Recently, I wrote about the two tools available to small businesses to stir interest and investment – the business plan and the private placement memorandum. Let’s focus on the private placement memorandum.
A Private Placement Memorandum (or PPM for short) is a legal document that organized businesses provide to prospective private investors who may be interested in buying stock or some other kind of security in your business in some kind of private transaction.
The PPM will put all of your cards on the table:
1. Your company’s basics: Who you are, what you are looking to accomplish and the nature of your business. This can also include the description of your company and management structure.
2. Your terms: First and foremost, you will need to identify the rights, restrictions and class of your securities. This section includes the capitalization of your company before and after offering the securities or stock. It shall layout the availability of the stock or security, the price per unit, and other business terms like anti-dilution provisions, voting rights and other provisions that investors will be looking for to protect their investments.
3. Use of Proceeds: Investors do not want to part with their money without a real plan. So your PPM should lay out how the company will use the net proceeds raised and how it will hopefully make everyone more money.
4. The Risk of the investment: This might be the most important part of your memorandum. Investors want to know what risk factors will impact the investment. Are there contingencies to your project, like securing strategic partnerships? Are there necessary personnel that must be in place before starting? What competition will you have?
5. All the technical stuff lawyers write: There is a lot of legal language intended to protect both your business and your investors like the instructions for investing and sample documents created to execute the sales.
PPMs have some distinct advantages. For smaller businesses, doing a PPM cuts out brokers or underwriters, and are less expensive and time-consuming than an IPO.
PPMs also have disadvantages. They limit your field of investment to “suitable” investors who can absorb the risk of what amounts to a highly speculative proposition. These investors may be difficult to locate or have limited funds to invest.
In either event, you should consult an attorney to see if crafting a private placement memorandum is the right move for your business.