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Private Placements

A private placement is the issuance of restricted securities sold privately to a limited number of accredited investors. These securities, usually in the form of shares, warrants or debt instruments, cannot be traded on the open market, and are not registered with the Securities and Exchange Commission. The most popular method to privately place securities is to complete a SEC Form D filing for those securities with the SEC.

Private placements appeal to small businesses, usually in the earlier stages of their development. A company looking to increase its capital to fund growth would be a natural fit for a private placement. Start-ups with solid business plans and sufficient product development also turn to private placement for financing. Projects requiring up to $20 million in funding often participate in this market.

Accredited investors, banks, pensions, insurance companies and hedge funds are the primary buyers of private placements. These investors will typically make private purchases in the range of a few thousand dollars (for individuals) up to $20M (for institutions). Buyers can resell the securities either privately, or after a specified interval, via a public sale. Both issuer and purchaser benefit from a private placement’s lower costs as compared to those engendered by an initial public offering (IPO).

The Private Placement Memorandum and Form D

A Private Placement Memorandum (PPM) is the centerpiece of an SEC Form D filing. It is a prospectus-like document that divulges vital information about offered securities to potential buyers, including the deal terms, disposition of funds, company- and industry-based risks, and other important facts.

The PPM is a highly-structured document containing a number of parts. The following is a checklist of its contents:

  • Cover Page
  • Securities Legends
  • Summary of the Securities Offering
  • Capitalization of the Company
  • Dilution
  • Suitability Standards for Investors
  • Risk Factors
  • Selected Financial Data
  • Use of Proceeds from the Securities Offering
  • Plan of Distribution of the Securities
  • Management and Compensation
  • Terms of the Securities Offered
  • The Business of the Company
  • Analysis of Financial Condition and Results of Operation
  • Certain Transactions (transactions between the Company and its shareholders,
  • officers, directors or affiliates)
  • Principal Shareholders
  • Description of Capital Stock of the Company
  • Tax Matters
  • Legal Matters
  • Experts
  • Financial Statements
  • Projections
  • Documents Available for Inspection
  • Exhibits

Other Important Components of a Form D Filing

In addition to the PPM, a Form D filing will also include:

  • Subscription Agreement – a contract for the sale of a declared face value of securities at an agreed price. It includes an investor receipt and approval of the PPM, a statement of the risks undertaken, and certification of an investors’ suitability to participate.
  • Promissory Note Agreement – the terms of a debt offering.
  • Investor Questionnaires – a workup of the investor’s knowledge and business background. The questionnaire gives confirmation that the investor is well-qualified to purchase the securities and realizes the risks involved.
  • SEC Form D Federal Compliance Filing: an 8-page SEC compliance form containing a description of the filing, the filing calendar, and other important information.

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