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Private Placement Memorandums
An Introduction to Private Placement Memorandums and Regulation D (Reg D)

In 1982, Reg D was introduced. (Reg D is formally known as Regulation D). Reg D allows companies to avoid filing a registration statement with the SEC when raising investment capital. Investment capital in this case means both equity and/or debt securities. This allows a company to sell stocks or bonds to investors. a Private Placement Memorandum (PPM) is required to secure funds. This confidential document discloses all relevant and significant information to investors -- the firms transaction structure (equity ownership or debt financing), proposed operations, terms of the investment, management details, potential risks, etc.. In order to develop the Private Placement Memorandum, it is important to understand the details of Regulation D.

Regulation D consists of six rules: Rules 501-503: Defines the terms and conditions that apply throughout the Regulation.

Rule 504: Pertains to transactions where securities under the amount of $1,000,000 are sold in any consecutive twelve-month period. This rule allows payment of commissions, creates no cap on investor numbers, and according to specific guidelines allows companies to sell securities that are not otherwise restricted.

Rule 505: This applies to transactions where less than $5,000,000 of securities is sold in any consecutive twelve-month period. Unlimited numbers of accredited investors are allowed to purchase but only thirty-five "non-accredited" investors. General advertising and general solicitation is not allowed.

Rule 506: There is no dollar limit under this rule. It is open to all issuers for offerings sold to not more than thirty-five "non-accredited purchasers" and an unlimited number of accredited investors. General advertising and general solicitation is not allowed.

The Two Primary Types of Reg D Offerings Are:

Equity: The firm sells partial ownership in the company to raise capital. This is through the sale of membership units or stock. This provides risk-sharing; the investors interests (and profits) are tied to the success of the company.

Debt: A group of investors lends capital to the company. This is very similar to a traditional financial institution providing the loan but more flexible. The annual rate of return and the maturity date are clearly laid out in advance.

PPM (Private Placement Memorandum)

To raise funds successfully from an accredited investor, a company needs to have a well-written Private Placement Memorandum (PPM) that discloses the full facts of the investment and business venture. This is in addition to, of course, to a business plan describing the sound, underlying business that requires the funding. A PPM is a detailed document. The PPM almost certainly has to be written by a professional specializing in PPMs.

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