What is a Private Placement Memorandum?

Learn Everything You Need to Know About Private Placement Memorandums from the Securities Lawyers at Oberheiden P.C.

Attorney Nick Oberheiden
Private Placement Memorandum
Team Lead

All securities offerings in the United States are subject to the oversight of the U.S. Securities and Exchange Commission (SEC). Under the SEC’s regulations, all securities offerings fall into one of two categories: (i) those that must be registered in legal document; and, (ii) those that are exempt from registration.

But, even when a securities offering is exempt from registration, rules and restrictions still apply. Specifically, these offerings are subject to Section 4(a)(2) of the Securities Act of 1933 and the SEC’s Regulation D. Securities offerings under Section 4(a)(2) and Regulation D are commonly referred to as private placements; and, for many companies, conducting a private placement involves issuing a private placement memorandum.

So, what is a private placement memorandum?

The Private Placement Memorandum: A Critical Tool for Unregistered Securities Offerings

A private placement memorandum, or PPM, is a securities disclosure document and confidential offering memorandum that companies can use to comply with the requirements for conducting an unregistered securities offering under Section 4(a)(2), Regulation D, and other applicable securities laws and regulations. While companies can issue PPMs under Section 4(a)(2) without also complying with Regulation D, the Regulation D “safe harbors” provide important protections to issuers. As a result, most companies conduct their private placements in compliance with Regulation D—and more specifically either Rule 504 or Rule 506 of the regulation.

Where does the PPM come in? As the SEC explains, “[e]ven if a company takes advantage of an exemption from registration, a company should take care to provide sufficient information to prospective investors to avoid violating the antifraud provisions of the securities laws.” Issuing a private placement memorandum allows companies to provide “sufficient information” to investors—which in turn allows them to both: (i) comply with all applicable securities laws and regulations; and, (ii) demonstrate compliance to the SEC if necessary.

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10 Key Elements of a Private Placement Memorandum

Although there is no “standard” or “form” private placement memorandum, all PPMs need to contain certain types of provisions and disclosures. Thus, while it is critical that companies craft private placement memorandums that are custom-tailored to their unregistered offerings, most PPMs will be built upon a framework consisting of certain key elements. Some examples of these key elements include:

1. Investor Notices and Disclaimers

This is one of the most important elements of a private placement memorandum. In this section, issuers will clearly state that the private offering is not registered, that there is no public market for its securities, and that investing carries a high degree of risk. Issuers may need to include various other notices and disclaimers that potential investors need to know as well.

2. Suitable Investors

Another critical element of any private placement memorandum is a section that describes who is a suitable investor. In many (but not all) cases, issuers will use the definition of an “accredited investor” under Section 506 of Regulation D.

3. Executive Summary

The executive summary section of a private placement memorandum will outline the issuer’s business plan and provide an introduction to how investors’ funds will be used (this topic is covered in greater detail in the “Use of Proceeds” section, as discussed below). It is imperative that issuers craft this section carefully, and avoid making any overstatements—or other false or misleading statements—that could potentially give rise to investor claims.

4. Forward-Looking Information

Private placement memorandums should include a separate section which makes clear that the representations contained in the executive summary and other pertinent sections are forward-looking information—or forecasts about future events. Essentially, this is an acknowledgement that, “actual results may vary,” and it is intended to ensure that investors receive adequate warnings.

5. Distribution Plan

This section of a private placement memorandum explains how the issuer will distribute its securities to those who invest in its unregistered offering. If the issuer is conducting its offering with the assistance of a broker-dealer, the broker-dealer’s identity, role, and compensation structure should all be disclosed. Broker-dealers that participate in unregistered offerings involving PPMs must meet additional compliance obligations as well.

6. Use of Proceeds

This section of a private placement memorandum will outline the issuer’s plan for using the proceeds obtained from investors and other sources. The intended “use of proceeds” will often be disclosed in a table format on the legal document provided —with the table accompanied by appropriate notices and disclaimers.

