The Private Placement Memorandum (PPM) is the disclosure document used in private securities offerings, providing to prospective investors detailed information about the company’s business plan, terms of the offering, risk factors, management, financial history and/or projections, etc., to enable the investors to make an informed decision on whether to participate in the offering. For Regulation D offerings, Rule 502 requires that a PPM be provided to any non-accredited investor and goes on to recommend that the same PPM also be provided to the accredited investors. Therefore, in an offering that is made solely to accredited investors, as is often the case, a PPM is not required. So the question is whether, in such cases, a PPM should nevertheless be prepared and provided.
One reason that a company would want to voluntarily provide the PPM is for liability protection, so it can document more clearly that investors were made aware of potential risks that may eventually come to pass. The flip side of this issue is that providing a detailed disclosure document can provide a ripe target for later second-guessing in a shareholder suit, though these risks can be mitigated with careful preparation of the PPM, with appropriate caveats and support for factual statements. Another reason for voluntary PPM preparation is investor demand, i.e., the investor wants to have a PPM as part of the formal documentation as a condition to its investment. Similarly, if there is a broker-dealer involved in the offering, it may have a policy of requiring a PPM even in the case of an all-accredited investor offering.
For some of the offerings I work on, particularly very early stage friends and family-type of investments, the client is cost-conscious and has no appetite for such a significant undertaking that isn’t legally required. In such a case, I recommend to the client that there at least be an exhibit attached to the subscription agreement containing a set of risk factors tailored to the particular company and offering. The subscription agreement should also contain detailed investor representations, including a statement that the investor has been given the opportunity to review detailed company information and have any questions answered.