Companies often ask whether they should use a private placement memorandum
(PPM) for securities transactions involving angel investors in a private
placement. Generally, the answer is yes, but inevitably, companies are
going to question whether a PPM is actually required.
The most obvious answer is that a PPM may be legally required in specific
scenarios—particularly when selling securities to future investors
who lack accreditation. In these instances, the specifics of the PPM typically
rely on the disclosure requirements of the relevant securities regulations.
Even in circumstances where a PPM is not required by law, the oral or written
statements of the issuer still fall under the purview of the federal and
state anti-fraud mandates. During a securities transaction, the issuer
cannot mislead the potential investor by making untrue or misleading statements
and must provide full disclosure of all pertinent material facts.
In the event of a material misstatement, intentional or not, the investors
could potentially bring a securities fraud claim against the issuer, as
well as its officers and directors. Additionally, the Securities and Exchange
Commission (SEC) can levy civil and criminal punishments.
A well-drafted PPM protects from securities fraud claims by establishing
a record of communications between the issuer and investors.
A polished, professionally-formatted PPM presented to prospective clientele
can also function as a useful sales tool. It subtly conveys to interested
investors that the issuer is detail-oriented and efficient—highly
sought after qualities in any industry.
After a company opts to use a PPM, the next step is constructing the actual
content of the document. Depending on the entities involved in the transaction,
securities law regulations meant to protect less sophisticated or financially
secure parties may dictate the general framework of the PPM.
If at least one investor of the private offering is without accreditation,
then the issuer will likely have to give detailed disclosures. This requirement
usually increases the context of the PPM and the subsequent legal expenditures
for doing so—which is why most offerings are limited solely to accredited
In other contexts, there may be minimal formal mandatory disclosure mandates—such
as when an offering extends to only a handful of accredited investors
from the same state. In these situations, the PPM should include, at a
minimum, the necessary details to allow the potential investor to make
an informed choice as to whether to proceed with the purchase.
The actual contents of a PPM may vary depending on the type of offering,
but below are some suggestions of contexts that should be described in
Summary of Offering Terms – Typically provided in the form of a term sheet, describing the
amount of funding required, use of funds, and term of the offering.
Cautionary Language – List of risk statements indicating the level of risk of offered
securities, as well as risk disclosure about generally investing in private
Description of the Issuer – Information on organizational structure, history of the company,
experience with private offerings, the reason for the offering.
Business Plan – Detailed description of the opportunity being presented, market
plans, implementation plan, use of funds, distribution plan, company financials, and
Risk Factors – Includes language detailing the risks associated with the particular
offering, foreseeable obstacles or roadblocks, risks to the issuer or
associated companies/individuals, and other risks that are associated
with the private offering.
Subscription Procedures – Detailed instructions on how to participate in the offering.
Conflicts of Interest – A summary of potential conflicts of interest to the issuer, affiliate
partners, principals, or others associated with the offering.
Supplemental – Contains information such as financial projections, licenses or
other organizational documents that may affect the investor’s desire
Although not always necessary, it is generally a good idea to use a PPM
when offering securities to early investors. Though some investors may
be accredited, companies must take into consideration all investors who
make up the angel investor pool and draft the PPM accordingly. The costs
and complexity associated with drafting the contents of the PPM will be
driven by the type of investors the offering is attracting.