Do You Need a Private Placement Memorandum (PPM) to Raise Money?

If you are seeking to raise investment money for your company, remember that one of the best things you can do to protect yourself is disclosing as much information about your company as possible. That way, if things fall apart and your investors threaten to sue you for securities fraud, or the government brings a regulatory action against your company, you can use your disclosures in your defense.

One of the best ways to do this is in a Private Placement Memorandum, or PPM for short. So what’s a PPM?

Private Placement Memorandum
A PPM is a disclosure document that includes relevant disclosures about your company that allow investors to weigh the risks involved with giving your company an investment. More specifically, a PPM is designed to satisfy Regulation D (or Reg D), which falls under the authority of the Securities & Exchange Commission.
While many PPMs share similarities, they are all different due to uniqueness of each deal and the uniqueness of each investment. They should contain information on the business, financial information, legal structure and ownership information, and information related to the offering itself. It should also contain information stating that Reg D controls the investment and therefore state securities regulations don’t apply (although you must usually notify the state of the investment).
Although PPMs are very thorough, the good news is that you don’t have to go through as many disclosures as would be required if you were going public. That’s a whole other issue that is beyond the scope of this post.

PPM’s are Worth the Investment
It is common for companies to pay $20,000 or more for a PPM because of the level of involvement from lawyers, accountants, and other advisors. However, when you are raising money, you should consider the PPM an insurance-type expense. The PPM can be used to thwart off frivolous claims from both investors and government regulators. It isn’t a foolproof defense by any means, but it makes it harder for a potential litigant to win a claim, and it improves your defense.

What if Your Investors Are Accredited?
You may have heard references to “Accredited Investors” and thought you may not need to provide them with a PPM. While that is technically true, and you may not need to provide them with a PPM-type disclosure, it is usually a good idea to do so. Keep in mind that the PPM is kind of like an insurance policy, and even if your investors are “accredited,” they may still seek claims against you if things go downhill. As a reference, an “Accredited Investors” are investors that (a) earned more than $200,000/year ($300,000 if filing jointly) in the last two years and reasonably expect to earn that amount this year, or (b) have a net worth exceeding $1 million.

What You Should Do
So how should you proceed? We have a couple tips for that:
First, if you use a pitch deck, be sure to include a legal disclosure page that states that the pitch deck doesn’t constitute a securities offering. While this isn’t full proof, it can help to reduce claims that you are making a public offering or general solicitation.

Second, talk to an attorney. Even if you are not ready to have the PPM drafted, get an attorney involved with your company. They can help to set you up with the proper legal structure to be ready to draft a PPM and obtain investment.
And when it comes time to actually raise money, use an attorney experienced in this area to help you draft your PPM. It’s worth the investment!

If you have questions about your company’s situation or if you need a PPM drafted for your company, feel free to Contact John Kennyhertz at Kennyhertz Perry.

About Kennyhertz Perry’s Transactional Law Practice Group

Kennyhertz Perry provides a full range of general corporate legal counsel. Helping companies of all sizes with formation, contracts and negotiations, mergers, acquisitions, and joint ventures. Since its inception, Kennyhertz Perry has placed a high value on entrepreneurship and a business-like approach to the practice of law. Drawing on our own experience as business owners, our extensive knowledge of the law, and our broad network of business and financial contacts throughout the Midwest and nationally, we are able to provide our clients with a unique spectrum of counsel.

We help clients address ongoing business demands, including day-to-day operational issues, growth strategies and competitive positioning. As businesses mature, we provide guidance on appropriate exit strategies and transition planning. Our attorneys frequently act as general counsel and advisers to companies, handling both routine matters and significant Mergers and Acquisitions.

For more information, visit kennyhertzperry.com.

*This article is very general in nature and does not constitute legal advice. Readers with legal questions should consult with an attorney prior to making any legal decisions. The choice of a lawyer is an important decision and should not be based on advertisements.