To have or not to have a PPM in private placements

PPMs are private placement memorandums. These disclosure documents are customarily used in connection with private placements of securities to qualified investors. PPMs describe, among other things, the terms of the offering, the company issuing the securities (its business strategy, employees, senior management, properties, financial statements), industry, market, competition, how the company will use the proceeds from the offering and risk factors relating to the industry, the company and the offering.

A PPM is viewed to be the central document of the transaction, and yet, thousands of private placements are conducted without one. So, what are the pros and cons of preparing a PPM in connection with a private offering of securities by a private issuer?

Pros:

1. To qualify for certain exemptions from registration of the offering under the securities laws, state or federal laws require that companies provide certain disclosure to a certain type of investors, therefore a PPM is needed to establish the claim for exemption from registration and to comply with applicable laws.
2. PPM is a written proof of what was presented to the investors in connection with the offering, therefore a PPM can help avoid liability for material misstatements or omissions under the antifraud provisions of state or federal law.

Cons:

1. There is no particular requirement to provide any specific quantum of information to accredited investors (so if the offering is made only to accredited investors, technically speaking, a PPM is not necessary).
2. The preparation of the document is expensive. Typically, a PPM is a joint effort of senior management, placement agents, lawyers and accountants and requires hours and hours to prepare. A successful PPM is a fine balance between creating a selling document that would appeal to potential investors and a document that is in compliance with applicable laws and regulations. A mistake in the preparation of the PPM can subject the company to civil and even criminal sanctions, result in lawsuits by investors and unravel the offering.
3. The Ralson Purina decision (the Securities and Exchange Commission v. Ralson Purina Co., 346 U.S. 199 (1953)), widely used for factors defining a private placement, requires only access to the type of information that a registration statement would disclose, not that the actual information be handed to the investors.
4. PPMs have to be consistent with future offering documents of the company; if not, questions may be raised as to whether the company was being truthful in its representations made in the PPM.

Overall, thousands of private offerings are conducted with little or no disclosure documents, and consequently, lower offering costs. On the other hand, PPMs, if prepared correctly, can serve as written testimony of what was and was not represented by the company in connection with the offering, thus saving the company thousands of dollars in potential legal disputes.

Perhaps, if a company conducts a smaller offering to accredited investors only, it may be sufficient to use a combination of an expanded business plan, coupled with risk factors, access to company records and a seminar for potential investors affording them an opportunity to ask the senior management questions relating to the offering.