A Private Placement Memorandum (PPM) is a document that addresses risk disclosures for an investment. It meets SEC regulations – reg D, Rule 502(b) (2) – for certain investments that involve multiple investors. Other names for a PPM include “Confidential Information Memorandum” and “Disclosure Document.” Here are reasons you need to consult with a business attorney when pitching this type of investment.
While there is no standard form for PPM, it must report specific disclosures for specific entities that issue securities. A strong PPM requires comprehensive financial, accounting and legal research, which can cost up to $20,000. It must be presented professionally and disclose any caveats that could hinder an investor from making a good return on their investment.
In order to attract experienced professional investors, a PPM is necessary when combined with existing capital. Hard commitments are otherwise very difficult to obtain from investors. The PPM ideally gives investors comfort enough that they are willing to consider the risk and invest anyway. The complex document may also contain upside information with profit estimates to help persuade investors to commit capital.
How PPMs Protect Entrepreneurs
The entrepreneurs who are trying to attract investors with PPMs protect their interests by letting investors know beforehand the potential roadblocks on the path to success. Then if the venture fails, the entrepreneurs can refer back to the PPM. Many companies use a business attorney on retainer to prepare the PPM, as the expenses are entirely based on legal assistance.
PPMs can be used either to attract purchasers of company shares or membership units for LLCs and Limited Partnerships. Both methods exist to raise capital for a company and both require help from a business attorney to make sure they comply with federal and state laws. A typical PPM consists of 40 to 70 pages and provides an overview of the proposed terms.