Private Placement Memorandum

A company will prepare a Private Placement Memorandum for the purpose of raising capital from investors in what is known as a private securities offering. A private securities offering is a type of exempt offering permitted under Regulation D of the Securities Act of 1933, as amended.

The most common type of Regulation D offering made by public, as well as private companies, is done pursuant to Rule 506 of Regulation D. A Rule 506 offering must be done as a "private placement" which means it must be offered privately to investors and not by way of advertising or any form of general solicitation. Subject to applicable state laws, this would allow the officers and directors of a company to go to family, friends, and business acquaintances with whom they already have a pre-existing relationship.

The officers and directors seeking to raise capital and sending out the private placement memorandum must have other duties and not have the primary role of just raising money for the company. Also, those officers and directors are not permitted to receive a fee, percentage or commission on the amount of money they raise for the company.


Give me a call if your company is considering funding through a Private Placement Memorandum or if you have any questions regarding terms, conditions, or structuring a funding. Before your company decides on a funding structure, make sure your management team has sufficient information and has examined all the various funding options that are available.
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Another requirement of a Regulation D Rule 506 offering is that the investors must meet the definition of an "accredited investor". Basically, an accredited investor is a person who offering either

    (a) is a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1,000,000 at the time the investment is made; or

    (b) is a natural person with income over $200,000 in each of the two most recent years or joint income with their spouse over $300,000 for those years and a reasonable expectation of the same income level in the current year.

Drafting a private placement memorandum requires a great deal of planning and review. It usually takes several drafts and many phone calls before the final draft is ready. Usually a private placement memorandum is prepared only if the funding is for a private company or a public company that is not yet fully reporting on the OTC Bulletin Board. If the company is already public,then it simply uses some form of a securities purchase agreement like a Standby Equity Purchase Agreement it which it can raise money by selling it shares to a hedge fund.

Some of the sections that need to be drafted are the business description, industry outlook, competition, historical and future estimated financials, management team, and risk factors. Be sure to have an attorney prepare or at least review your Private Placement Memorandum before you distribute it to any potential investors. Also, make sure you discuss with your attorney the various state and federal securities regulations that apply to avoid any potential problems or violations. Even if your company is private, you must still adhere to state and federal regulations because you are still raising capital from investors and selling a security.

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