As an entrepreneur or small business seeking to raise capital, there are few better options than a private placement offering. Private placement is a means of selling equity—that is, shares of stock—to private, accredited investors. Accredited investor is a term meaning investors with at least $1 million in net worth (or institutional investors, such as mutual funds and others) who are considered sophisticated buyers, often including high ranking executives, directors, and others within the company, who wish to purchase shares. Taking out loans, issuing debt—that is, a bond offering, such as 144A bonds—or going public are appropriate avenues to raising capital for some businesses, while certain firms might be better off going the route of raising funds through selling equity via a private placement offering or capital raise.
With a private offering, the company is exempt through SEC Regulation D from the requirement to register its securities with the SEC and individual states. Since the private placement path is exempt from SEC registration, in order to effectively raise a round of private funds businesses need to disclose their risks to potential investors through a document called a private placement memorandum (PPM). The private placement memorandum (PPM, offering memorandum), like prospectus of a public offering (IPO), makes clear all the risks of the investment to investors so that the business and entrepreneur are protected against accusations of potential fraud.
After presenting the business’ plan to investors with a pitch book, the entrepreneur or business owner typically provides a private placement memorandum (PPM or private placement documents, offering documents, offering memorandum) in order to disclose all potential risks and come into compliance with SEC regulations (SEC Rule 504, Regulation D PPM). With disclosure through a private placement memorandum (PPM), the firm is shielded from liability, creating a “safe harbor” for the investment and protecting the entrepreneurs’ personal assets as they raise capital from investors.
Unlike a business plan, the private placement memorandum (PPM) not only sets out the business’ operations and structure, but discloses all risks of loss, legal disclaimers, and potential liabilities so that investors can make an informed decision. The PPM (private placement documents) typically sets out the structure of the fundraising (capital raising) offering by designating the classes of stock (securities), describing the structure of the business, and laying out any risks of loss or potentially damaging or risky information, such as any outstanding law suits or legal liabilities.