Understanding the Private Placement Memorandum
A private placement memorandum (PPM) is a legal document provided to interested investors of a certain deal. Private placement memorandums are dubbed “private” because they are only made available to accredited investors or those who meet pre-established criteria. In order to read the private placement memorandum of an offering, you may need to have an existing relationship with the company or be able to prove that you meet the criteria of an accredited investor. The PPM will then be mailed or emailed to you for your review as a possible investment.
What’s Included in a Private Placement Memorandum?
Private placement memorandums may vary slightly between deals, and among different companies. In general, though, you can expect to find the following sections in a private placement memorandum.
Summary of Offering
The Summary of Offering is an overall, broad picture of what the PPM is about. Typically, this section tells you what the minimum investment amount is. The Summary of Offering also goes into detail about when the offer commenced and the deadline to reach the raise goal. It may also detail what the maximum investment amount is per investor, as well as the minimum and maximum number of investors in that particular raise.
There will also be a lengthy disclosure statement section, which is the legal language required by law to inform investors of the risks involved with PPMs. This is usually boilerplate, but it behooves you or your attorney to read through it at least once so you are fully aware of the risks involved.
This section basically outlines the facts about the company that is sponsoring the offer. If you work with the same company each time, you can anticipate this section to remain virtually unchanged from deal to deal. Any time that you work with a company or sponsor for the first time, you should carefully read through the Executive Summary.
The sponsor needs to ensure that each of the investors is duly suited for the investment opportunity. The suitability standards section outlines what the investor criteria are. This will include requirements about financial capabilities of the investor. It may include language about how long the investor will be keeping their money in the deal, tax implications, and how the company or sponsor intends to use the funds raised for the project. This section will go into detail about the investor qualifications to be accepted into the deal.
Use of Proceeds
While earlier sections may have touched on the basics of how the funds of the raise will be used, the “Use of Proceeds” section will go into detail about how the money will be spent. It may include a general breakdown of use of proceeds including minimum and maximum spending.
The Distribution Schedule details how the investors will be paid for their financial contributions. This will include details about the timing, amount and interest to be paid on the investment.
This section is a disclosure statement of the management fees or sponsor fees to be paid for handling the private placement offering.
Specific risk factors will be outlined in this section as they pertain to the specific project. This section should be carefully read so you fully understand the risks involved with investing in the project. This section outlines what determinants are involved with the deal being a success and what roles are core to the overall likelihood of the investor recouping their capital. This section may also go into detail about the investor’s position in the event of a loan default.
This section explains what the goal of the raise is and sets the benchmark for successful completion of the deal. The investment objectives will be different for each project, so it’s important to thoroughly review this section for each PPM you assess.
The more private placement memorandums you read, the easier they’ll be to understand and the faster you’ll be able to glean the information and be able to decide whether or not the investment aligns with your financial goals. When you work with the same company again and again, you can also learn to trust the company and just go to the sections that apply to that specific project.
At American Real Estate Investments, we offer PPMs to accredited investors interested in earning double digit returns on private money lending deals. If you’re interested in getting in on this kind of lucrative offer, please contact us for more details.