Protect Yourself With a Private Placement Memorandum

So where do you go for capital if you run or own a private company? There are several sources of capital for privately held businesses. One is the capital generated internally by judiciously managing the company’s working capital. Another source is your local bank, which is the one the primary financing vehicles for private companies. And of course, there is always the owner’s pocket.

But where do you go if your capital needs outstrip what is available from a bank, especially if your company is in need of permanent capital to fund long term growth objectives, capitalize a start-up, or finance an acquisition? If you do not have the wherewithal to write checks yourself, you will need to raise outside capital.

Junior Capital
Junior capital is a term used to describe capital that sits below bank debt, and includes mezzanine, or subordinated, debt, and equity. Sources of junior capital include institutional investors, such as insurance companies, hedge funds, private equity funds, mezzanine funds and SBICs.

Individual Investors
Another source of capital is the individual investor. This class of investor includes friends, family, and high net worth individuals. And if you are issuing securities to individual investors, you may be required by law to write and distribute a Private Placement Memorandum to each of your potential investors.

There are two major reasons for preparing a Private Placement Memorandum.

Protect Yourself Against Securities Fraud Claims
First is to give you protection against securities fraud claims. By preparing and delivering a Private Placement Memorandum, you are establishing a record of what has been communicated to the investors about the offering and the company. When issuing securities, state and federal law is most concerned with securities fraud issues. Anti-fraud requirements call for the issuer to not make any unture statements of a material fact, or to leave out a material fact, the absence of which would make any statements made misleading; i.e. the issuer must disclose all relevant and material facts of the issuance and the company. A well-prepared Private Placement Memorandum will establish a record of the information presented to investors, and will provide a level of protection for the company and issuer against claims of securities fraud.

Professional Image
The other reason for writing a Private Placement Memorandum is that it presents a professional face for the issuance. The image presented to investors by presenting a document that is well-prepared is one of professionalism and competency. Approaching sophisticated investors with a poorly drafted offering document will scream “unprofessional”, “novice”, “don’t know what they’re doing” – the exact opposite of what you are trying to project.