The Private Placement Memorandum is an offering document, sometimes called a prospectus, offering circular, or PPM. The majority of early startups, real estate syndications, and emerging growth companies commonly raise money through what are called private placements.
A placement is simply a sale of equity ownership (or debt) in the company to private investors that become owners (or lenders) in the company. The reason they are classified as private is because the offer and sale of equity (a security) does not involve any public filing or registration of the security with the US Securities & Exchange Commission (“SEC”) and falls under an exemption to the registration requirement.
Put simply, private placements are not available on the open market so not everyone has access to these opportunities. They are private transactions.
The PPM is a legal document prepared by an attorney and provided to prospective investors and its purpose is to 𝐟𝐮𝐥𝐥𝐲 𝐢𝐧𝐟𝐨𝐫𝐦 𝐭𝐡𝐞 𝐢𝐧𝐯𝐞𝐬𝐭𝐨𝐫 𝐚𝐛𝐨𝐮𝐭 𝐚𝐥𝐥 𝐚𝐬𝐩𝐞𝐜𝐭𝐬 𝐨𝐟 𝐭𝐡𝐞 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬, 𝐜𝐨𝐦𝐩𝐚𝐧𝐲, 𝐢𝐧𝐝𝐮𝐬𝐭𝐫𝐲, 𝐦𝐚𝐧𝐚𝐠𝐞𝐦𝐞𝐧𝐭, 𝐩𝐫𝐢𝐨𝐫 𝐟𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐩𝐞𝐫𝐟𝐨𝐫𝐦𝐚𝐧𝐜𝐞, 𝐚𝐧𝐝 𝐟𝐮𝐭𝐮𝐫𝐞 𝐩𝐫𝐨𝐬𝐩𝐞𝐜𝐭𝐬, 𝐚𝐬 𝐰𝐞𝐥𝐥 𝐚𝐬 𝐩𝐫𝐨𝐯𝐢𝐝𝐢𝐧𝐠 𝐜𝐞𝐫𝐭𝐚𝐢𝐧 𝐫𝐢𝐬𝐤 𝐟𝐚𝐜𝐭𝐨𝐫𝐬 𝐢𝐧𝐯𝐨𝐥𝐯𝐞𝐝 𝐰𝐢𝐭𝐡 𝐢𝐧𝐯𝐞𝐬𝐭𝐢𝐧𝐠,
The SEC and state regulators want to be sure that you disclose what is required and don’t over-hype your company. The anti-fraud statutes state that you need to fully disclose all material information so that you are not defrauding or misleading investors.
The PPM is a very long legal document. It is recommended that you thoroughly review it with your attorney. If you don’t have one, try to review it completely to the best of your ability so that you fully know what you are getting into.
When the PPM is signed, you have officially committed to the investment. However, you are not 100% in yet until you complete the final step, wiring the funds.