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Faces of Modern CFO's
Equity Operations

What is a PPM? A Key Document for Startup Fundraising

Graham McConnell


July 17, 2019

Building a business comes with a lot of challenges, fires to put out, and decisions to be made. Lots and lots of decisions. Who’s running the client meeting on Friday? Who should you hire to run marketing? On top of that, you’re also looking for the capital to keep your company operational and elevate it to your next goal. As you seek cash investments you may turn to your close family and friends for help. This falls under the Securities and Exchange Commissions’ definition for private placement. A private placement is a securities offering that is exempt for SEC registration. Companies can raise capital and not be held to some of the restrictions that are typically in place to protect investors. Private placements include accredited and non-accredited investors (people like your family and friends). When raising this sort of capital, one of the most important things you need is a Private Placement Memorandum. If you’re wondering what exactly that is, don’t worry, we’re here to explain.

Let’s cover some rules

Before we get to the ins and outs of a Private Placement Memorandum (or PPM), it’s important to take a look at SEC regulations. While a private placement offering makes it exempt from filing with the SEC, Regulation D of the Securities Act has some requirements and restrictions on private placements. There are three rules in this Regulation that are important to keep in mind:

Rule 504

Permits certain issuers to offer and sell up to $1 million in securities in any 12 month period. These securities may be sold to any number and type of investor. The issuer (individual or company selling securities) is not subject to specific disclosure agreements. Securities that fall under Rule 504 are typically referred to as restricted securities.

Rule 505

Those who fall under Rule 505 can sell up to $5 million of their securities in any 12 month period. But, this rule varies on the type of investor to whom an issuer can sell. Securities can be sold to an unlimited number of accredited investors, but no more than 35 non-accredited investors. If non-accredited investors are involved, the issuer must disclose certain information to them. This includes financial statements. If only accredited investors are part of the sale, the issuer can use discretion in which information to provide. Information given to accredited investors must also be sent to non-accredited.

Rule 506

This Rule is like 505 in that an unlimited number of accredited investors and 35 non-accredited investors can be involved. There are some differences, however. Those 35 non-accredited investors must have sufficient knowledge in business and financial matters. This requirement can be met by a purchaser representative. Any information that is disclosed follows the same guidelines as Rule 505.

Finally, an issuer relying on Rules 505 and 506 must provide non-accredited investors with the time to ask questions and receive answers about the investment opportunity.

So what is a PPM and why is it important?

If you’re planning to issue a private placement, then you’ll want to have your ducks in a row. You’ve probably heard about the Private Placement Memorandum (if not, that’s okay). In short, a PPM serves to tell investors about the nature of your company. According to attorney Richard Gora, of Gora LLC, a PPM should include the following:

  • Your industry
  • The product and/or the services you offer
  • Projections for your product and the economic gains
  • Company financial statements
  • Biographies of the management team
  • Your investment terms and how the capital will be used
  • The risk with the investment

Why is this document so important? Gora says that it will protect startups from violating SEC regulations. It is vital that an organization does not mislead investors. Using a PPM will cover all the bases for what your company does and what investors can expect. When issuing a private placement, not all of your investors will be accredited. A PPM will help non-accredited investors make the decision on whether to invest in your business.

How do I create a PPM for my company?

Your next question likely is, how do I create a PPM? A Google search of “ppm template” produces many sites with samples and documents for sale. It’s easy to become overwhelmed if you’re not sure where to begin. Gora says that many founders try to skip the attorneys and bankers who typically draft these documents to save cash. You can create one yourself, but if not done properly, your business can be exposed to liability. If you are looking for a way to avoid the fees associated with legal experts, try a PPM generator such as Nth Round‘s. This tool provides the structure and protection of a document created by an attorney but without the cost drafting one from scratch.

When it comes to building your business, there are thousands (probably millions) of thoughts running through your head. Making sure your PPM contains the right information for investors will save you from problems in the future. If you decide to draft your own PPM, it is a great idea to have a lawyer review it. Whether you create your own or have a legal or banking professional help you, a PPM will protect your business as you seek investment.

A private placement can be a vessel for your business to raise capital and grow. While unregulated, it’s important to follow the proper steps and guidelines. If you’re looking for more information, check out the SEC’s Investor Bulletin on private placements.