7. Management

A private placement memorandum should also include information about the issuer’s management team. While issuers can approach this section of the PPM in different ways, some examples of more-common disclosures include information about individual managers’ backgrounds, relevant experience, compensation, bankruptcy filings, material litigation, and any conflicts of interest.

8. Offering Description

All private placement memorandums need to include a description of the investment opportunity and securities being offered. This is a technical description that explains the legal nature of the securities as well as other key information about the company’s shareholder agreement, partnership agreement, or operating agreement.

9. Risk Factors

Along with the investor notices and disclaimers section, the section of a private placement memorandum that discusses the risk factors associated with the issuer’s unregistered offering is also among the most essential. Issuers must work closely with their counsel to make informed decisions about what risks to disclose—while also ensuring that their PPMs include appropriate (but limited) advisories that the risks disclosed may not be exclusive.

This is one area in particular where the SEC has provided guidance—and where the SEC tends to focus when examining issuers’ private placement memorandums during enforcement matters. The SEC has made clear that broad warnings about “potential risks” are not enough, and that issuers must instead specifically disclose risks that are pertinent to their unregistered offerings.

10. Subscription Agreement

All private placement memorandums should also include a legal contract section that explains how investors can participate in (or “subscribe to”) the issuer’s unregistered offering. This includes explaining the documents that investors will need to sign and how they can transmit funds to the issuer.

Again, these are just examples. When it comes to compliance with Section 4(a)(2), Regulation D, and other applicable securities laws and regulations, the importance of a custom-tailored private placement memorandum cannot be overstated. Company owners and executives must work closely with an experienced securities lawyer to ensure that their PPMs contain all necessary disclosures in light of the unique aspects of their unregistered offerings.

FAQs: Understanding Private Placement Memorandums (PPMs)

What is the Purpose of a Private Placement Memorandum?

The purpose of a private placement memorandum is to demonstrate compliance with the federal requirements for conducting an unregistered securities offering in the United States. A well-drafted private placement memorandum will also serve to help protect the issuer against investment fraud claims in both civil litigation and SEC enforcement proceedings.

Is a Private Placement Memorandum Legally Required?

No, a private placement memorandum is not legally required. While Section 4(a)(2) of the Securities Act and Regulation D establish various requirements for conducting unregistered offerings, they do not specifically require use of a private placement memorandum. However, using private placement memorandums has become standard practice when conducting unregistered offerings, as providing adequate disclosures to investors serves a number of legal and regulatory purposes.

How Important is Having a Private Placement Memorandum?

Even though having a private placement memorandum is not legally required, it is still an important and fundamental component of almost any unregistered securities offering. Not only can issuers use private placement memorandums to establish compliance with all pertinent securities laws and regulations, but they can also rely on their PPMs (assuming proper drafting and issuance) when defending against allegations of investor fraud.

What is the Relationship Between a Private Placement Memorandum and an Unregistered Securities Offering?

Issuing private placement memorandums is a means for companies to demonstrate compliance with the federal requirements for conducting unregistered securities offerings. While there are some exceptions, in most cases unregistered offerings and PPMs go hand-in-hand. To ensure that a private placement memorandum serves its intended purpose, it is critical that the PPM is custom-tailored to the specific unregistered offering that is being undertaken.

Do I Need a Law Firm to Prepare a Private Placement Memorandum?

Due to the complexity of private placement memorandums, the breadth of the legal and regulatory issues they implicate, and the critical importance of issuing a custom-tailored PPM that addresses all pertinent considerations and risks, engaging a law firm to prepare a PPM is strongly recommended. Standardized PPM forms and automatically generated documents are not likely to provide adequate protection for companies conducting unregistered securities offerings.

Discuss Your Private Placement Memorandum Needs with a Securities Lawyer at Oberheiden P.C.

If you have more questions about private placement memorandums or the importance of preparing a custom-tailored PPM when conducting an unregistered securities offering in the United States, we invite you to get in touch. One of our securities lawyers will be more than happy to explain everything you need to know. To schedule a complimentary consultation at Oberheiden P.C., please call 888-680-1745 or tell us how we can reach you online today.