Is Your Business Ready To Raise Capital Using A Private Placement Memorandum?
Quite a few States have begun using the Small Corporate Offering Registration ("SCOR")
that utilizes Regulation D, a viable source of growth capital, for entrepreneurs and smaller companies through the use of a private placement memorandum.Keeping in mind this basic outline of the regulatory issue, you can prepare an offer document, called the Private Placement Memorandum (PPM). The aim of a PPM is to divulge to potential investors all relevant information about the company and its area of business, with special emphasis on the risk factors involved when investing with the company. When selling stock, preparing a Private Placement Memorandum is desirable. It is also a requirement when applying for exemption from the securities laws.
A PPM is very often useful in proving that the company has provided all the material facts relevant to investors, especially in case of failing investments when investors might begin clamoring for refund of their money.
PPM Guidelines
A PPM should comply with certain important rules. The guidelines that should be followed when creating a PPM are:
Do not make any false statements.
There should not be any misinformation in the PPM that will mislead an investor.
All the material facts should be set out completely.
All risk factors should be divulged at the outset.
The PPM should also prove the veracity of the statements it makes.
Facts should be set out plainly and simply without any exaggerations or rosy projections.
A Private Placement Memorandum is a venture capital tool extensively used by companies seeking to raise capital from investors.
How to Create a PPM
There are a number of avenues open for companies to create a private placement memorandum.
First and foremost, is to retain the services of an attorney who will draw up the PPM. Upon completion, the company may, through this document, solicit and go ahead in obtaining investments. Attorney fees for the complete private placement can range from $5000 to $20,000.
Second, some companies may turn to investment banks to raise capital. But with so much of the negotiations and with existence many different investment banks, entrepreneurs may run the risk of losing complete control of the situation - something to be avoided.
Third, is the advent of specialists in the preparation of PPMs. These specialists have streamlined the process for raising capital. Companies on a high growth path can save valuable time by utilizing their services.
Fourth, is the self-preparation of your own Private Placement Memorandum using a template.
A good PPM, during its lifetime, can be instrumental in raising millions from individuals and institutions.
The contents of a Private Placement Memorandum are exhaustive and detailed, so before making a complete Private Placement Memorandum, first try preparing a Pre-Offering Summary that would set out the prime objectives of the company and also help ascertain the market's potential for the proposed offering.
The PPM should, however, hold information regarding Introductory Materials, Description of the Company, Risk Factors, Capitalization of the Issuer, Management of the Company, Terms of the Offering, Allocation of Proceeds, Dilution, Description of Securities, Financial Statements and a little bit about Exhibits. Federal Securities Laws Applicable To Private Placements Generally speaking, the Securities and Exchange Commission needs you to file a registration statement before commencing to sell security in interstate businesses. Exemptions to the Securities Act of 1933 are Rule 504, Rule 505 and Rule 506.
A PPM does not imply that it is an offer. It is merely a memorandum. When an investor sends a completed subscription along with a check to indicate his or her willingness to invest, it is only an "offer to buy" and does not become "legal acceptance" until the offer is either accepted or rejected.
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