Private Placement Memorandum Definition
A legal document containing the specifics of a security and its issuing business, provided to private investors is called a ‘Private Placement Memorandum (PPM)’. It’s a.k.a an ‘Offer Memorandum’, or, ‘Offer Document’.
A Little More on What is a Private Placement Memorandum
When a company is looking for sale of securities in the private sphere – instead of in the publicly traded market, it creates a PPM to share with individuals and private investment firms interested in buying its stocks. Since this is a private offer, it isn’t monitored under Securities and Exchange Commission (SEC) guidelines. Private placements help small businesses raise capital without going public i.e., trading stocks in the public sphere via an Initial Public Offering (IPO).
What’s the importance of a Private Placement Memorandum?
PPMs include all the information pertinent to making a proper assessment of the investment opportunity. Investors need compelling reasons to buy securities in a firm and a carefully crafted PPM goes a long way in inspiring their confidence and trust in the potential of the firm.
Contents of a PPM
A standard PPM contains detailed information on the following topics:
- Specifics and summary of the securities offering – terms and conditions, pricing, dates, lot sizes, distribution plan, etc.
- Disclosures, disclaimers, and notices.
- Overview of company, history, founders, bios, management, shareholding pattern.
- Operational costs, overheads, potential, forecasts.
- Securities structure of the company, majority stakeholders, assets, liabilities, capital expenditure.
- Compliance and litigation procedures, legal obligations.
PPMs are used when companies are looking for private investments to raise capital but also want to safeguard company interests with carefully managed legalese, or have investors that aren’t accredited.
PPMs are not necessary when the offering is too small and the costs of creating one are relatively prohibitive. A single angel investor or family friends investing in your firm also do not warrant the creation of a PPM. When all potential investors are accredited, a PPM might not be required.
References for Private Placement Memorandum
Academic Research on Private Placement Memorandum
Private placement memorandum, HOUSING, R. S. (2016). This is a sample PPM of a Housing Firm for Students.
Private Placement Memorandum, Fund, A. S. (2002). Sample PPM of a Construction Business.
Analyzing a Private Placement Memorandum, Peer, N. J. (1988). NJ Law., 33. This article analyses a standard PPM issued in the United States.
Confidential Private Placement Memorandum, STOCK, S. O. C. (2016). Sample PPM by Look At You Inc.
5531 Nicholson Lane Redevelopment North Bethesda, MD-Montgomery County, Private Placement Memorandum, Goldstein, D. J. (2012).
Private Placement Guidelines-A Lawyer’s Letter to a First-Time Issuer, Morgenstern, M. H. (1992). Bus. Law., 48, 257. This is a letter aimed at first time PPM issuing firms with focus on best practices and industry norms.
Private Placement and Proposed Rule 146, Borton, M. E., & Rifkind, R. G. (1973). Hastings LJ, 25, 287. This journal studies the implication of PPMs in light of Rule 146 of securities placements.
Some Commercial Overtones of Private Placement, Israels, C. L. (1959). Va. L. Rev., 45, 851. This article discusses the exemption of PPMs from SEC monitoring and its commercial implications.
Procedures and Responsibilities of Purchasers’ Special Counsel in Private Placements of Securities with Institutions, Robinson, H. B. (1975). Bus. Law., 31, 1489. This article highlights the responsibilities of advisory counsels on investment in PPMs placed with managed funds.
Access to US Capital Markets for Foreign Issuers: Rule 144A Private Placements, Trevino, L. F. M. (1993). Hous. J. Int’l L., 16, 159. This journal discusses the issue of access for foreign investors in possession of PPM invites, for investing in U.S. capital markets.
The Duties and Liabilities of Attorneys in Rendering Legal Opinions, Howe, R. R. (1989). Colum. Bus. L. Rev., 283. This paper discusses the duties and liabilities incumbent upon attorneys advising on legal transactions.
Evaluating the Offering Documents for Principal Protected Securities, Marmorstein, H., Robinson, T., Schulte, D., & Trent, W. (2006). JOURNAL OF FINANCIAL PLANNING-DENVER-, 19(12), 60. The authors discuss Principal Protected Securities (PPS) and how to critically evaluate an Offering Memorandum document.
E-Communication to Shareholders Outside the Offering Process, Romanek, B., & Lee, D. (2005). U. Tol. L. Rev., 37, 387. This paper discusses the access afforded by internet to shareholders and investors and the SEC proposed rules on Offering Documents, in light of e-communications.
The post-offering price performance of closed-end funds, Weiss, K. (1989). Financial Management, 57-67. This paper sheds light on the resurgence of closed-end funds, and on the majority of these trades that have negative performance trajectories within a 24 month duration from the sale.
The syndication of venture capital investments, Lerner, J. (1994). Financial management, 16-27. This paper studies data from 271 privately held firms in the biotechnology vertical and examines the rise of syndicated venture capitalism.
Regulation of initial public offering of shares in China, Wang, J. (2009). This paper discusses regulation of Initial Public Offering (IPO) trading in China.
Federal Legislation Affecting the Public Offering of Securities, Cohen, M. F. (1959). Geo. Wash. L. Rev., 28, 119. This paper sheds light on Federal Regulation of publicly traded securities by the SEC.
Signaling in equity crowdfunding, Ahlers, G. K., Cumming, D., Günther, C., & Schweizer, D. (2015). Entrepreneurship Theory and Practice, 39(4), 955-980. This paper examines empirical data to study signals and forecasts used by entrepreneurs to solicit investments.
Hybrid organizational arrangements and their implications for firm growth and survival: A study of new franchisors, Shane, S. A. (1996). Academy of management journal, 39(1), 216-234. This study discusses the impact of Hybrid organizational arrangements on the growth of a firm and the challenges to overcome the new franchisor assimilation.
Firm value and the choice of offering method in initial public offerings, Bower, N. L. (1989). The Journal of Finance, 44(3), 647-662. This journal takes a look at the different approaches to creating an Offering Document and the resultant efforts that either get lost in the milieu or help a firm stand-out.
Outside director liability: A policy analysis, Black, B. S., Cheffins, B. R., & Klausner, M. (2006). Journal of Institutional and Theoretical Economics JITE, 162(1), 5-20. This journal takes a look at the limited liability incurred by outside directors and investors with significant stakes in a privately held firm, and proposes a more engaged approach in light of legal and other ramifications.
The puzzling persistence of the fixed price offering: implicit price discrimination in IPOs, Griffith, S. (2005). This chapter puzzles out fixed price offerings in the US and the influence of underwriters in sticking to fixed prices instead of maximising returns with differential price offerings. It posits that the fixed price offering benefits the underwriter while a differential price offering would benefit the securities issuing firm.
Information asymmetry, the Internet, and securities offerings, Black, B. S. (1998). J. Small & Emerging Bus. L., 2, 91. This paper casts doubts on the veracity of information available on the internet, the hurdles of overcoming this barrier for both investors and small time firms trying to raise capital.