Do I Need a Private Placement Memorandum (PPM)?

Do You Need a Private Placement Memorandum (PPM)? Find Out from the Securities Lawyers at Oberheiden P.C.

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A private placement memorandum (PPM) is a type of securities disclosure document and confidential offering memorandum used to establish compliance with the federal requirements for unregistered securities offerings. By issuing PPMs, companies can confidently solicit qualified investors, and they can raise funds without going through the arduous, time-consuming, and comparatively expensive process of registering with the U.S. Securities and Exchange Commission (SEC).

When is a PPM Necessary (and Why)?

If you are asking, “Do I Need a PPM?” you are not alone. While PPMs are commonplace in the world of investing, they are not broadly understood. In many cases, company owners and executives do not realize that the laws and regulations governing unregistered securities offerings exist; and, as a result, they unknowingly execute unregistered offerings without taking the steps necessary to establish federal compliance.

This can be extremely risky, as it can lead to both private investment fraud litigation and SEC enforcement action.

To be clear, using a PPM in conjunction with an unregistered securities offering is not required under federal law (or under Regulation D, which is the most common basis for claiming an exemption from registration). There is nothing in the statutes or regulations that says companies must issue PPMs when conducting unregistered offerings.

However, the statutes and regulations—and Regulation D in particular—do establish various other requirements for conducting unregistered offerings, and issuing a PPM is a common way of meeting these requirements. Today, the PPM is the standard in the industry, and the SEC generally recognizes a well-drafted and custom-tailored PPM as an effective tool for establishing federal compliance in appropriate cases.

As a result, even though a PPM isn’t strictly required under federal law, a PPM is still generally considered necessary when relying on a federal securities registration exemption—such as the exemption for offering unregistered securities to “accredited investors.” A well-drafted and custom-tailored PPM will help to eliminate any questions about compliance; and this, in turn, will help to mitigate the issuer’s risk of facing civil investment fraud litigation or SEC enforcement action.

Using a PPM to Establish Regulation D Compliance

As we mentioned above, one of the primary federal regulations governing unregistered securities offerings is Regulation D. The SEC promulgated Regulation D to achieve two primary goals: (i) to facilitate unregistered securities offerings when registration is not necessary to protect participating investors; and, (ii) to ensure that investors participating in unregistered offerings have access to the information they need to make informed decisions.

Companies must consider these goals when conducting unregistered offerings under Regulation D—and this is where the PPM comes into play.

While a PPM is not specifically required under federal law or regulation, companies conducting unregistered offerings must not only comply with the pertinent federal requirements, but they must document their compliance efforts as well. As we mentioned above, this is critical for both avoiding (or defending against)  investor fraud claims in civil litigation and withstanding scrutiny from the SEC when necessary. When drafted and used effectively, the business and management sections of a PPM will serve purposes including (but not limited to):

• Advising prospective investors of the unregistered nature of the securities offering
• Advising prospective investors that there is not a public market for the securities
• Advising prospective investors that investing involves a high degree of risk
• Informing prospective investors of specific risks factors associated with the unregistered offering
• Informing prospective investors of any restrictions on the transfer of the issuer’s securities
• Identifying suitable investors (i.e., those who qualify as “accredited investors” under Section 506 of Regulation D)
• Disclosing the issuer’s distribution and business plan and intended uses of investor funds
• Disclosing broker-dealer compensation and any conflicts of interests involving the issuer’s executives or other managers
• Addressing other disclosure requirements under applicable federal securities laws and regulations
• Ensuring that issuers provide other notices, secure necessary waivers, avoid misleading statements, and take other necessary steps to effectively mitigate their risk factors related to unregistered offerings

These are just some of the benefits of using and offering memorandum. Again, while a PPM is not technically required under federal law, issuing well-drafted and custom-tailored PPMs is a highly effective way for unregistered issuers to maintain and document federal compliance. As a result, from a risk management perspective, PPMs will be considered a necessary legal document in most cases.

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Dr. Nick Oberheiden

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Brian J. Kuester

Former U.S. Attorney

Hon. Kevin McCarthy

55th Speaker, U.S. House of Representatives (ret.)

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Mike Pompeo

Of Counsel

Former U.S. Secretary of State

John W. Sellers

Former Senior DOJ Trial Attorney

Linda Julin McNamara

Federal Appeals Attorney

Nicholas B. Johnson

Former Prosecutor

Roger Bach

Former Special Agent (DOJ)

Chris J. Quick

Former Special Agent (FBI & IRS-CI)

Michael S. Koslow

Former Supervisory Special Agent (DOD-OIG)

Ray Yuen

Former Supervisory Special Agent (FBI)

What is an Unregistered Securities Offering?

All of this raises another important question: What is an unregistered securities offering?

Under U.S. federal securities laws, the default rule is that securities offerings are subject to registration with the SEC. Section 4(a)(2) of the Securities Act of 1933 establishes certain exemptions from this general registration requirement, and Regulation D goes further by establishing specific “safe harbors” for conducting compliant unregistered offerings. Today, most unregistered securities issuers use the safe harbors under Rule 504 and Rule 506 of Regulation D to avoid the need for registration.

When determining whether reliance on Regulation D is necessary, the threshold question is: What constitutes a “security”?

As the SEC explains, “[f]ederal securities laws broadly define the term ‘security’ [to] captur[e] many different forms of investment criteria issued to those who provide funding to startups” and other companies. All of the following can constitute securities when issued to company outsiders for purposes of raising capital:

• Stock (including common stock, preferred stock, and restricted stock )
• Stock options
• Membership interests in limited liability companies (LLCs)
• Debt (including convertible notes)
• Simple agreements for future equity (SAFEs)

Here too, these are just examples. If your company is considering raising funds from outside parties, you will want to talk to a securities lawyer about the need for a PPM. It is important to address federal securities compliance proactively, as once a company makes a noncompliant unregistered offering, there may be little that the company can do to correct its mistake and mitigate its liability exposure.

If you are wondering whether you need a PPM, we strongly encourage you to get in touch. We can help you determine whether your company needs to comply with the federal securities registration exemption requirements based on its capital-raising plans. If so, a securities lawyer at our firm can help you choose which exemption to use, and we can prepare a custom-tailored PPM that clearly establishes compliance with all pertinent statutory and regulatory requirements.

FAQs: Understanding When You Need a Private Placement Memorandum (PPM)

Questions About PPMs? Contact Us to Speak with an Experienced Securities Lawyer at Oberheiden P.C.

Do you have more questions about PPMs? If so, we invite you to get in touch. To speak with an experienced securities lawyer at Oberheiden P.C. in confidence, call 888-680-1745 or request a complimentary consultation online today.