A PRivate Placement Memorandum (PPM) is a complex legal document that provides great detail into a company and offers a portion of its ownership for sale to an investor, often an Accredited Investor as defined under Regulation D for the SEC.
Private Placement memorandums could be used to raise capital when a company cannot otherwise access the capital markets. Perhaps a bank would not loan the company money, but an investor may for a stake in the game. The PPM would provide detailed information of the equity state being offered in the business.
Private Placement Memorandums in the Cannabis Industry
PPMs are popular in the cannabis industry because of the lack of financing options resulting from its federal prohibition. Subscription Agreements are used when new investors come in and purchase equity in your business.
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Why You Should NOT Use Templates for your PPM
using templates to do your private placement offering is okay – when you are in good hands and they have used such templates to craft and customize private placement offerings for the unique conditions of the specific business deal being offered.
Unfortunately, some entrepreneurs want to keep legal and consulting costs to an absolute minimum and take a form they got on the internet and try to stick their names in the right places. This could cause headaches and huge problems if anything goes wrong, which is more likely to happen when you are cutting corners instead of doing the due diligence required.
Here’s a link to Private Placement Memorandum Template Library
FINANCING YOUR BUSINESS THROUGH A PRIVATE PLACEMENT MEMORANDUM
As this article is written, small businesses are being ravaged by the effects of COVID-19. The Small Business Administration is stepping up with all kinds of offerings to help small businesses weather the storm. Still, times are very difficult and uncertain for business owners, and there’s a good chance that credit will be tight over the coming months. For prospective small business owners, the hardest part might be simply finding a bank that is even open and available to meet during the ongoing COVID-19 pandemic.
Fortunately, budding entrepreneurs don’t have to rely on taking on big, high interest loans from a bank. Instead, there is an alternative: the private placement memorandum, or PPM. The federal Securities and Exchange Commission (the “SEC”) provides this helpful guide on the legal basics of a PPMs. In this article, we’re going to go over some of the highlights of the PPM route, which will help you determine if a PPM is the right course for your business.
What Is A Private Placement Memorandum (PPM)?
Generally, when someone wants to sell securities in a company, they have to go through the registration process with the SEC. This applies not only to the Googles and Facebooks of the world, but also to much smaller companies as well. After all, small businesses have shareholders too.
A PPM is, in simple terms, a way to raise funds without going through the SEC’s burdensome registration process. Instead, you go directly to potential investors. This is a very common route for small businesses, even ones with pretty big budgets. For our Chicago-area readers, some of the city’s most famous and lucrative restaurants, such as Chicago Cut, are actually owned by a small group of shareholders.
To raise money through a PPM, entrepreneurs can make use of Regulation D, Sections 504, 505, and 506, depending on certain conditions such as the amount of money being raised. Section 504 is limited to fundraises of under $1,000,000, and so is unlikely to be useful for people hoping to open a typical cannabis business, especially a craft grow cultivation facility. For most entrepreneurs, they’re going to be raising money from Accredited Investors.
Raising Funds from Accredited Investors With PPMs
Regulation D sets out the definition of an accredited investor. Different kinds of institutions (banks, LLCs, trusts) can be accredited investors, but in general you’re talking about wealthy individuals. These are individuals or couples who meet the following criteria:
- earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
- has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence and any loans secured by the residence (up to the value of the residence)).
Private placements are risky by their nature- these are brand new companies fundraising with relatively little government oversight. Investors could very easily lose everything. That’s why it’s so important that accredited investors be sophisticated and financially capable of absorbing the full loss. A typical PPM doesn’t require much information from an accredited investor. They simply have to certify that they meet the criteria. Some entrepreneurs may want to get independent verification, such as bank statements or CPA letters, but that’s not necessary to meet the requirements of Regulation D.
Why Should your Startup Try A PPM?
Starting a business is hard. We just finished submitting all of our clients for the State of Illinois’s competitive cannabis cultivation and transporter application process, and boy did we learn a lot. Your average craft grow facility can cost upwards of $4,000,000 to fully build out. Worse yet, many traditional banks are still reluctant to work with cannabis clients.
The PPM bypasses regulatory hurdles and allows you to go directly to individuals who want to get involved in the industry. These can be people in your community who you know, who have the money but don’t know how to get involved. Accredited investors can be wealthy lawyers, bankers, restaurateurs, real estate brokers, or any number of people who are simply your friends and neighbors.
We’ve put together a PPM package for our clients to help them get started in their entrepreneurial pursuits. The best part about a PPM is that it is highly customizable. You can sell ten shares at $300,000 each, a hundred shares at $10,000 each, or nearly any combination that best suits your needs. Moreover, you can raise money in multiple rounds. We’ve designed our package so that investors can contribute a small, initial sum to help cannabis entrepreneurs finance their application, with the second, larger round contingent on the company actually being awarded the license.
There are countless other ways to customize a PPM to suit your needs and the desires of the investors your hoping to recruit. If you’ve got a plan and a vision, but you don’t quite have the capital, a PPM could be just the solution you need.
How much does a Private Placement Memorandum cost?
The costs in legal and professional fees to draft a complete private placement memorandum will depend on the complexity of the documents from the NDA to the closing docs and the level of service your attorney or securities broker provides. Depending on how much research needs to be done, the cost could range from a few thousand dollars up to tens of thousands of dollars if additional services, such as due diligence investigations, are necessary. Additionally, if you choose to have multiple rounds, there may be additional associated costs.
It’s important to understand that any financial investment carries risks and that having a thorough understanding of those risks requires an experienced legal team to help you draft everything correctly. Ultimately, ensuring your Private Placement Memorandum is airtight can save time and money down the road and give investors the peace of mind they need when considering investing in your business.
Private Placement Memorandums Are Not General Solicitation
A private placement, unless it is using 506(c), you do not solicit in general to people to raise the money. It is a private placement memorandum – it is a private offering of an ownership stake in your company. So it means that you have a few investors. Your first meeting is a general meeting to get to know if your investor is right for you. Then you can follow up with them if they are interested in learning more. Often times your PPM includes investment from friends, family, close network connections that you and your business may have.
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