When it comes to submitting your private company offering to potential investors, having a Private Placement Memorandum (PPM) that paints a positive image for your company and its potential for growth is absolutely essential. An expert PPM will showcase the company’s financial status and provide all the relevant data investors may need to assess your company as a candidate for deploying capital.
Though companies and prospective investors have to put in time and effort for completing a private placement successfully, they both stand to make substantial gains through this investment vehicle.
Private placements that meet certain requirements are not liable to register according to the provisions of the federal Securities Act 1933 and public disclosure. Further, the securities to be sold through private placements should not be offered by way of advertisements, public offering or public solicitation. Additionally, it is important to ensure compliance with state as well as securities (anti-fraud provisions) laws when undertaking private placements. Companies are required to reveal all relevant information so as to enable prospective investors make an fully-informed decision.
There are different forms of selling securities through private placements. However, securities are commonly sold as equity or debt.
Today’s business landscape helps to determine the form, size and function of various forms of corporate finance. Private placements present opportunities for companies to raise capital and take their business forward without going through the hassles of public offerings. For investors, private placements provide an early “in” to companies that have massive growth potential.
When drafting a PPM, the proper legal and business consultants will be necessary to handle the offering, ensuring your private placement is in full compliance with the Securities and Exchange Commission (SEC) and any state laws. Extreme care and in-depth understanding is required in drafting a PPM as liabilities and warrants can have an effect on the success of your overall offering.
Most potential investors conduct their own independent research, making it difficult to misrepresent any company in the promotion and sale of securities. If reasons exist that would intimate an offered companies securities do not fall within the claims made in the PPM, investors could seek compensation through legal means.
For companies that want to raise capital, private placements offer an superb opportunity. However, private placements are unsuitable for public offering or venture capital. PPMs help companies to quickly raise capital more quickly and much less expensively than a traditional IPO. In fact, many of today’s high growth companies are opting for private placement offerings rather than the public counterpart. In addition, companies are not required to take the burden of complying with disclosure obligations that are essential when undertaking a public offering.
There is a minimum issue size stipulation as far as public offerings are concerned, but the transactions associated with private placements are generally smaller compared to initial public offerings (IPOs). A company that has a proven track record and showing willingness to move to the next level of growth is considered as a typical candidate for private placements. This is to say that the company must be perceived as a highly convincing investment opportunity.
It is, therefore, important that private companies that are thinking in terms of private placements to assess and determine as to whether they have certain crucial elements. The key positions of the company should be filled up with high caliber managers and the company should foresee strong growth with a clear strategy for exit in the future.
Private placements come with a high level of risk. Securities sold by way of private placements are not traded and are less liquid. Moreover, investors are provided with only a restricted amount of stock and they have to hold the securities for a specified period. Generally, companies that seek investments through private placements are those that are in the developmental stage and not tested in the market.
Investors opting for the private placement route must have high levels of risk tolerance, low levels of liquidity concern and be prepared for long-term commitments. Investors should also be able to afford the loss of the entire investment. Hence, most private investors are either institutional or are individuals with high net worth. As with any investment, investors are required to satisfy certain eligibility criteria. The stipulation in force currently is that entities should have at least $5 million in assets or all individual owners must meet accredited investor requirements. Individuals who have a net worth of $1 million or a gross income of at least $200,000 ($300,000 including spouse) in each of the previous two years and expecting to earn the same amount in the current year are also eligible to invest through private placements.
Investors must also be aware that more capital may be required for the company to sustain its growth without any kind of guarantee that it will be able to achieve the same. On the other hand, investors may be handsomely rewarded for the risk they take through high returns.