Successfully raising capital from suitable investors requires careful planning, a selection of crucial documents, and a strategy aimed at convincing others of the value of your offering. Today, one of the most effective means of fundraising for any startup business or entrepreneur comes in the form of equity crowdfunding. In fact, by the end of 2014 crowdfunding had injected more than $69 billion into the global economy. However, along with the simplicity and effectiveness of crowdfunding, comes serious and sometimes complex legal measures to consider. And, the proper deployment of these critical legal measures and protections falls squarely on you as the business owner.
Fortunately, one of the best ways to legally protect yourself and your business is also one of the most effective means for garnering serious investor interest. This plan of action involves the disclosure of as much information as possible about your business. Providing complete disclosure ensures that if things begin to fall apart, and investors threaten to sue for securities fraud or other issues, you can use your disclosure as a powerful defense. The right way to present these business and legal disclosures in a safe and professional manner is through a Private Placement Memorandum - or PPM for short. However, crowdfunding entrepreneurs are consistently overlooking the value of PPMs - an oversight that could prove to be disastrous. So why should you use a PPM for your crowdfunding project?
What Is A PPM?
Simply put, a PPM is a hybrid legal and business document that can offer critical protections to a company in search of funding from investors. One of the most important elements of a properly drafted PPM is the risk factors section. The risk factors section of a PPM essentially is the part of the PPM that tells investors why and how they could possibly lose part or all of their investment. And, if they are done right, a PPM with well drafted and comprehensive risk factors will work to defend a company from investor complaints and even SEC actions if the business unhappily goes south and investors were to lose their money. .
The information contained in a PPM varies from business to business, and offering to offering, but most contain the following elements:
- A summary of the securities (equity, debt, etc.) being offered - including terms of sale
- A description of the business structure and ownership - including history and the context of the offering
- A comprehensive discussion of the business - including the value proposition of the company
- A list of risk factors associated with the investment
Crowdfunding And The PPM
The origins of the PPM come from the disclosures found in a prospectus, which is the legal document that gets filed with the SEC when a company goes public in an IPO. In fact, up until 2013 when the JOBS Act relaxed the rules, generally speaking, crowdfunding from investors was not possible unless a prospectus or similar disclosure document was filed with and approved by the SEC.
Since September 2013, any business, private startup or otherwise, can raise capital by using public solicitation without having to register a prospectus with the SEC. This means crowdfunding from investors, also known as equity crowdfunding, is now legally available to any startup company. It is a relatively simple matter to sign up with a crowdfunding portal like EquityNet.com, one of the largest in North America, and instantly gain access to thousands of investors looking to invest millions of dollars. In fact, there are tens of thousands of startup companies actively crowdfunding right now on EquityNet and other such sites. This is great news, but there is one problem with many of the startup profiles out there. You may have guessed that many of these startups do not have a PPM, and because of that, they are not only opening themselves up to a frightening amount of legal exposure, but also are failing to put their best foot forward with savvy and wealthy investors. As it turns out, most suitable investors expect to see a PPM and ignore offers that lack one. Why Invest In A PPM?
A PPM includes all of the facts about your business that an investor would need in order to make an informed decision about their investment. Without a private placement memorandum, if you make any kind of material misstatement about your business at any time during the investment process—regardless of whether that misstatement was intentional or otherwise—investors could have grounds to launch a securities claim against you and your business. At the same time, the Securities and Exchange Commission (SEC) may choose to impose criminal and civil penalties that any startup business would likely not survive. By investing in a well-prepared PPM, you can avoid securities claims before funding is secured.
In addition, a PPM that is professional in appearance can be an effective sales document when delivered to prospective investors. The reason for this is that anyone choosing to invest in a PPM presents themselves as truly serious about the future of their business. With a proper and complete PPM, you present a professional product and business that stands out as more vetted, better organized, and more substantial that other startups in your industry.
A private placement memorandum is a great tool for companies interested in using equity-based crowdfunding solutions to get their business off the ground and pointed squarely towards success. If you have learned any useful tips about utilizing a PPM, please share them in the comments!
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.