A document which comprises relevant disclosures so that investors can measure and get to know the risk involved with an investment and make a fully informed decision about the investment is known as private placement memorandum (PPM). A formal private placement memorandum is made to fulfill all the disclosure requirement of Rule 502(b) (2) of Regulation D.
The private placement memorandum should go beyond the common level to particularly address the terms and risks of any company’s offerings. The major sections of a PPM which should be integrated in almost any private placement are:
Cover Sheet and Table of Contents: this should be in the beginning along with the company name, contact information and date. All the sections inside the memorandum should be defined along with the appendices or exhibits attached.
Key Disclosures: Reproving language should be used to detail the intent of the memorandum and the limitations of its uses, before getting into the terms of investment.
Summary: This part contains the general overview of the complete document, the business, and the securities that are offered.
Risk Factors: this part of the memorandum should focus on both specific as well as general risk attached to the company, along with the security offered by the company.
Use of Proceeds: Every potential Investor wants to know, how the funds invested by him/her are used to leverage the company’s future plans and success. The funds collected by the investors should not be utilized for general operating expenses (except during a limited startup period). Instead, it should be used to develop a capacity or purchase assets which will back the successful growth of the company.
Capitalization and Dilution: This section under capitalization or “cap table” gives details about who currently owns what in the company. Details of dilution and what will happen to those shares as additional shares are issued is described in detail to the investor. Also, both ownership and voting rights are mentioned in the section.
Financial Data and Analysis: under this section the financial summary of the past, planned and projected future of the company is described. The section also presents the management analysis of the company’s financial scenario.
Business and Management: These sections, similar to a business plan, give a greater overview of the business and the management team.
Term Sheet: this sheet also called offering summary explains the specific offer that is being made along with the number of shares, the offering price, commissions that the company must pay on the capital raised and the type of shares. There may be a minimum and maximum number of shares to sell for the private placement to move forward. A table format is apt for this information.
Subscription Agreement: The private placement memorandum also includes the subscription agreement. The subscription agreement is the original “sales contract” for the shares of stocks being placed. Investors are required to sign this document and send this along with their investment capital.
The Subscription Agreement is the “buy” document carried out by the investor and returned to the Company. There is a Questionnaire attached to this document; setting up the investor sophistication and ascribed status. The subscription agreement provides complete detail and disclosure of the investor to the company, just the way Private Placement Memorandum provides every detail about the company to the investor.
The investors give the assurance in the Subscription agreement to the issuing company that the complete loss of their investment capital is not capable of impacting their standard of living in any case and will not jeopardize the financial status of the investor as a whole. These qualified investors are typically referred to as “accredited investors.”
As a supporting document, sometimes companies even attach their business plan, financial statements, articles of incorporation and different other documents as supporting documentation in order to build up the confidence among investors.
The issue of private placement memorandum is significant because it provides investors with all the prearranged data that they will need to arrive on an investment decision. It also includes the original documentation to effect the investment transaction. Private placement memorandum are designed as a complete document, which means that investors do not need to access any further information in order to make an investment decision.
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