As a business law attorney I often get asked by clients who are doing private equity raises if a Private Placement Memorandum (PPM) is necessary. Let's face it - these are terrible documents that do a poor job of casting a vision for the business, and investors hate reading them as they are "overly lawyered" and thick in regulation. I am of the opinion that the only reason a PPM does not scare away investors is that most private equity investors have seen a million PPMs in the past and have learned to essentially ignore the disclaimers.Here is the first line of a common disclaimer section found in a PPM:
THE UNITS OFFERED HEREBY ARE SPECULATIVE, INVOLVE A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.Obviously, no company that is issuing a PPM to raise private equity expects that its investors will lose their entire investment. So, what is the purpose of including this language? Only one reason... to avoid a securities fraud claim.
Both federal and state law include anti-fraud requirements for private securities offerings. The issuer of the securities must not make any untrue statement of a material fact (or omit to state a necessary material fact). A common example is a stated (or implied) rate of return on an uncertain and high risk investment. A well drafted PPM can create a written record of what has been communicated to investors with the goal of full disclosure of the risk associated with the investment. Based on the above disclaimer, for example, each investor was put on notice of the high degree of risk associated with the investment and that no specific rate of return can be expected.
PPMs can serve other more informal purposes as well. A well drafted PPM can be a "sales" presentation document - presenting a summary of the business plan in a professional manner. But, the fundamental purposes of a PPM is to present the world of risk to potential investors - allowing them to make a well informed investment decisions regarding the company.
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