Why You Need a Private Placement Memorandum (PPM)

The antifraud securities laws state that it is against the law for an issuer to sell any securities by means of any oral or written communications that falsely states any material fact or fails to state all the material facts about the issuer and the investment. As part of jumping through the requisite hoops in preparing your company for raising capital, a Private Placement Memorandum (PPM) is duly suggested and most often required.

The PPM is a detailed and fairly complex document that includes both finance and legal disclosures required to protect both investors and the issuer in making an offering of securities. Private Placement Memorandums have emerged with greater fanfare with the release of some of the new crowdfunding exemptions thanks to the 2012 JOBS Act. Relaxed general solicitation rules have placed even more of an onus on issuers to ensure they are not purposefully misleading or omitting material facts about the business or its future prospects within a given market.

When an issuer decides to raise capital both general and anti-fraud securities laws are often ignored or ignorantly bypassed in the process. Hoping for the best while ignoring the potential pitfalls inherent in raising capital through a debt or equity securities offering is ill-advised. The Private Placement Memorandum, while helpful in protecting both issuer and investor, can still not be enough, especially if it is wholly ignored or inadequately prepared. In a worst case scenario, an investment that does not end well, every investor may have the legal right to recover his or her money from the company and also directly from its officers and directors.

Worse still, the officers and directors of the company could face civil and criminal penalties if laws were sidestepped or ignored. A well-prepared PPM can act as insurance against many of the risks and pitfalls inherent in the offering of private securities. Skimping on the PPM, hastily preparing it, being cavalier regarding its distribution, execution and safekeeping are all important pieces of running a secure, legal and ultimately successful process for raising capital. Minimally, there are a number of necessary items to include in your Private Placement Memorandum.

Additional disclosures may be needed, depending on the nature of the issuer, its products or the relationship of the officers of the issuer and the offering. The real driving force behind the PPM is to accurately, fully and completely disclose all material facts about each specific issuer and its business operations. This allows investors to make informed decisions with all the facts in-hand.

While many of the securities laws have been relaxed, including the ability to generally solicit for securities offerings, it generally means more scrutiny (not less) will be applied to specific private offerings. For instance, 506(c) (or Title III offerings) require more disclosures, adherence to issuer background checks and detailed investor suitability requirements not had by previous private offerings. Yes, the ability to advertise and raise capital has been greatly expanded, but so have the laws and regulations revolving around the who, what, when, where and why of such offerings.

What a Well-Constructed PPM Actually Contains

A thorough PPM is organized to walk a prospective investor through the entire picture of the offering. The document typically opens with a summary of the offering terms—security type, total offering amount, minimum investment, and use of proceeds—before moving into a detailed description of the company’s business, its competitive landscape, and its financial history. The risk factors section is often the most extensive portion and is deliberately comprehensive: it is designed to put investors on notice of every material risk, however unlikely, so that the issuer cannot later be accused of omitting a known concern.

Subscription agreements, investor questionnaires confirming accredited status, and representations from officers round out the back matter. Issuers raising capital under Regulation D should pair a well-drafted PPM with thorough investor materials so that every prospective participant receives a consistent, accurate picture of the opportunity. Inconsistencies between what the PPM says and what management presents verbally in roadshows or investor meetings are a common source of post-closing disputes and should be avoided carefully.

The PPM as Part of a Broader Capital-Raise Process

A PPM does not exist in isolation. It is one component of a disciplined capital raise preparation process that also includes investor targeting, a compelling pitch narrative, and a data room organized to support the disclosures in the document. Investors who receive a PPM will expect the underlying financial data and supporting materials to be accessible and well-organized. A virtual data room that mirrors the structure of the PPM makes diligence faster and signals operational maturity to sophisticated capital providers.

Issuers should also plan the timing of PPM distribution carefully. Distributing the document too broadly or too early—before the issuer has confirmed accredited-investor status for each recipient—creates regulatory exposure regardless of how thorough the PPM itself is. Working with qualified securities counsel to develop a distribution protocol is as important as the document itself. For related context on navigating private capital markets, see our article on what to include in your Private Placement Memorandum and our overview of steps for finding private investors.

Frequently Asked Questions

Is a PPM legally required for every private offering?

Not in every jurisdiction or for every exemption, but it is strongly advisable in virtually all cases. Even where a PPM is not strictly mandated, the antifraud provisions of federal securities laws apply regardless. Issuers who raise capital without adequate disclosure documentation are exposed to rescission claims and regulatory action if the investment does not perform as hoped.

Who should prepare the PPM?

A securities attorney with direct experience in private placements should lead PPM preparation, working in close coordination with the issuer’s management and accountants. Template or self-prepared PPMs are generally inadvisable: the nuances of risk factor disclosure and the representation language in subscription agreements require legal judgment that a template cannot provide.

How long does it typically take to prepare a PPM?

A straightforward Regulation D offering PPM can often be completed in four to eight weeks when the issuer’s financial information is well-organized and management is responsive. More complex structures, such as a fund-of-funds or a real-estate syndication with unusual tax features, may require three to six months of drafting and review.

Disclaimer: This is not meant to be legal or investment advice. Please consult with competent financial and legal professionals when making business and investment decisions.