Private Placements

What is Private Placement Memorandum (PPM)?

A private placement memorandum is an offering document, sometimes called a prospectus, offering circular, or PPM.  The majority of  startups and emerging growth companies commonly raise money through private placements.  It is simply a sale of stock (or debt) in the company to a private, instead of public, investors that become shareholders in the company. 

Although there are other exemptions including Regulation A+, the most common exemptions used under federal securities laws (Securities Act Section 3(b)) for when raising money are:


Regulation D –  Private offer and sale of securities require compliance with offering requirements and limitations on resale of securities requirements.  The common categories include the following 3 exemption from registration:


Rule 504– raise up to $1 million within 12 month period; no specific information requirements for PPM


Rule 505– raise up to $5 million in a 12 month period; unlimited number of accredited investors and only up to 35 unaccredited investors; 502(b) information disclosures required


Rule 506– unlimited amount of money raised within a 12 month period to accredited investors; unlimited number of accredited investors and up to 35 unaccredited, but “sophisticated” investors; Rule 502(b) information disclosures required.


If Rule 505 or 506 placements are only sold to accredited investors, there is no information specifically required to be provided.  If there is even one non-accredited investor, the company must provide (unless they are already a reporting company with the SEC) certain financial and non-financial statement information.

Section 4(5)– up to $5 million; unlimited number of only accredited investors


The term accredited investor was amended recently under the Dodd-Frank Act.  There are a number of categories to qualify based upon things such as recent income and net worth, but the main change was to limit the definition for net worth to not include the investor’s primary residence as an asset and not include the mortgage on their primary residence as a liability (except for debts taken out within 60 days, for example a cash out refinance).


Rule 502(b) does also required the company to provide reasonable access to information requested by potential purchasers for Rule 505 and 506 offerings prior to their purchase. Even though a sale may be exempt from registration and have limited or no information requirements to provide to potential investors, the anti-fraud rules still apply and a company can get into a serious bind if they misrepresent, lie, omit, or misstate items about the company, its business, its management, future business, and other items.

Those exemptions require that no public advertising or general solicitation is used in the offer and sale of those securities.  So, the company is not able to start issuing press releases, posting website ads, or sending mass mailings to potential investors in most cases.  This does make it more difficult to get your message out there, but it must be complied with for the offering and sale to qualify for the exemption and not violate securities laws.  Often this results in needing to be introduced to prospective investors through connections.


When a company decides to raise money through a private placement (which can also be in the form of a loan, which is still classified as a security), they have certain rules they must follow for the placement to qualify for the exemption and comply with securities laws.  Typically, the company was already in the process of, and I highly recommend, putting together things like a 30 second elevator pitch of their company/product/service, a 5 minute presentation, a written executive summary, and a full business plan with financial projections, pro forma data, exhibits, and other relevant materials. The full business plan is essentially the formal document given to potential investors to tell them about the business, its product or services, management, financial projections, and plans for the future.


A list of categories for the PPM:


Executive Summary– A brief, usually one page or so, overview of what your company does, how it is different or solves an existing problem, who your team is, and what your plans are to grow the business (i.e. how are you going to make money for the investor)


Management Team– Name, title, and a bio on each top member of the management team (officers and directors) to show what experience or assets they are bringing to the table


Product or Service Description– What do you do and how is it novel or better than something else out there and how do you make money from it?


Intellectual Property Protection– How have you or will you protect your company’s ideas, brand name, developments?


Manufacturing and Operations – How will you produce the product or provide the service, as well as manage and operate the administrative side of things?


Human Resources –  How many people do you have now and how many do you plan to bring on?  Any other challenges, such as using independent contractors versus employees?  Do you still need to identify and hire certain positions in the company?


The Market –  What market are you targeting and where do you fit into it?  What is the landscape and current trends in the market or industry?


Competition – You are probably not the first person to think of this, so how are you better or different than your current or future competitors?


Sales and Marketing –  How do you plan to get your message out about your produce or service?


Company Background and Structure – things like current capitalization, how the company was formed, is it a C corporation formed in a certain state.


Financial Information –  current, historical, and future pro forma financial statements such as balance sheet, statement of cash flows, and profit and loss statement.


What needs to be in the PPM?

This depends upon the exemption being used for the current offering, but it is best to try to include some general discussion in categories such as:  summary information and risk factors, offering terms (e.g. offering for sale of 1,000 shares of common stock at $1 per share), use of proceeds, dilution, plan of distribution, description of securities to be offered, and certain information about the company and its business.  This is really a matter for your lawyer to review to be sure you have adequate disclosures.  Also, they should review the PPM to be sure that anything that you say in there may not be construed by an investor as misleading or fail to include something material to the business. 

You can see examples of how much risk disclosures are involved by finding a copy of a prospectus for any large publicly traded company.  They go on for pages and pages and cover all kinds of random disclosures of possible risks down the road, but they are being cautious to warn investors.  The SEC wants to know that investors are being informed and not misled.  Most PPMs will include a statement about risks of “forward-looking statements” for things like projected revenues, which is normally a safe harbor from enforcement for public companies, but it is a best practice to include it anyway.