Private Placement Memorandum: An Ultimate Guide for Entrepreneurs

Pro Business Plans
Jun 25 · 8 min read
Private Placement Memorandum Overview

Last Updated: Jun, 25, 2021

A private placement memorandum (PPM) is a document issued by a company that wishes to raise capital by issuing securities to private investors, that outlines the terms of a private placement offering. Also known as an offering memorandum, this legal document states the objectives, risks, and terms of an investment.

PPMs may only be used for private, unregistered securities offerings.

The private placement document will educate investors on the offering at hand which will hopefully lead to an investment in the company. The memorandum itself outlines the terms of what the issuer is offering.

A private placement is an alternative to an Initial Public Offering (IPO) and its respective S-1 Filing, where the sale of stock shares or bonds to investors and institutions (who are pre-selected) takes place rather than on the open market.

Why do some companies choose private placement?

Private placements are commonly used by startup companies in the internet and financial technology sector. Moreover, generally, start-ups benefit from private placements as they allow them to expand while avoiding the formalities accompanied by IPO.

Private placements are a speedier and more affordable process for private companies

Since private placements do not require annual disclosures and other lengthy regulations do not apply, it becomes a short process in terms of time. Also, it becomes more affordable to the issuing company.

There are two main types of PPM documents used worldwide: Equity private placement and Debt private placement. This section discusses the basic differences between these two types:

Equity: In an equity offering memorandum, a company offers an “ownership stake” through selling shares of stock in the company. Sometimes, preferred stock is also sold in an equity placement memorandum. In an equity placement memorandum, some Limited liability companies or Limited limited partnerships could offer limited partnership interests or some units.

A private placement of equity might help the business avoid the formalities of IPO, however, the investor might demand a higher degree of ownership in the company or a fixed dividend income in case of equity private placement.

Debt: A debt placement memorandum includes details for selling securities such as bonds or notes. The interest rate, maturity dates, and other terms for bonds or notes are detailed in this document. Some types of debt offering memorandum might offer convertible bonds or convertible notes where the debt is converted into equity in some pre-determined future date or in case of a trigger event.

For a debt private placement, it doesn’t require a credit rating from an agency. However, the investor in a private placement would be more demanding of a higher level of interest rate to justify the comparison with a public offering. Moreover, the buyer of private placement offering might demand collateral in case of debt private placement, because of a higher risk attached to not knowing the credit rating. Also, some national and international regulations apply to private placement memorandum. For example, in the US, regulation D by SEC applies to private placement memorandum.


Regulation D allows companies the ability to raise capital through the sale of equity or debt securities (private or public stock shares). It is designed to provide an exemption to sell securities in a private capital raise without registering the securities (any business transaction involving investors), and also to provide the appropriate documentation for accepting and using capital.

We discuss components of regulation D in detail in the following section.

Regulation D includes a total of 9 rules, two of them are exemption rules (504 and 506) and six of them are administrative rules (500,501,502,503,505,507,508).

Among the exemption rules, Rule 506 is more frequently used than rule 504 because it is recognized by all the states in the US.

Rule 504 of Regulation D provides an exemption from the registration requirements of the federal securities laws for some companies when they offer and sell up to $5million of their securities in any 12-month period.

A company can use this exemption so long as it is not a blank check company and does not have to file reports under the Securities Exchange Act of 1934.

Whereas, Rule 506, which is considered a safe harbor for the private offering exemption of Section 4(a)(2) of the Securities Act, allows companies to raise an unlimited amount of money. More importantly, the two distinct exemptions that fall under Rule 506 are Rule 506b and 506c.

Section 4(a)(2) of the Securities Act exempts from registration transactions by an issuer not involving any public offering.

Under a Rule 506(b) offering, the issuer is allowed to believe that the investor is accredited, unless the issuer has reason to believe the investor is lying by relying on the word by the investor.

However, in Rule 506(c) offering the issuer is required to take reasonable steps to verify that every investor is accredited. It allows an issuer to rely on an investor’s primary documents like brokerage statements, tax returns, or W-2s, but they also allow the issuer to rely on a letter from the investor’s lawyer or accountant. Moreover, in Rule 506(b) offerings, the issuer can advertise only the brand. In Rule 506(c) offerings, the issuer can advertise the deal.

