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 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.


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. If you are interested in discussing your potential private offering with a licensed rep, please reach out to us directly.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.

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