Nov 08, 2018 The PPM – What It Is and Why You Need One for Your Capital Raise
The key disclosure document in the private placement financing process is the offering circular or memorandum, often referred to as the “private placement memorandum” or “PPM”.
As a general rule, prospective investors use the PPM as a means for understanding the various strengths and weaknesses of the issuer, including the products and services offered by the issuer; the needs of the marketplace; the risks which may be posed by actual and potential competitors; the strategic plans of the issuer with respect to innovation, marketing and financing; and the overall business environment in which the issuer will be operating during the term of the investment.
In the case of a start-up venture, what passes for a PPM is often little more than a business plan at that point; however, the information collected to prepare the document can be used as a means for determining whether or not it is feasible to undertake the proposed business.
US & Non-US Form and Structure of PPM’s
In the US the form and structure of the PPM, while obviously subject to variation based on the type of offering and business model of the issuer, typically follows a standardized path beginning with a cover page that identifies:
- The issuer
- The security and the amount of the offering
- The s series of securities law legends
- A summary of the terms of the offering and an overview of the business of the issue
- A comprehensive risk factors section
- A description of the issuer’s business, information on the management team, financial information (including projections with material assumptions and a management’s discussion and analysis of previous results)
- A detailed discussion of the securities being offered along with the overall capitalization of the issuer
- Lastly, information on how to subscribe for the offering (which generally refers readers to a subscription package that includes an investor suitability and general information questionnaire to help the issuer understand if the subscriber is qualified to invest, signature pages to the investment documents and tax forms) and obtain additional information from the issuer.
PPM’s prepared by non-US issuers generally follow a similar format; however, there will be differences based on local regulations pertaining to the requirements for exemptions from registration under securities laws. In addition, issuers in countries that have adopted disclosure obligations for public companies in areas such as environmental risks will typically include such information in their PPM’s.
So Why Are PPM’s Necessary?
A fundamental question that is always asked is why is a PPM necessary when the offering is to be limited to wealthy and sophisticated investors with a long track record of evaluating businesses and related risks and the leverage to put issuers through extensive due diligence inquiries.
In almost all cases, as with offerings under Regulation D in the US, an exemption from registration will be available provided that investors can be verified as meeting the conditions for “accredited” status.
However, satisfaction of quantitative and qualitative requirements, such as those included in Regulation D, is not sufficient to assure protection against liabilities under anti-fraud regulations applicable to securities offerings which, in general, impose obligations on issuers to adequately disclose all material facts relating to the issuer’s business and the terms of the offering.
Other Important PPM Details
While such disclosures can and often made in oral presentations and interviews the PPM serves as a formal written record of an attempt by the issuer to comply and also provides the issuer with an opportunity to demonstrate a grasp of the marketplace and reassure investors about how potential risks will be addressed.
Another way to avoid the registration requirements of US securities laws is to rely on the Regulation A+ exemption, which actually allows issuers to expand the scope of offerees beyond accredited investors; however, Regulation A+ requires substantial disclosure comparable to a registration statement for a public offering and issues will certainly have to prepare an extensive PPM in order to rely on Regulation A+.
Related Article: Risk Factors in Your Offering Documents
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