A Comparison of Offerings 506(b) and 506(c) under Regulation D

Rule 506b of Regulation D is considered a “safe harbor” under Section 4(a)(2). It provides objective standards that a company can rely on to meet the requirements of the Section 4(a)(2) exemption. Companies conducting an offering under Rule 506(b) can raise an unlimited amount of money and can sell securities to an unlimited number of accredited investors. An offering under Rule 506(b), however, is subject to the following requirements:

· No general solicitation or advertising to market the securities

· Securities may not be sold to more than 35 non-accredited investors (all non-accredited investors, either alone or with a purchaser representative, must meet the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment)

If non-accredited investors are participating in the offering, the company conducting the offering:

· Must give any non-accredited investors disclosure documents that generally contain the same type of information as provided in Regulation A offerings (the company is not required to provide specified disclosure documents to accredited investors, but, if it does provide information to accredited investors, it must also make this information available to the non-accredited investors as well)

· Must give any non-accredited investors financial statement information specified in Rule 506 and

· Should be available to answer questions from prospective purchasers who are non-accredited investors

Purchasers in Rule 506(b) offerings receive “restricted securities.” A company is required to file a notice with the Commission on Form D within 15 days after the first sale of securities in the offering. Although the Securities Act provides a federal preemption from state registration and qualification under Rule 506(b), the states still have the authority to require notice filings and collect state fees.

Rule 506(c) of Regulation D, approved by the SEC on July 10, 2013, enabled “general solicitation” (i.e., advertising) for Regulation D Offerings where only Accredited Investors may purchase the Securities offered under 506(c). Under this Rule, the SEC must receive the Offering documents as least 15 days before the solicitation is to occur (an Advanced Form D Filing) and also notification within 15 days of the first purchase by an Investor (a Form D Filing). Not making each filing within the prescribed deadlines could result in a prohibition of the Issuer’s access to the Regulation D market for 1 year.

  • Virtually any type of Security can be offered to Investors through a 506(c) Private Placement including Promissory Notes or equity interests (e.g., common stock, preferred stock or membership interest in a Limited Liability Company).
  • Investors participating in a 506(c) Private Placement must complete an “Accredited Investor Questionnaire.”
  • IMPORTANTLY — All Accredited Investors participating in a 506(c) Private Placement must also provide third-party verification that they qualify as an Accredited Investor. The means of verification standards is communicated to Investors by the Issuer but often involves tax returns and/or an accountant’s statement.

Important tips for writing a PPM

What’s Needed for a Private Placement Memorandum

While writing a PPM, the double-ended purpose of ensuring compliance while marketing the deal to motivate the investor to take action by investing, is important. Henceforth, we provide some tips to draft a PPM.

· Simplicity: The language of the document should not be very complex. Since the document will market the deal to investors, they should be able to understand it easily while being able to comprehend the legal terms and requirements mentioned in the offering.

· Customization of the document: The length and content of the document need to be tailored according to the structure of the deal, industry, target audience, and the specific exemption rule that the issuer company is relying upon to avoid SEC registration since the use of that exemption might create the necessity to include some specific information in the document.

· Clarity: The tone of the PPM must be clear in terms of communicating the associated risks with the deal of issuer(including the early-stage investing risks), financials of the company, the terms of the securities being offered, and the related risks.

Main Topics Discussed in a PPM

Here is a checklist of some main topics discussed in a PPM

  • Notices to Investors: Some common investor notices include: reliance on the exemption from registration, no public market, high degree of risk, restrictions on the transfer of securities, no legal advice, no business advice, no tax advice, right of the issuer to modify the offering, opportunity of the investor to ask for information.
  • Executive Summary: Executive summary in a PPM generally provides a summary of investment opportunity, current capitalization, material terms, requirements, and restrictions of the investors who can participate, reference to risk factors, list of documents the investors will sign.
  • Company Purpose and Overview: This section, also considered the business plan is a market-oriented description of the facts related to the company’s structure, business and marketing plans, and its mission and value proposition.

· Terms of the Offering and Securities: It mentions details related to the type of securities being offered, their price, voting rights, information rights, liquidation rights, pre-emptive rights, ownership percentages, mandatory capital calls, convertibility, call and put rights, and whether the securities are collateralized.

  • Risk Factors: This important section clearly communicates the risks related to the issuer’s company, industry, and the offered securities.

· Use of Proceeds: This section can provide details on various categories including transaction expenses (legal and accounting fees, fees to finder’s and placement agents if used), compensation to related parties (e.g., salaries, bonuses, etc.), especially if that money will be distributed from funds raised as a result of the private offering being documented, pro forma financial statement (expected financial results going forward).

  • Financial Information: This section essentially includes information on company capitalization, historical financials, Proforma financials, management discussion of financial results, timeline to achieve profitability, and specific financial risks.

· Management: This section needs to highlight all the important background information and relevant experience, accomplishments, and setbacks for those who are in key roles in the business’ command structure.

· Legal and Tax Matters: The tax information section may vary from brief to very long depending on the type of business.

  • Exhibits: Exhibits could include instructions for investing, purchase agreements, governing documents, material contracts, investor questionnaires, and W-9.

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