By Kresimir Peharda, partner
What is it?
A private placement memorandum (PPM) is used by a sponsor to raise capital from investors. It is a disclosure document that typically contains basic information about the project or investment strategy, geographic focus, manager/sponsor, risks, exit and will contain a copy of the operating or partnership agreement that governs the entity taking the funds.
How to decide if you need one?
If you have even 1 non-accredited investor (see Regulation D of the Securities Act of 1933), then you need one. This means that the opposite is also true. If you have only accredited investors in your real estate project, then no PPM is required under the law. A subscription document that requires the investor to certify that they are indeed accredited under the law is sufficient.
Why do real estate deals always seem to use PPMs?
Custom and practice. Sponsors have to provide the investor with the information that the investor wants to see before making an investment decision. This information typically includes the categories mentioned above.
What are the differences between various real estate PPMs?
The level of detail. The most basic PPMs may have a summary of the offering and opportunity, and some risk factors. The more detailed PPMs will contain the following sections:
- Investment opportunity
- Market opportunity
- Management/manager experience
- Track record
- Risk factors
- How interests will be sold
- Related party transactions
- Conflicts of interest
- Tax matters
- Summary of the operating or partnership agreement
- Investor suitability
- How to invest
What drives costs in a PPM?
The level of detail and the amount of information that the sponsor has prepared, proofed and edited before submitting it to their counsel. This includes the terms of the operating agreement or partnership agreement which will be govern the entity receiving the offering proceeds.
Why you might use a PPM even if you don’t have to
A PPM is a disclosure document. As such, the more information you provide to the investor that is accurate the easier case you can make in defending yourself against situations or events that were described in the PPM. Specifically, if you made clear that certain risks were inevitable and those risks come to life an investor will have a hard time arguing that they were misled or did not have the right information before investing.
The decision on what type of PPM you need hinges on the following:
- Type of investor (accredited v. non-accredited), and
- Investor expectations