As one of the single greatest tools today’s investors have at their disposal, transparency can simultaneously build trust and a business. Exercising a transparent approach to your career in the real estate industry, for that matter, isn’t simply an option, but rather a necessity — especially if you hope to raise capital and secure funding. There is absolutely nothing more important than being upfront and honest in your own attempts to raise money, which is why investors looking to place a private placement offering need to incorporate a private placement memorandum (PPM). The critical documents disclose the information necessary to complete a legal and transparent deal.
Private placements represent an opportunity for investors to secure funding. In it’s simplest form, a private placement awards real estate entrepreneurs the ability to raise capital by selling securities to subsequent investors. Better yet, it may help to look at private placements from an alternative perspective. A private placement issued by a real estate investor is similar to a private offering that will witness other investors invest in their limited liability company (LLC), which happens to be backed by real estate.
It is worth noting, however, that private placements have become synonymous with regulatory requirements and standards investors must abide by; namely, they must be accompanied by a PPM and cannot be broadly marketed to the general public.
As its name suggests, a private placement memorandum is a legal document tasked with disclosing the objectives, risks and terms of the aforementioned private placement, or attempt to raise capital. In other words, a private placement memorandum discloses all of the important information an investor may want to know before agreeing to the terms in a private placement. It is, therefore, the job of the PPM to protect the parties involved in the disbursement of funds. That way, investors in a real estate LLC know what they are getting into, and the recipients of their capital exercise a transparency that complies with federal securities law.
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As a legal document intended to disclose important financial information, it’s absolutely critical that a private placement memorandum has everything in working order. More importantly, there are a number of parts a PPM needs to be considered complete. Therefore, if you are intent on having a private placement memorandum drafted by a legal professional, make sure it has at least the following:
No surprise here; the introduction of a private placement memorandum plays a very important role. As you should have guessed by now, the introduction will serve as a precursor to the rest of the document — a cover-page, if you will. More specifically, however, the introduction should include a summary of the private placement offering, a comprehensive description of the assets that will be purchased with the funds raised, a schedule, the minimum investment required, a brief list of the risks and how you intend to mitigate them, a suitability standards statement, and full disclosure of the fees and commissions payable to each party involved. In short, the intro will briefly touch on everything interested investors will want to know about. And, above all, it’ll exercise complete transparency.
A private placement memorandum is nothing, if not an attempt to make crowdfunding a deal as transparent as possible. As a result, every PPM needs to contain several disclosures that bring to light every aspect of an impending offering. Every PPM, for that matter, must provide adequate information to help investors decide whether or not they want to invest their money. That said, the more transparent, the better. The PPM has to disclose certain information, not the least of which includes:
Sponsor Dedicated Information: Sponsor dedicated information is meant to do exactly what you would expect: tell sponsors the foundational information of a particular offering. In other words, sponsor information will disclose the personal information of the investor looking to raise money. In addition to their name, contact information and biographical information, this section will identify past performances, track record, previous results, and anything to shed some light on the person asking for money. In short, this is a lot like a resume and should suggest why investors should feel comfortable.
Property Information: The investor trying to raise capital must disclose the information they have on the property they hope to invest in. How much will it cost? How much work does it need? Are there any foreseen problems? Everything the investor knows about the subject property should be put in a disclosure to put subsequent investors’ minds at ease.
Risk Factors: A good PPM will disclose each and every risk factor associated with a deal. It is quite common for risks to be comprehensive, as to fully disclose the status of an investment. Risks pertaining to the asset, environment, tenants, market, legality and tax risks should all be include — leave no stone unturned.
Summary: A good PPM will summarize the offering in question and disclose anything and everything necessary.
Company Capitalization: Information related to the capitalization of the company, both prior to and after the proposed investment is made, as well as language concerning other capitalization-related issues.
Competition Information: Private placement memorandum requirements should include information on the competition one could expect to encounter over the course of the impending deal.
There are several more disclosures that should be made in a private placement memorandum, but it’s best to leave them up to a professional. That said, be sure to hire a good local securities lawyer and CPA team to make sure you proceed with your PPM accordingly.
A private placement memorandum should include a legal agreement that refers to the way the private placement will be governed. Sections to include in the legal agreement section include:
Each of these sections should be included in a private placement memorandum, but they are not indicative of everything that must be included. If for nothing else, PPMs are complicated legal documents that must comply with regulations. To see to it your own PPM abides by the right laws, consult a good local securities lawyer and CPA team before making any commitment to issuing a private placement. Do not — I repeat, do not — draft your own private placement memorandum and assume it complies with the necessary laws.
Private placement memorandums are intended to protect the parties involved in a private offering. Investors in the private placement will be made aware of anything and everything associated with the impending deal, whereas the investor looking to raise capital will comply with the appropriate laws. As a result, few documents are more important to an investor looking to make a private placement offering than a private placement memorandum.