What is a PPM? A Private Placement Memorandum is a legal document that serves as an introduction to potential investors when selling a stock, fund or security in a business. These types of offerings are classified as “private” transactions because they’re offered privately to individual investors only.
PPMs list out the details of the investment offering, including what the opportunity is, the potential risks of investing, terms and conditions, legal liabilities, and much more—so, interested people can weigh the pros and cons of the offering before investing. While Private Placements are regulated by the Securities and Exchange Commission (SEC), they’re not required to run through the same process as public offerings, but they must follow some specific rules to be exempt.
It should be noted that the actual PPM documentation is not required by the SEC for private placement offerings, and it won’t be reviewed. But, the SEC warns that unregistered offerings can be used to scam potential investors, and also says that legitimate private offerings will provide a private placement memorandum. So, ensure due diligence is performed before investing.
What’s included in a PPM?
While PPMs can vary in the information they provide about the private placement offering they’re introducing, most of these memorandums will include the following information:
- Description of the business—its product/services, markets served, distribution methods, competitors, growth strategy, etc.
- An introduction of the investment
- Risk factors & Important notices
- Disclaimers & conditions—statements on specific states
- Restrictions on investors regarding the sale or transfer
- Dividend policy
- Use of Proceeds
- Plan of Distribution
- Forecasts of future operation results
- Introduction of C-Suite and their background
- Fiduciary responsibilities
Remember, it’s imperative to ensure you’re investing into a legitimate fund. Do your due diligence and lookout for potential red flags such as unverifiable sources and sloppy documentation.
Additionally, a PPM includes two additional documents:
Subscription Agreement – This is the sales contract that an investor fills out for the shares of the stock they’re ready to buy. They’ll sign and send this with the funds they’re contributing.
Investor Questionnaire – This helps the fund sponsor verify if the potential investor is accredited or not. Additionally, in the agreement, the investor provides assurances to the sponsor that they understand the risks of investing.
PPM vs Business Plan
While both serve important functions in their respective areas of industry, many people confuse a PPM and business plan as one in the same. However, they each serve different roles.
For example, a business plan is primarily a marketing document for company promotion purposes. It may include various bits of data on market demand, profiles, opportunities for growth, competition, market threats, possible strategic partners, revenue stream(s), niche customer segments and more.
In comparison, a PPM is a legal document that presents straightforward, descriptive details to help potential investors decide if they will invest in a private offering or not. These disclosures need to address both the potential internal and external risks associated with the fund. Because PPMs are built to look professional, they may come off looking like marketing materials. A well executed PPM should harmonize important disclosure information, while maintaining a well-designed look-and-feel to close the deal with an interested investor.
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