Hi this is Brett Cenkus the right-brain
business lawyer and today we're talking
about private placement memorandum or
ppms sometimes called confidential
offering memorandums or confidential
information memorandums but ppm is the
the term you'll hear the most in the context of
securities offerings and so that's the
context at which we're gonna talk about
them today sometimes you'll see them
called confidential information
memorandums when they're the whole
business is being marketed through
investment bankers or something but this
is about a ppm what it is what's in it
why you use it all in the context of
offering securities stock or interest in
an LLC to to investors so the first
thing is what is it as you've seen one
it tends to be a fairly thick document
50 pages 70 pages you know sometimes
they come a little bit briefer but it's
this quasi legal quasi business risk
mitigation tool it's this document that
talks about what it is the business is
going to do what you're offering to
investors the risks involved we'll get
into a few more details about the
sections but fundamentally it's this
document to lay out and show a court
later on that here's what we told the
investor we gave them all the
information that we could think of we
talked about the risks we just laid out
the deal on paper so it tends to be
pretty heavily lowered they take quite a
bit of time to do them right but that's
what it is around a high level it looks
a little like a business plan but it's a
little less readable it's a little bit
more legalese a little bit more about
like the legal things and how things are
gonna work that's what it is
when do you use them so the first point
is it's pretty rare when we're raising I
mean number one it's a private placement
memorandum so this is for when you offer
private securities whenever you offer
stock or other securities in the u.s. to
investors you need to either register
those securities with the Securities
Exchange Commission and state security
commissions or you need to have exemptions
from doing so so when you're raising a
couple hundred thousand dollars a couple
million bucks whatever it is it just
wouldn't make any sense to register the
securities with the SEC
that's the idea is that that's what
going public basically is it's a very
involved very expensive time-consuming
process so when you issue securities in
a private context we look for exemptions
we look for inability to do it without
registering and there's a lot of
exemptions they each have their own
rules and nuances but that's what we're
doing and so the PPM is for private
placement basically an offering of
securities private securities to
investors so that's the context it is
rare that you have to produce a ppm it's
definitely best practice in certain
contexts and it's definitely something
you should do in certain contexts but
it's pretty rare you have to do it so
how do you know if you have to do it or
not so that depends on the amount of
money you're raising and who you're
raising it from and the exemptions that
you're using it would be you know if
you're raising a hundred thousand
dollars and you've got to spend 15 grand
on an attorney like me to do it which
might make you fall out of your seat but
it's pretty inexpensive to do a lot of
custom work on a ppm compared to the
market but but that's again it's not
cheap so if you had to spend that kind
of money to raise a hundred thousand it
doesn't make a lot of sense so you're
going to number one if you're not
raising a lot of money and you raise it
from people you know well we're
generally trying to figure out a way to
not have to do one I don't know how to give
you better advice than that but some of
it is just depends on the risk profile
of the deal now if you're raising
someone came to me a couple weeks ago
and said I do I have to do a ppm if I'm
raising a hundred million dollars for
this idea and it you have to do a ppm
there's a hundred million dollars like I
mean spending 20 grand a lawyer's like I
mean it sounds like a lot if you're raising 100 if you're raising one hundred million
dollars you're not willing to do that
like I think you gotta have your head
examined I mean it's this is protecting
you I'm trying to have a conversation with
clients about like you know what's good
for them you do it when you're raising a
lot of money because it's a it's a drop
in the bucket to get the protection the
risk to protect yourself
a little bit right then there's things
like how many people you raise the money
from if you're raising money from a
lot of people the deal starts to look a
lot less like a private offering it
doesn't look like an IPO but like at
some point it doesn't look like what the
SEC might call private offering so you
want to jump through certain hoops and
to jump through those hoops sometimes
you need to give the investors the kind
of information that's in a ppm so some
of that's the number of investors some
of it is the is the industry you're in
so technology companies raising money
from angel investors and venture
capitalists I was a venture capitalist
during .com 1.0 I think out of 500
business plans I saw in the first year I
was doing that maybe I signed two PPM's
like that is not normal there venture
capitals aren't in the business of suing
people you got a really screw them over they're
in the business of taking risks they
are used to losses it's okay now the ppm
helps avoid an argument that you said
something or misled them that there's
there's a benefit of it but it's just
not normal in that world to use a ppm in
restaurant raises or real estate funds
hedge funds you know stuff like that
definitely very very common they're kind
of expected you will often see films
that work to help people raise money on
a major motion picture a couple years
going yeah we did a ppm because the
investors are all asking about it so you
kind of raise red flags if you don't
give it to them so again it's kind of a
complicated question but it's rare you
have to do it it's really a matter of
like you know having a good conversation
open conversation with someone like me
about like you know should I or shouldn't I
what goes in it let me give you
a handful of categories of things number
one is you will usually have a little
bit of an opening summary about the
opportunity you will typically have a
term sheet that lays out the key points
of what you're offering and the deal is
there a preferential return how much
does someone have to pay for a share of
stock or a one percent interest in your
