A Personal Placement Memorandum, or “PPM,” is a disclosure doc usually utilized in reference to a personal providing of securities. It accommodates a compilation of details about the corporate issuing the securities, the phrases of the securities, and the dangers of investing in these securities. This text explains the authorized background underlying why a PPM is often used and overviews what is usually included in a PPM.
Why Use a PPM?
Put merely, a PPM is used to tell potential buyers about an providing of securities. The quantity of disclosures included in a disclosure doc like a PPM varies amongst non-public firms which are promoting securities with some firms together with a really detailed PPM to others selecting to not embody any formal disclosure doc to their buyers. How does a enterprise proprietor searching for to lift capital or an organization officer concerned in a securities providing know if the corporate, or “issuer,” ought to be distributing a PPM to potential buyers? To reply this query, let’s first take into account the authorized background underlying why PPMs have turn into widespread follow for issuers.
The Securities Act of 1933 (the “Securities Act”) governs securities choices and requires that each one choices of securities be registered with the Securities and Change Fee (“SEC”) or meet the necessities of a registration exemption. Probably the most generally used registration exemptions is Part 4(a)(2) of the Securities Act, which exempts these choices which don’t contain a “public providing.” Choices that depend on Part 4(a)(2) are generally known as “non-public placements” since they’re supposed to not contain a “public providing” (therefore the identify Personal Placement Memorandum). Registering an providing with the SEC is an costly and prolonged course of and due to this fact, non-public issuers usually go to nice lengths to suit below the Part 4(a)(2) exemption.
There’s a variety of steering from the SEC on what’s and isn’t thought of a personal providing of securities. Nonetheless, the spirit of this steering revolves round correct disclosures to potential buyers, with the diploma of these disclosures being on a spectrum: much less refined buyers needing extra disclosures and extra refined buyers needing much less disclosures. Moreover, securities legal guidelines require these disclosures to be correct and never deceptive. Since a PPM formally memorializes what you’re telling potential buyers about your organization and its providing, it’s a useful gizmo to (i) help an issuer in offering applicable data to potential buyers and (ii) adjust to securities legal guidelines governing these disclosures.
What is usually included in a PPM?
Now that you’ve an understanding of why you could need to use a PPM, let’s flip to what’s sometimes included in a PPM. For the overwhelming majority of personal choices, the securities legal guidelines solely present steering on what could also be disclosed in a PPM versus particular necessities. Nearly all of the SEC’s assets are, understandably, spent on reporting firms (suppose Fb and Apple), which do have disclosure necessities. Resulting from this focus, a lot of the SEC’s steering is said to those reporting firms. That being mentioned, non-public providing practitioners have usually taken this steering and utilized it to non-public choices.
Probably the most generally included sections of a PPM are (i) an outline of the issuer, (ii) an outline of the phrases of the providing, (iii) sure danger components and disclosures, (iv) a subscription settlement and investor questionnaire, and (iv) a abstract of any materials agreements. Though these are the widespread parts of a PPM, each state of affairs differs.
Description of Enterprise. To persuade somebody to put money into your organization, it’s important to inform a great story. To do that, you will need to precisely depict your small business, which is the explanation an outline of the enterprise is usually one of many first sections within the PPM. Nonetheless, from a authorized perspective, you have to be cautious in crafting this part in order that you don’t violate the prohibition towards the usage of fraud, materially false statements, omission of fabric data, or different acts to deceive one other individual with respect to the providing or promoting of securities. Committing securities fraud may end in an adversarial judgment, penalties, fines, and even a proper to rescind the acquisition of securities. To additional defend the issuer from claims of fraudulent gross sales, an issuer can also give potential buyers entry to key company paperwork and supply materials to again up the data within the PPM.
The Providing. This part usually describes the phrases of the deal and usually, a broad abstract of the primary paperwork concerned within the deal (e.g., company paperwork and stockholders agreements). Questions usually addressed on this part embody: how a lot fairness is being provided, worth of the shares, whether or not there a minimal buy quantity, what rights buyers may have, and who’s eligible to speculate.
Sure Disclosures/Threat Elements. Disclosures and danger components are particularly necessary in addressing the anti-fraud provisions addressed above. This part of the PPM describes intimately the dangers related to your small business. Though your inclination could also be to restrict your danger disclosures as a result of you don’t want to “scare” off buyers, it ought to be the part you spend the vast majority of your time. As talked about above, securities legal guidelines (particularly with respect to reporting firms) information PPM disclosures. For example the significance of drafting these danger components fastidiously, take into account the case the place the SEC initiated an motion towards Mylan N.V. (“Mylan”), an SEC reporting firm. The SEC alleged Mylan violated Part 17(a) of the Securities Act as a result of Mylan disclosed in its SEC filings that there was danger that the Facilities for Medicare and Medicaid Companies (“CMS”) “could” take the place that its submissions to Medicaid had been incorrect when, the truth is, CMS had already instructed Mylan that it was misclassifying one among its medicine leading to incorrect submissions. In different phrases, as a substitute of revealing that CMS had already disagreed with Mylan’s classification of one among its medicine, Mylan misleadingly used the phrase “could” and offered it solely as a possible danger. This instance highlights how correct firms ought to be in disclosing its enterprise dangers to its buyers. (Cite: See sec.gov/information/press-release/2019-194; https://www.sec.gov/litigation/complaints/2019/comp-pr2019-194.pdf)
Subscription Settlement and Investor Questionnaire. To be able to buy securities, an investor usually wants to finish some type of a subscription settlement. This settlement governs the precise buy of securities (e.g., how a lot is being purchased, when should funds be transferred and the way, and so forth.). Investor questionnaires are additionally generally included. Not solely does a questionnaire present the issuer with the investor’s contact data, additionally it is helps the issuer adjust to the suitable non-public placement exemptions from the SEC’s registration necessities. For instance, if an issuer is relying upon the Rule 506(b) protected harbor, usually the issuer will restrict the providing to accredited buyers, and an investor questionnaire provides the issuer an affordable perception that the investor is an accredited investor.
Summaries of Materials Agreements. Lastly, PPMs additionally usually embody summaries of the fabric deal paperwork. Typically, these summaries are extra in depth than the abstract of the providing part addressed above. Relying on whether or not the issuer is a company, restricted legal responsibility firm, or different entity, sure governing paperwork can also be connected. For instance, a company may connect its certificates of incorporation which incorporates data on the category of shares provided, whereas a restricted legal responsibility firm may connect its restricted legal responsibility firm settlement which units forth the rights and obligations of its members.
In abstract, a PPM is offered to buyers to tell buyers in regards to the providing, mitigate sure dangers to the issuer related to the providing, and to truly promote the securities. Whereas many varieties of choices don’t require a PPM to be delivered, it’s useful to think about the assets spent getting ready securities disclosures like buying insurance coverage. The extra put into getting ready the disclosures, the extra these disclosures will defend towards danger of potential securities legal guidelines violations.
This text is for common data solely. The knowledge offered shouldn’t be construed to be formal authorized recommendation nor the formation of a lawyer/consumer relationship.