs the company, its market research completed, and its strategy and plans to move forward, is not a legal document for soliciting private investment. The private placement memorandum may contain elements of the business plan within, or have the business plan as a large exhibit attached to it. Be careful to never make a direct request for funding or give the specific terms of the investment in the business plan itself. These terms must be reserved for the PPM.
Primary Purpose of the PPM
The primary purpose of the PPM is to detail all of the risks and make all of the necessary legal disclaimers associated with investing in your firm. This will include both general risks which are true of all similar investments and specific risks associated with your firm’s situation.
Rather than scaring away investors, these disclosures should have the effect of proving your transparency and openness, making them more comfortable to trust in your company and to become an investor (and, in effect, a co-owner of the firm). Furthermore, the business plan should include clear descriptions of what attempts will be made to mitigate risks wherever possible through creating multiple revenue streams, auditing market research or financial projections, or having some redundancy for key personnel. By seeing those reasonable plans along with the disclaimers of the PPM, a potential investor will not view the risks as so insurmountable.
Protection Against Fraud Claims
The effect of all of these disclosures for your business is to head off and better defend against potential claims of fraud. Claims of fraud will generally only arise if the investment turns sour in general or for a specific investor. In that case, your PPM is a record of the communication you made with the investor. If the firm’s business has taken a downturn because of one of the risks you detailed at the outset an investor won’t be prevented from suing, but the PPM does offer evidence to support your side to a judge.
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Our consultants can create your private placement memorandum for you. We will make sure your PPM is sound and ready for investors so you can continue to focus on running your business. Over the past decade, we have created PPMs for hundreds of entrepreneurs like you.
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