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Private placement memorandum



Private placement memorandum also known as offering memorandum is the most important document for any private company that is raising capital. Such sale of stock, bonds or other securities directly to selected private investors is called private placement. Unlike company that is raising capital via traditional IPO and becomes publicly traded, company that utilizes private placement remains private. Private placement memorandum can be compared to prospectus in public offerings and its purpose is to provide prospective buyers with needed information.

Offering memorandum gives in depth look at business and its operations explaining nature of business, terms of investments, potential risks and management among other things. Sometime it can be compared to thorough business plan but there is a difference. Business plan often has marketing purpose created to promote the company and attract investors. On the other side private placement memorandum is more factual and descriptive in tone but not persuasive, letting investors decide worthiness of investment. The purpose is to fully inform investors about all aspects of business, financial performance, management and risks involved. Companies that engage in private placement offers their securities to more experienced investors that will not have problem to understand legalese of offering memorandum.

Disclosures that are included in offering memorandum differ depending which exemption from registration is being used but most private placement memorandums are drafted in similar format. There are many sections in PPM but the key sections are summary of offering terms, use of the investment, risk factors, financial information  and business and management section.

Summary of offering terms - sections that usually looks like term sheet should include information about company's capitalization before and after offering, number of securities sold, its price and expected proceeded, description of the securities, investor qualification standard as well as information on  liquidation preferences, voting rights and other protective provisions for investors.
Use of investment - it explains why company is seeking additional capital and how that capital will be spent with table showing its allocation. It shows investors how their invested money  will be used. In this sections are shown compensation that any related party will take from transaction.
Risk factors - in this section company must reveal all risk associated with the offering that might have negative impact on return on investment. It should state general risk as well as risk that is unique to issuer and its securities.
Financial information - company provides detailed information on its revenues, expenses, profits and liabilities, including past data and future projection.
Business and management section - it is more detailed explanation  of company's history, what they do and how they earn revenues. It also contains biographical information on the management team and owners of business.


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