Private Placement Memorandums Explained - What is a PPM & When Do You Use it? - YouTube

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