An offering memorandum, also known as a Private Placement Memorandum (PPM), is a document used by an individual raising capital. It’s purpose centers around disclosing everything the investor needs to know to make an informed investment decision, after which, they’ll wire over capital to invest.
It’s important to note that a business plan is much different than a PPM. The PPM details the investment opportunity, disclaims legal liabilities and explains the risk of losses. It doesn’t try to sell itself; rather, it attempts to outline the realities of investing–most importantly, the realities of a loss.
What this entails:
- The offering structure
- The share structure of the company
- SEC disclosures about the shares being purchased
- Company information
- Information on company operations
- Risks involved with the investment
- Management information
- Use of proceeds
- Information on certain transactions that could affect the investor
- Investor suitability data
The PPM also includes the subscription agreement which is the actual “sales contract” for the shares of stock being placed.
A subscription agreement is the “close.” It’s where you sign on the dotted line. Once the investor signs the document, they’ll send it back with their investment capital.
The PPM is important because it provides the investor with all of the prescribed data they will need to make an investment decision and includes the actual documentation to effect the investment transaction. PPMs are designed as a stand-alone document – meaning that there need not be other information presented to the investor for them to make an accurate investment decision.
Many venture capitalist, entrepreneurs or private equity firms dislike that fact that the PPM often looks ugly. It’s merely a long text-based document that is pessimistic-realistic. There are some things you can do to clean it up:
Attach a powerpoint presentation, a business plan, financial statement, your articles of inroporation (“AIC”), and any other marketing related items. Just make sure that the documentation you attach corresponds to your PPM.
The Subscription Agreement
The subscription agreement was outlined briefly above. But what does it mean, really?
The Subscription Agreement is the “closing” document signed by the investor and returned to the Company. There’s also an attached document called the Investor Questionnaire; which establishes the investor sophistication and accredited status.
The Subscription Agreement provides full disclosure to the company regarding the investor’s financial status. In the Subscription Agreement the investor provides assurances to the issuing company that can afford an absolute loss on their investment. These qualified investors are typically referred to as “accredited investors.” You can learn more about them here.
What you need to develop your PPM:
- Business Plan
- Financial Statement
- Management Team Bios
- Stock / Ownership Records
- Intellectual Property (if any)
