What is a Private Placement Memorandum?

A private placement memorandum (PPM) is a document providing information about a proposed private placement of securities, where a company sells securities to select investors, rather than releasing them to the public. This document is sent to proposed investors so they can review the information and make a decision about whether they want to invest. Firms draft private placement memoranda in consultation with their attorneys to ensure accuracy and completeness.

Private placement of securities usually involves the sale of stocks, bonds, and other securities to institutional investors who are willing to buy large blocks of securities. The private placement allows a company to raise capital for activities without needing to formulate an initial public offering and it is highly discreet in nature, as members of the public are generally not aware of the sale of securities until after it is complete. In addition, private placements conducted within specific limits do not need to be registered with the Securities and Exchange Commission.

In the private placement memorandum, the company provides information about the types of securities being made available and their pricing. General information about the company, akin to that found in a prospectus with a public offering, is also provided. This includes data about earnings, the industry as a whole, high-ranking members of management, and other topics of potential interest to investors. The purpose of the private placement memorandum is to make investors aware of risks and benefits associated with the investment.

Development of a private placement memorandum also involves a certain amount of salesmanship. The goal of the document is not only to provide important information, but to illustrate to investors why they should invest in the company. The document is carefully framed to present information in a positive light, emphasizing the company's accomplishments and strengths to bolster investor confidence and make potential investors feel like they would be making a sound decision if they joined in on the offering.

Investors invited to participate in a private offering can review the private placement memorandum to determine if they want to participate. Institutional investors typically maintain a staff of analysts and other personnel and use these staff members to review potential investments and make calculated choices about investments. These analysts can use the information in the private placement memorandum, as well as other material that may be available, including write-ups on the company in financial publications and general news about the economy and the industry the company is involved in.