PrintPreparing a Private Placement Memorandum when selling stock or other securities is desirable for the company and is sometimes required to obtain an exemption from the securities laws. The purpose of a Private Placement Memorandum is to disclose the material information about the company and its business — especially the risk factors associated with the investment in the company — to prospective investors.
The Private Placement Memorandum may not be formally required in very small stock offerings given to a few individuals who are sophisticated and who have access to all the information they need about the company. However, a Private Placement Memorandum is a useful way, in many circumstances, to prove that the company provided all important information to investors (in case the investment goes bad and investors insist on having their money refunded).
A complete Private Placement Memorandum needs to follow several important rules, so make sure to consult with an experienced securities attorney when putting one together. The following list contains some fundamental principles to adhere to when creating a Private Placement Memorandum:
- Be certain that your statements are true.
- Don't mislead potential investors in any way.
- Don't omit any information that may affect the investor's decision.
- Lay out the risks to the potential investor.
- Provide proof of your statements.
- Don't exaggerate facts or projections.
If you don't follow the rules to the letter, a number of adverse consequences can follow, including possible civil and criminal penalties and the investor's right to demand his or her money back. The advice of a good securities lawyer is absolutely essential in this area.
The specific contents of a Private Placement Memorandum can be quite detailed. Click here to view a Checklist for Contents of Private Placement Memorandum. For examples of the types of disclosures made by public companies in a prospectus, which is the public offering equivalent of a Private Placement Memorandum, check out the SEC documents contained in the online EDGAR database.
Before you go through the time and expense of preparing a full-blown Private Placement Memorandum, you may want to prepare a shorter Pre-Offering Summary. You can use this document to lay out the basics of your company and gauge the potential receptiveness of investors.
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