A Private Placement Securities Offering includes a number of documents, which collectively comprise the Offering Package. Each document has the specific purpose described below:
The Private Placement Memorandum
The Private Placement Memorandum (PPM) essentially “tells the story” of the investment. Legally, it is the disclosure document required by the Securities and Exchange Commission (SEC) or applicable state securities agency for certain private placement offerings. It describes such things as the structure of the company, projected returns to investors and compensation to the manager, the risks of investing, potential conflicts of interest and a summary of how the company will be operated, among other things. The rest of the documents within the Offering Package are attached to the Memorandum.
The Investor Agreement
The Investor Agreement is the enforceable contractual agreement between the issuer of the securities (i.e., the person promoting the offering) and the investors. It can take many forms, such as:
- Limited Liability Company Agreement or Operating Agreement—This document describes how a Limited Liability Company will be operated. Legally, it is the governing document for the company and describes in detail the rights and duties of the members (investors) and the manager, what the investors are buying (units or interests), how meetings and votes of the members will be conducted, and how and when cash distributions will be made, liquidation of company assets and admission or disassociation of members, among other things.
- Limited Partnership Agreement—This document has the same role as a Limited Liability Company Agreement, but for a Limited Partnership. It describes the rights and duties of the general partner (manager) and the limited partners (investors) and what the investors are buying (Limited Partnership Interests).
- Shareholder Agreement.—This document has the same role as a Limited Liability Company Agreement, but for a Corporation and describes the rights and duties of the officers and board of directors (managers) and the shareholders or stockholders (investors) of the corporation, what the investors are buying (shares or stock).
- Trust Agreement—This document has the same role as a Limited Liability Company Agreement, but for a Business Trust or Title Holding Trust with multiple beneficiaries. It describes the rights and duties of the trustee and beneficiaries (investors) of the trust and what the investors are buying (beneficial interests).
- Promissory Note—This is the document to be used when an investor makes a loan in exchange for a promissory note (i.e., promise to pay) signed by the borrower. Promissory notes are defined as a security under federal and state laws and describe the terms of the loan. The issuer of the promissory note is the borrower, and a private lender is the investor. This document describes the purpose of the loan, the principal loan amount, payment schedule, interest or shared profits to be paid to the lender (how calculated, when due), points or origination fees, duration and maturity (end date when principal must be repaid), whether the borrower’s personal guarantee is required, lender remedies in case the borrower defaults on the loan, and collateral for the loan (i.e., property the lender can acquire if the loan is not repaid according to the terms of the note).
Other Investor agreements may be used, but the documents described above are the most common contracts used in Private Placement Securities Offerings.
The Subscription Booklet
The Subscription Booklet is the section of the securities offering that tells the manager about the potential investor. Legally, it contains the investor’s representations and warranties as to its qualifications and suitability to invest in the opportunity described in the offering, the amount the investor is planning to invest and a place for the manager’s acceptance and acknowledgement of the investment.
Additional documents found within a securities offering will be attached to the memorandum that further describe or provide additional, relevant information related to the company, its affiliates and the investment opportunity. One such document might be an Investment Summary containing information about the property or business that is the subject of the offering.
Collectively, the Private Placement Memorandum and its attached documents are meant to provide the investors with all of the information they need to make informed consent prior to making an investment decision. Before making an investment decision, each prospective investor should carefully read the memorandum and each of the attached documents. Further, they should ask the manager any questions they may have, and consult with their financial advisers.
(NOTE: This article specifically pertains to a domestic (U.S.) issuer of securities (aka, a syndicator, manager or promoter) that is seeking to solicit and/or pool money from investors to start up a new business or acquire real estate.)