Introduction                                 dreamstimesmall_15551300

While our San Diego business attorneys previously featured some of the most common types of private placement memorandums; this article answers the question, “Why Use a Private Placement Memorandum in the First Place”?

Officers and directors of a business which is attempting to raise capital through angel or venture capital investors have a heightened interest in ensuring that proper disclosure is made through a private placement memorandum in order to avoid the potential for personal liability should an investment go sour. As an officer or director, if assertions in a private placement memorandum materially misstate the facts, are misleading, or if material facts are omitted, you run the risk of not only civil penalties, but serious criminal penalties as well.

PPM Required by Securities Regulations

In certain contexts, especially when offering securities to prospective investors who are not accredited, a PPM is required by law. In such situations, the contents of the PPM may be more or less dictated by the disclosure requirements of the applicable securities regulations. For more information regarding Regulation D, Rule 505 and 506 requirements for a private placement memorandum, see and

Protection Against Securities Fraud Claims

Even where a private placement memorandum is not required because the offering is being made only to a limited number of “accredited” investors, it is usually a good idea to prepare one anyway. Keep in mind that a PPM is much like an insurance policy in the event things falls apart and do not go as planned. If that happens, your investors may still threaten or actually pursue claims against you. As our San Diego business lawyers can attest, being able to produce a well-drafted private placement memorandum can be critical evidence which establishes a record of what was communicated to the investors about the offering before they invested and reveal that the investors were well aware of the potential risks and that full disclosure was made, helping to ensure that any claim against you is dismissed.

As we have stated, when you are raising capital, you should consider the PPM an insurance-type expense. The PPM can be used to thwart frivolous claims from both investors and government regulators, which can cost ten times or more than the cost of having a professionally prepared private placement memorandum. It isn’t a foolproof defense, but a professionally written PPM makes it significantly harder for a potential litigant to win a claim and can even prevent claims from being asserted if you have provided ample warning of the risks associated with the investment, along with other disclosures.

Professional Product

A good, professional-looking private placement memorandum delivered to prospective investors can also become an effective “sales” document. It helps establish credibility by communicating to prospective investors that the directors and officers of the issuer are serious about their business, that they know the company and the industry they are in, and that they are professional and know how to deliver a good product.

If you have questions about your company’s situation or if you need a PPM drafted for your company, feel free to Contact the San Diego Business Lawyers at Gehres Law Library or browse our website.

For additional information, see the following bulletin from the SEC’s website: