Break Your Private Placement Memorandum Into Sections For Easier Drafting

Break your Private Placement Memorandum into sections and your drafting sessions will be easier. There are several sections that will be included in your Private Placement Memorandum. The general themes include a disclosure about the security, a summary of the transaction, risks of the transaction, description of the business, how to participate in the transaction.

The key to writing your private placement memorandum is to first and foremost, be honest, and secondly, tell, don’t sell (save your selling for your power point presentation). State and federal securities laws are most interested in protecting the investor, so do not commit any lies of commission or lies of omission. This means do not misrepresent any material facts, and do not omit any material information, which if included, would lead the prospective investor to a different conclusion.

Put yourself in the shoes of your prospective investor. What kind of information would you like to see and have if you were on the side of the table? The challenge will be one of balancing amount of information. The trick is to present the information in a clear and concise way that is easy to understand without cutting any corners, but also without diving into too much minutia.

The scope of the disclosure required would depend on a number of factors, including, the size of the offering, and whether you are offering the investment to non-accredited investors. Try erring on the side of caution – not having sufficient disclosures may risk violating securities laws, but there is no harm with over-disclosing.

Break your Private Placement Memorandum into the following sections when preparing to put a draft together:

Notices to Investors: This section will include disclosure legends informing prospective investors that the securities described are not registered with the SEC. this mostly boilerplate and mostly cut and paste. Depending on your offering, you may need some additional state-specific disclosures.

Term Sheet: The Term Sheet provides a summary of the security you are seeking to raise through your offering document. Some of the parts included in the term sheet include the purpose of the issuance, identification of the issuer, the type of security that is being issued (debt, preferred stock, common stock), specific terms of the security being issued (dividends or interest, current pay or accrued, warrants, collateral), affirmative and negative covenants, conditions precedent, etc.

Risk Factors: This is the section where you describe all the reason a prospective investor should not invest in your transaction. This is the CYA section and should be as comprehensive as possible. This section sets forth the risks specific to the company and risk of investing in the type of securities being issued. Some examples include reliance on customer concentration, cyclicality, inability to achieve projections, changes in regulations, etc. Read the prospectus for any public company and you’ll get a sense of the types of risks that you should identify and discuss.

Conflicts of Interests: In this section you’ll want to describe any situation where someone associated with the transaction may have a conflict of interest with the Issuer. An example might be a director of the Issuer who is also a principal of the Issuer’s major supplier. A good filter for this is if you wonder if it is a conflict of interest, it probably is.

Description of the Issuer, its Business and the Business Plan: this section describes the actual business of the Issuer. You will want to include a discussion of the Issuer’s products, strategy, customers, sales and marketing, operations, industry and competitive analysis, and discussion of management.

Transaction Description: While the term sheet describes the security being issued, this section describes how the security being issued fits into the transaction. This section would include a schematic of the transaction, a sources and uses table and a capitalization chart.

Financial Information: The financial section would include a presentation of the Issuer’s historical financial results with a discussion and analysis of the results. This section would also include management’s forecast and a discussion of the assumptions behind the forecast.

Subscription Section: the Subscription Section provides the prospective investor with instructions on how to participate in the offering.

Some sections will require more work than others. But overall, when you break your PPM down into sections, the overall drafting task will be easier. Remember to keep to the facts, put yourself in your prospective investors’ shoes, tell, don’t sell, and be straight up in everything that is presented. Follow these suggestions and you’ll find that your drafting sessions will go smoothly and you’ll end up with a document that will do your transaction justice.