LLC I'll see that kind of thing you
will go into a section that's a deeper
dive about the company what it's going
to do the shape it's in right now the
milestones like where it's at the use of
the proceeds really important how are
you gonna put that money to work you
typically will build in some
flexibility there you know this isn't
set in stone we need to be fluid as
things develop but you still want to
give investors a good idea of where
their money is going to go
backgrounds of the management what have
they done not just whether they're well
but if they have a huge failure you want
to disclose it I know there's a lot of
concern from clients sometimes but like
this is about protecting your butt
they're thick documents that most
investors don't read cover to cover and
memorize you know it's like yeah you
oughta so you I hope the investors read
it but the point is you don't have to be
worried about disclosing some things you
shouldn't be afraid of that I mean number
one it's the right thing to do but
number two it's like they're just
disclosing everything alright the good
and the bad so you shouldn't shy away
from things like yeah if you had a you
lost some money you had a failure don't
you maybe you don't put it on screaming
headlines on page one but that's
something you would cover again this is
a disclosure document it's it should
look good it should present you and the
team properly it should fundamentally
help you sell a deal but the first of
the first and most important goal of it
is it protects your butts so so disclose
what you need to disclose you're going
to talk about the securities you're
offering what are the terms we've talked
about some of that back in the basic
term sheet but how much do I pay what do
I get
you know what rights does that give me
do I have some preferential treatment what
happens if you go out of business do I
get paid back first stuff like that you
will give financial information about the
business always always always like even
if you're not using a ppm I tell my
clients definitely give a profit and
loss statement if this business has been
operational give a little balance sheet
if there's nothing on it like you've got
to have a record that you showed the
investors what shape this business was
in that's really important so in a ppm
you're always going to deliver some
financials historical and forecasts and
a balance sheet you will also talk about
how an investor subscribes what do they
need to do what do they need to fill out
how does that go down you'll have a
whole big list of exhibits which will be
like the certificate of formation of the
company the bylaws or the operating
agreement if it's an LLC you may have
some other
you might have collateral about the
business you might have milestones goals
you may have you may have press releases
you may have other sort of sales kind of
documents as exhibits and I skipped over
because I want to come back and do a
very deep dive on the most important
section of the private placement
memorandum and that's the risk factors
so you can go online you could buy a ppm
for a couple thousand bucks I probably
don't need to tell you not gonna get a
lot of custom work on that document
right lawyers they charge different
amounts but there's very few charge $20
an hour I mean it just isn't where the
market is at so when you buy a ppm for a
couple thousand bucks versus you know
for me to do one might be 15 or 20 to do
it to really do it right to pay in the
business sometimes less but and that's
low I mean really for the market when I
was in big law we would charge fifty
sixty thousand dollars for it it sounds
crazy but it's like it's a lot of work
to do it right and when you buy
something off the shelf what you get are
these canned risk factors the business
won't do well if we don't have good
people and that the economy turns down
we'll get hit and look that maybe it's
better than nothing I could argue it
differently courts definitely have made
it clear over the years that the
obligation on you is to disclose the
real risk factors the reason this
business will fail if it fails and you
need to spend some time on that you can
go to SEC.gov their website you can find
risk factors for similar businesses
those are publicly filed documents that
are usually very well lawyered so you can you
can start to do some of this and pull
these things together but you really
have to be intentional and clear and
draft those properly they should be in
order from big of greatest risk to you
know kind of descending order from the
most significant risk typically gonna be
categorized like risks about this
industry risks about this particular
company risks maybe about this offering
you know what you're buying but the risk
factors are critical it's really
important that they be clear and
thorough and maybe the right risks and
it's not to say something won't come up
that you never thought about or never
saw but like the point being if
something if the business goes down for
something that should have been obvious
upfront and you didn't talk about it
because you just have some canned
risk factors that said well if we fail
it's because the market was bad and our
people you know we got the wrong people
you're gonna be in some trouble I mean I
wouldn't want to be defending that that
case so risk factors are really really
really critical the SEC at SEC.gov and I
forget the exact URL but it's like
something industry guides as these
certain types of Industry guides for
certain types of businesses and they're
really good go by for the kind of things
you should have in your ppm in some
cases need to have in your ppm for certain
types of businesses including oil and
gas and bank holding companies insurance
companies I think mining companies kind
of a random mix of things but it's
really good these industry guides for
things that you would want to think
about putting into your ppm so just to
wrap up again it's kind of a ppm 101
it's rare you have to do this okay and
they come in very different flavors in
terms of size and what you say and what
you disclose but for certain types of
offering securities offerings you should
do a ppm for others you probably want to
do a ppm it's important question to talk
to your securities attorney about like
does this make sense do I need this is
it worth it in the grand scheme of what
we're doing here so if you have
questions about this visit businessattorneyinaustin.com there's a lot of
articles about ppms or reach out to me
happy to have a conversation with you
