A private placement memorandum (PPM), which is also called an offering memorandum, is a lengthy document that legal counsel, accountants, investment bankers, and other pertinent professionals put together for a company to present to prospective investors. A PPM can take quite some time to craft, as it must explain the terms of the investment that the company is offering, including an explanation of the goals and potential risks. Here is a brief rundown of some of the key information that should be included in a well-designed PPM:
Investors are not going to fork over any money unless they have a strong grasp of the company that is asking for that capital. This will usually require an explanation of the company’s founding and history, along with biographies of the leadership and management teams. This part of the PPM may seem like a taxing summary or pitch, but investors need to understand the big picture to determine whether making an investment is a worthwhile venture.
Prior Performance and Financial Projections
In addition to general explanations about the company’s products, client base, marketing strategy, and business goals, there has to be separate and quite detailed sections that adequately describe the company’s prior performance. Of course, those historical figures must be used to make financial projections for the future, and the purpose of the investment must tie into these numbers as well.
Terms of the Security Offering
The whole point of the PPM is to make an offer investors will not want to refuse, so specific terms must be provided in easy to read and understand language. Some examples of the terms that should be discussed include price, investment minimums or maximums, any rights or restrictions associated with the investment, fees or penalties, and the required qualifications of potential investors.
Intended Use of the Capital Raised
Investors obviously care about the return they will get on their investment, and they will need to know how the capital they provide will be used to assess whether it is likely that they will get the financial yield that they anticipate.
Potential Investment Risks
All investments carry some risk, and it would be impossible to elucidate every possible risk within a PPM. Nonetheless, there are usually certain risks with which a company will already be familiar, and there must be transparency from the beginning to avoid problems later. There should be an explanation of the general risks associated with an investment, as well as those specific to the particular company and/or proposed investment.
PPMs often contain various appendices with graphs, charts, or other documents that help highlight the company and its performance. Any information that will demonstrate the value of the company and provide visual confirmation of the soundness of the investment should be included to help investors make an informed decision.
The goal of a PPM is to entice investors to furnish capital for your business, so there should be a description relating to how they can go about doing so in the event they are in fact interested. Most PPMs include a subscription agreement and questionnaire that the investors may fill out and return to indicate their desire to move forward.