A private placement memorandum (PPM) is basically a prospectus for shares in a private company, much like the sort received by an investor in a stock, mutual fund, or other publicly traded security. It details all of the terms of the investment, requirements of the investor, and proper disclaimers and disclosures related to the business and the equity.
A private placement is an equity or debt offering which does not have to go through the detailed paperwork and expense of registering with the SEC because it meets legal exemptions.
Laws Permitting Private Placements
While there are numerous laws permitting types of private placements, the most commonly used are based on Regulation D (often called Reg D) in the Securities Act of 1933. Reg D has separate exemptions for companies raising capital of under $1 million, under $5 million, and unlimited amounts, each with slightly different restrictions. The rules generally refer to a prohibition on general solicitation or advertising to promote the offering, sale only to accredited investors, and restrictions on the resale of the securities.
Other types of private placements include Rule 144a Convertible Transactions and Reg S Transactions. A Rule 144a offering is sold only to Qualified Institutional Buyers (QIBs), which are institutions managing over $1 billion in assets. These offerings use convertible debt or convertible equity and are often sold to a financial agent (broker-dealer) and then resold to QIBs. Reg S allows private offerings to foreign investors.
Contents of the PPM
The PPM contains a number of sections aimed at informing the investor. A term sheet or summary details the specific terms of the investment. Legal disclaimers explain the specifics of how the private placement works. A section on risks details the specific and generic risks associated with the business. Charts show how the business is capitalized and the dilution of stock that the capital raising will cause. A subscription agreement is the contract that must be signed to move forward with the investment.
Some Overlap With the Business Plan
There is some overlap between a business plan and a PPM. Both show actual and projected financial statements, and some detail on the management and operations of the business. However, the business plan goes into much greater depth on the market research, strategy, and tactics of the business. The business plan cannot hold an offer for investment within its pages. This is reserved for the PPM only. The PPM is focused on risks and disclosures. Often, the business plan in its entirety is included as an exhibit of the PPM. Both documents are necessary to effectively raise capital through a private equity offering.
- Related article: Private placement memorandum for film projects
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