The Private Placement Memorandum: Everything You Should Know

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Investing in private placements is a favorite investment option for most investors. However, while many people like this idea, very few understand the proper process to follow before signing the contract and liquidating funds. And that’s where the Private Placement Memorandum (PPM) comes in for you. 
private placement memorandum

Whether you’re an entrepreneur or on a paycheck, I’m sure you’ll agree with me on one thing – accumulating resources and wealth requires great efforts and hard work.

And when it comes to investing these hard-earned resources, you need to take your time to analyze the investment you’re about to venture into.

Investing in private placements is a favorite investment option for most investors. However, while many people like this idea, very few understand the proper process to follow before signing the contract and liquidating funds. And that’s where the Private Placement Memorandum (PPM) comes in for you. 

So, what exactly is the Private Placement Memorandum? When does an investor use the PPM? What’s included in the PPM, and why should you review the PPM?

To make it a cakewalk for you, we’ve created this article to explain everything you need to know about the Private Placement Memorandum. Let’s get started!

Private Placement Memorandum Explained

A private placement memorandum (PPM) is a legal document presented by a private company that outlines the disclosures and details of a private real estate deal. 

Sometimes known as an offering document or offering memorandum, the PPM is similar to the prospectus provided by public companies when they issue a public offering.  

A PPM fundamentally keeps track of- and portrays the provisions of an investment opportunity and includes the expected rate of profitability, the course of events, imminent risks, and potential contributors. In turn, this helps you to make an informed investment decision.

PPM contains all the detail and disclosures of an investment deal and may, thus, be extremely lengthy. Still, be sure to go through every detail of the PPM before making your final decision. 

Important: A Private Placement Memorandum is not a Business Plan!

People have often mistaken the PPM for a business plan – which is wrong. These two documents serve different purposes. The primary role of a business plan is to market or promote a company. It contains the forward-looking information of an organization, including the growth opportunities, revenue channels, customer profiles, and market demand, among others.

PPM, on the other hand, is a descriptive disclosure document that outlines the details of an investment opportunity. And although it may indirectly serve the marketing purpose, it’s primarily created to equip investors with information regarding a real estate investment deal.

Also, business plans are used by investors when getting a loan. But when exactly do we use the PPM? Read on. 

When is PPM used?

A PPM is used in private transactions when the securities are not registered under the applicable state or federal law. This means that the securities are sold using the exemption from the registration.

In real estate investments, PPM is used when a firm is selling securities for private real estate offerings, including:

  • Crowdfunding
  • Real estate investment fund (REIT)
  • Syndication
  • Private REITs

The disclosures in the PPMs vary based on the type of exemption being used, the complexity of the private offering deal, and the target investors. In some cases, the PPMs aren’t even needed. For instance, crowdfunding deals sold using Regulation D mustn’t provide a PPM to investors. 

However, be very cautious when purchasing securities that don’t have a PPM. Failure to have disclosure information may affect your decision, and ultimately, your investment. 

As a firm or an individual selling the securities, make it a habit to provide investors with the PPM. Having this legal document for your investment deals is vital in winning the trust of potential investors and avoiding any misunderstanding that may lead to a lawsuit. 

When providing a PPM, be sure to include all relevant information, as discussed below: 

What Does a PPM Include?

Like most transactions, the security transactions are subject to anti-fraud provisions of the relevant law – this time being the federal securities laws. This means that as individual selling securities, you can’t make misleading or false statements about your company or the securities you offer.

Basically, the PPM is meant to fully inform a potential investor about all the aspects of a business, previous financial performance, management, prospective partners, risks involved, and expected profitability. 

A typical PPM will have multiple sections that cover different aspects of the concerned investment. It would help to ensure that these sections are well organized and easy to reference. Here is a summary of these components.

Introduction 

This comes on the first page. Here, you’ll get the basic terms of the investment deal, a brief overview of the company, and its core business. This section provides the prospective investor with an idea of the investment and the company they’re about to strike a deal with. 

