Companies can raise money from investors through a private placement or an initial public offering. In both of these, securities are sold to investors who then have a stake in the company. The Securities and Exchange Commission requires that all companies listing themselves through an IPO file a prospectus. Companies raising money through private placements, on the other hand, are not required to register with the SEC. The equivalent of a prospectus for a private placement is the private placement memorandum.
Much like a prospectus describes the securities being offered by a publicly traded company, a private placement memorandum provides material information about the company and the securities being offered to potential investors. These are sometimes distributed by the underwriter or brokerages and are also known as offering memorandums or offering circulars.
Almost all PPMs contain a company history and a description of the company's business. This helps provide context for potential investors who are trying to gauge the venture's market viability and profitability. This often includes information such as founding dates, significant milestones and information about parents and subsidiaries.
Financial statements include disclosures about a company's cash flow, its balance sheets, its debts and liabilities and its assets and other financial information. This is useful for investors who want to assess the company's fiscal health; if a company goes bankrupt, investors can potentially lose all of their investment.
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One of the key selling points of an offering is the management. As such, most PPMs contain biographies of the officers and directors of the company. This includes information about compensation, other directorships and their past achievements and affiliations. This is useful for establishing a track record and identifying potential conflicts of interest.
An important aspect of PPMs is the disclosures section. Before purchasing securities, most investors will perform extensive due diligence and background checks on the company that may reveal litigation and other legal matters involving the company. By disclosing them upfront, the offering company can protect themselves from accusations of misrepresentation as well as have an opportunity to explain the status and liabilities connected to the lawsuits. Companies can also disclose any regulatory disciplinary actions.