So, what is a PPM (hint: Private Placement Memorandum)?
At PPM LAWYERS, we are dedicated to providing startups with an essential and powerful tool for raising capital. This tool is called a PPM, which stands for Private Placement Memorandum. So, what is a PPM? The PPM is a self-contained disclosure document consisting of everything that an investor will need to fund your business. The PPM also operates as legal protection that allows you to raise capital from investors while closing the loop on legal exposure and regulatory issues.
It’s All About Raising Money.
So, what does all that mean? Well, let’s break it down a bit. To truly understand what we’re talking about, you must first bear in mind the process that a startup must go through to raise capital. Now, I’m not going to go too far into that, which is a topic for another blog (look for it coming soon!), but let’s just start with the premise that in order to raise money, a startup needs to get investors. Investors can come from anywhere, including crowdfunding.
This is a Securities Transaction.
Now, these investors are usually looking for a percentage of the company in exchange for their hard earned cash. Whenever an investor gets an interest in a company, typically in the form of stock or shares, this is called a securities transaction. And, all securities transactions are regulated by the Securities and Exchange Commission (SEC) in accordance with the securities laws. And, it’s these securities laws that you need to be concerned with whenever you are raising capital for a business. This where the PPM comes in. Before you take one dollar from an investor, be sure he or she has a properly prepared PPM in hand. Without it, you could get in trouble.
What’s in a PPM?
One major element of a properly prepared PPM includes all the important and materials facts about your business. This information is the kind of information that any investor would want and need in order to make an informed decision about making an investment. In this way, it’s kind of like a business plan. But, let’s be clear, a PPM is not a business plan.
A PPM is not a Business Plan.
In this regard, one important difference between PPM and business plan often comes in the wording and tone of the document. A business plan is basically a giant brochure for you business. However, the wording in a PPM must be more subdued and reserved. For example, in a business plan, you might say, “We are the best in the business.” This should rarely appear in a PPM because an investor, a court, a state securities commission, or the SEC may very well ask you to prove it! So, a PPM can be thought of as a sort of hybrid between a business plan and a legal contract all in one.
It's also a Legal Document.
And, this brings us to the other major element of a PPM: the legal element. Much of a PPM contains certain legal statements and language that speaks to the SEC and other legal entities about what rules and regulations are being relied upon in connection with the proposed securities transaction. A properly prepared PPM will even be organized in a very particular manner for these reasons as well. In addition, the PPM will contain details for the investor about the deal so she knows exactly what kind of stock or shares she is getting and how much of the company that translates into. And, most importantly, the PPM will contain statements about the risks that investor faces if she makes such an investment. In fact, there’s an entire section of a PPM devoted to that called…you guessed it, “Risk Factors.” Read about risk factors in our blog here.
So, in a nutshell, a PPM is a document that provides important and material details about your business, including:
- Plan of Operations
- Marketing and Sales Plan
- Products and Services Offered
- Management Profiles
- Financial Statements and Projections
But, a properly prepared PPM must also contain:
- Industry and Company-Specific Risk Factor
- Various State and Federal Legal Disclaimers
- A Description of The Company’s Capital Stock
- An Investor Subscription Agreement
- An Investor Questionnaire or Accredited Investor Representation Letter
So, that’s it, now you know.
And, don’t forget to read our three part blog on why it is critical that your PPM have custom risk factors, rather than just template-based or boilerplate risk factors.
About the Author: Erik P. Weingold
Erik P. Weingold is an entrepreneur and corporate securities lawyer with over 20 years experience under his belt. He has been practicing law since 1995, and since 1998 has been drafting PPMs that have been used to raise millions upon millions of dollars for startup companies and small businesses throughout the U.S. Erik is the founder and General Counsel to PPM LAWYERS, as well as Of Counsel to Convergent Litigation Associates, LLC (www.cla-law.com), a national law firm focused on the representation of clients through complex securities and commercial litigation.