PPM stands for Private Placement Memorandum. A Private Placement Memorandum is a document that is put together by a privately held company when seeking to raise money from investors. The PPM is designed to illustrate and disclose the structure of the investment terms. It also outlines the risks/potentials that come along with investing in the security.
Additionally, the PPM document can be used as an opportunity to convince potential investors that the security is worth buying. While it is not a requirement to draft and disclose a memorandum to investors in every circumstance, there are several rules, guidelines, and amendments that come into play. These need to be carefully followed in order to abide by SEC regulations.
There are several steps in the PPM investment process that need to be followed by both issuers and parties who are interested in investing. Private placements are not available to the general public like a security or financial instrument traded on the New York Stock Exchange. Instead, ppm fund investments will be collected digitally through private placement software, investor portal, or private equity trading platform.
So, who can buy into a ppm investment fund if they are not available publicly? The answer to this question is dependent on the type of capital raise the company is executing. The SEC has put in place different capital raise “rules” that need to be met, and the nuances of these rules determine the class of investors they can accept money from.
Given the higher-risk landscape of private placement investments, the Securities and Exchange Commission (SEC) wants confidence that those who are diving into these uncharted waters have the qualifications and cash to back themselves up. Why does the SEC care to monitor so closely? Because they do not want to have to look out for and protect those who cannot handle the responsibilities of higher-risk investments. In turn, the SEC has created two investor classes: Accredited Investors and Non-accredited Investors.
Accredited investors are made up of high net worth individuals, organizations, institutions, insurance companies, banks, and trusts. Accredited Investors are a vast minority of the population because of the demanding financial requirements that need to be upheld by the investor. Net worth or joint income but meet specific requirements.
To be classified as an accredited investor, one must earn a yearly individual income of $200,000 (or a joint income of $300,000) or more for two consecutive years. They must also anticipate earning a consistent or greater amount in upcoming years to qualify for accreditation.
Accredited investor verification is a fairly simple process. The point is to provide proof of funds and net worth. Requiring the submission of an accredited investor form or an accredited investor questionnaire are a few steps to verify their merit.
A Non-Accredited investor, on the other hand, is anybody who cannot match the SEC’s financial requirements. This is anyone who does not produce at least $200,000 annual income or have at least $1,000,000 in assets.
Investor accreditation has a direct impact on:
a) Which private placements one may invest in
b) The requirements of companies who are issuing private placement securities
There are a few notable advantages of a ppm (private equity).
Many young companies do not have the resources or desire to put themselves at the center of attention that an IPO would create. For example, if an organization went public too early (and this does happen) and failed, they would have potentially tarnished their reputation on a mass scale.
This would deprive the business of an opportunity to adjust, hone in on their business plan, and return strong enough to succeed. Private placements reduce this risk because companies are only marketing their raise to select investors and don’t usually incur as much press and media as a public offering.
Highly popular amongst young startups that need to raise capital and scale quickly, private placements can help a company get the financing they need – fast. Launching an initial public offering (IPO) can take quite a long time because there are several steps and disclosure requirements that must be put in place and approved by the SEC. For any organization that needs to acquire funding on a stringent timeline, the quick turnaround that comes along with private placements is a huge advantage.
The cost of underwriting for an IPO can be extensive, and startups do not often have the resources to pay for it. Additionally, if the issuer is selling debt securities and wanted to go public, they would have to obtain a credit rating from a bond agency. This can also be a costly feat. Additionally, businesses can utilize a private placement platform (often called a ppm platform) to keep all transactions digital and organized.
Another advantage of private placements is that companies can offer more complex securities and investment structures since their investors are (often) accredited, experienced, and more knowledgeable than the average non-accredited investor.
Stay up-to-date with the latest articles, tips, and insights from the AET team