Private Placement Memorandum

Private Placement Memorandum

If you are trying to raise capital for your business by offering debt or equity to angel investors, private investors, hedge funds, venture capital or a commercial funding company you probably need a Private Placement Memorandum (PPM). This investment tool takes advantage of the SEC Regulation D exemption rules 504, 505 and 506.

A PPM allows a company to raise unlimited capital with a structure that is legal and recognized by the Securities and Exchange Commission (SEC) and other Securities Government Organizations.

What is a Private Placement Memorandum?

The disclosure document commonly used in private offerings is called a Private Placement Memorandum or Private Offering Prospectus. The memorandum is similar to a business plan, except that the emphasis is on the disclosure of facts rather than projected results. This document should be professional prepared and legal counsel should be consulted for a final review.

A Private Placement Memorandum typically includes a discussion of the terms of the offering, the allocation of proceeds and the risk factors inherent in the business and industry. In general, the memorandum must contain all information about the company, its business, and the securities offered, that would be considered “material” by a potential investor.

The Private Placement Memorandum is accompanied by a Subscription Agreement and Investor Questionnaire. The Subscription Agreement is a contract to purchase a specified amount of securities at an agreed price, and contains a statement that the investor has received and reviewed the Private Placement Memorandum, is aware of the risk factors and is a suitable investor. The Investor Questionnaire elicits information about the investor’s background, employment and investment or business experience. It is used in part to confirm the investor’s accreditation and sophistication.

SEC Regulation D Filing Exemptions

Regulation D establishes three exemptions from Securities Act registration.

Rule 504

Rule 504 provides an exemption for the offer and sale of up to $1,000,000 of securities in a 12-month period. The company may use this exemption so long as it is not a blank check company and is not subject to Exchange Act reporting requirements. Like the other Regulation D exemptions, it may not involve use public solicitation or advertising to market the securities, and purchasers receive “restricted” securities, meaning that they may not sell the securities without registration or an applicable exemption.

This exemption may be used for a public offering for which investors will receive freely trade-able securities under the following circumstances:

* The offering is registered exclusively in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors;

* The registration and sale takes place in a state that requires registration and disclosure delivery, and the buyer is in a state without those requirements, so long as the disclosure documents mandated by the state in which you registered to all purchasers are delivered; or

* The securities are sold exclusively according to state law exemptions that permit general solicitation and advertising and you are selling only to accredited investors. However, accredited investors are only needed when sold exclusively with state law exemptions on solicitation.

Rule 505

Rule 505 provides an exemption for offers and sales of securities totaling up to $5 million in any 12-month period. Under this exemption, securities may be sold to an unlimited number of “accredited investors” and up to 35 “unaccredited investors” who do not need to satisfy the sophistication or wealth standards associated with other exemptions. Purchasers must buy for investment only, and not for resale. The issued securities are restricted, in that the investors may not sell for at least two year without registering the transaction. General solicitation or advertising to sell the securities is not allowed.

Financial statement requirements applicable to this type of offering:

* Financial statements need to be certified by an independent public accountant;

* If a company other than a limited partnership cannot obtain audited financial statements without unreasonable effort or expense, only the company’s balance sheet, to be dated within 120 days of the start of the offering, must be audited; and

* Limited partnerships unable to obtain required financial statements without unreasonable effort or expense may furnish audited financial statements prepared under the federal income tax laws.

Rule 506

A company that satisfies the following standards may qualify for an exemption under this rule:

* Can raise an unlimited amount of capital;

* Does not use general solicitation or advertising to market the securities;

* Sale of securities can be to an unlimited number of accredited investors and up to 35 other purchasers. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated – that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;

* Seller must be available to answer questions by prospective purchasers;

* Financial statement requirements as for Rule 505; and

* Purchasers receive restricted securities, which may not be freely traded in the secondary market after the offering.


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