Summary of offering terms

This is the term sheet that outlines the capitalization of the firm – after and before the offering. This section may also include other details, including the expected rate of profitability, voting rights, minimum investment accepted, voting rights, and the projected length of the investment. 

Risk factors

This section details the risk factors conceivable by the issuer which may affect the investment. Here, you’ll find the general risks common in all real estate investments and the risks unique to this particular deal. For instance, these risks may include competition risks, risks associated with the local market, or risks that arise from dependence on a strategic partnership.

Summary of the company and its management

In this segment, you’ll get an in-depth description of the company’s history, products and services, goals, performance history, competition, marketing strategy, intellectual property, customer description, industry, suppliers, and any other information that may interest the investor. You’ll also find the company’s management information, including the management’s biographical information, skills, and personal experiences.

Use of proceeds

This part describes how exactly the company will use the proceeds collected from the investor and a rough estimate of the amount to be used for each purpose. It provides the investors with the knowledge of how their money will be used. For instance, their money could be used to make down payments for the property, do renovations, or close deals.

Description of securities

This segment provides details on the restrictions, rights, and class of the securities being offered. It describes in detail the type of security the investor is buying. This section should also outline the ability of the firm to change its capitalization. 

Fees

This section provides the fees that go along with the private placement offering, including the loan fees, disposition fees, asset management, and acquisition fees, among others. 

Subscription procedure

Here, you’ll get the instructions for investing in the offering.

Timing and location of funds

As the investor, your funds are held somewhere when the offering is open. This section states where your funds will be held, the time it’ll take before the offering is closed, and what happens if the offering is not fully funded.

Conflict of interests

This segment describes the conflict of interests relevant to the company, its management, or the offering.  

Liquidity and transferability

This part equips the investor with relevant information regarding the liquidity and transferability of the securities. Most private placement investments are long-term and can’t be transferred. 

Investor suitability

Here, you’ll get information about the eligibility of an investor. Usually, one has to be an accredited investor to venture into private placement real estate investments. This section may have a questionnaire that can help determine whether you’re an accredited investor.

Tax matters

This section states what tax documents will be sent to the investor each year (mainly the K-1 document)

Exhibits

These are the extra documents or information that may interest the investor. This can include financial statements, purchase agreements for the real estate, copies of the investment contract, closing documents, licenses, key contracts, etc.

Reviewing the PPM

Let’s be honest. Most of us agree to terms and conditions without reading a word! A research study carried out by Deloitte shows that 91% of people consent to legal terms and services without going through them. 

For serious but lengthy documents like the PPM and insurance forms, we skim through them before signing. Remember that signing the document means that you’ve agreed to all the terms of the contract. 

As such, it is advisable to take your time to go through the entire document carefully when it comes to the PPM. Each section may have some fees and disclosures that you aren’t aware of. You don’t want to file a lawsuit after a misunderstanding but end up paying the company. If you do not understand the terms and conditions of the contract, feel free to approach a real estate expert or a law firm. 

The Bottom Line

Before entering into a private real estate deal, make the Private Placement Memorandum your friend. It will certainly guide you towards making an informed decision about your resources. However, knowing what to look for in the PPM is key to saving most of your time – which is money! This post ensures that you have everything you need to know about PPM.

Join the Billionaire’s Club

There are the likes of Bill Gates and Mark Zuckerberg who made their fortunes from technology, and there is another lot that became billionaires through real estate investments. How exactly do you join the latter group? Unfortunately, this is not the kind of information that you’ll get whenever you search for “easy ways to become a billionaire.”

Lucky for you, Fair Winds Capital Investments may have the information you need to get started in the real estate business. Reach out to us today for more information. 

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Fair Winds Capital Investments is a veteran owned and operated firm dedicated to providing safe and exceptional quality housing to our tenants. We aim to provide our partners with a shared ownership platform of low-medium risk alternative investments throughout the Southeast, with a partnership preference given to our fellow Servicemen seeking to add a diverse and bolstered income stream.

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