Private Placement

Private Placement – What is it?

The term ‘private placement‘ is used in a variety of aspects mainly related to a company seeking to raise ‘private’ capital‘, and/or ‘place’ their stock with an investor; hence the term ‘private placement‘. Essentially, when a company is seeking to raise private capital, they need to give some type of disclosure document to the potential investor. This disclosure document is called a private placement memorandum (PPM) or an offering memorandum (there are many other names for it). As opposed to a private placement offering where a private placement memorandum (PPM) is given to the potential investors, in a public offering this is mainly done through a ‘prospectus‘. Both have their similarities and differences, but for the purpose of this discussion, we will only focus on the private placement offering and the PPM document that goes along with it.

Private Placement Memorandum – What’s it about?

Private Placement Memorandum, or a PPM, by its very name, is a document that disclosures the details of the private placement. Thus, the memorandum is the exclusive document that elucidates the private placement. In the private placement memorandum offering (PPM) are various disclosures, rules, and strategies relating to the private offering at hand. For instance, a good portion of the private placement memorandum PPM deals with SEC rules relating to the sale of private stock. That is, if your company was selling private stock to an investor for capital, your offering memorandum would detail the terms of the sale (called the terms of the offering). Additionally, and quite importantly, the private placement memorandum PPM would detail the major risk factor associated with your business, and with your private placement stock offering.

Private Placements – Is it it right for you?

Private placements, and the conducting of private placement offerings, are really essential for any company selling private stock for private capital. Whether you are seeking investment capital from an uncle or from a venture capital firm or private equity, the PPM private placement is mandatory. It is mandatory for two main reason: 1) because it is supposed to add protection to you and your company while conducting the private placement; this protection is based around the SEC disclaimers and your risk factors that must be disclosed, and b) it looks professional to have such a private placement document. Even when raising money from an uncle, it is best to give him a private placement memorandum. Why? Because down the road, if you need a second round of funding and that funding is much more capital than what you received from your uncle, you most likely will be asked ‘how did you conduct your private placement before you came to me?’ If your answer was ‘I did not conduct a private placement, I went to my uncle’, this will look bad. It doesn’t mean you will not get investment capital, but by having the company structured and set up properly in the first round of private placement will go a long way for future private placements.