The Kiddie Guide to Investment: Private Placement Memorandum
In today’s Kiddie Guide to Investment, we would like to talk about private placement memorandum. For those of you who is a stranger to the term, you should not be embarrassed because it is perfectly normal for you to think like that. You are, after all, a ‘kiddie’ in the world of investment, and it is wont for you to not understand about it. Fortunately for you, we got this handy guide that will tell you a bit about what private placement memorandum is and how people use it to their benefits.
Without further ado, let us begin first with a brief exposition of how investment works:
The how to’s of investment
To see it in its simplest form, investing is like loaning money to an individual or to a company and expecting that money to be returned within the allocated time. Not only that the money will be returned, you also expect to make a bit of profit from your investment. Simple, right?
In its core, it is pretty simple. The world, however, despises simple things. Now, investments are so complex it drives people away. People think that investing their money in stock markets is a hard thing to do so they shy away from it. With all the rules surrounding investing, it is normal for people to be afraid of investing in stock markets. Add to the list that there are a LOT of investment types out there, which makes investing your money in something so abstract a scary thing to do.
We are not here to talk about the kinds of investments, though
Because we want to talk about private placement memorandum, not the other kind. While a memorandum of this kind counts as a type of investment, this is a simpler concept that commoners can easily learn. To understand more about this memorandum, you need to understand that there are two ways of selling your stocks to the public:
The first method is through an IPO or an initial public offering. This is the most common way of offering your stocks to external investors. With this way, you basically throw yourself into the stock market and allow the mass to buy your stocks through that market. An IPO is usually the first thing that a company will do when they want to foray into stock markets, and to be able to conduct an initial public offering, you need to register your company to the market.
The second method is using a private placement memorandum, which is today’s major topic. Contrary to IPO, you use a PPM if you do not want to expose your stock to the mass. The basics are the same; you still try to find an external investor for your business, but instead of opening it to the public, you offer your stock to a select few people that you think will invest on your business. The investors may or may not accept your offer, all depending on how they think your business will go. A PPM is often used by companies who are yet to be eligible to compete in an open market or to companies who do not like exposing themselves to the public.
The difference between the two lies to the chance of potential investment amount. While you can earn a lot of investors through IPO, those investing in stock markets rarely invest in high numbers, meaning you will need to tend to many investors at one while earning a trickle of equity from them. The PPM method will net you a whole lot of equity (depending on the amount being invested, but it is often higher than using IPO), but there is a risk of rejection.
A PPM sounds a bit risky when you have read the above paragraph, but in reality, the two offering methods bear the same kind of risk. A public offering gone wrong will not land you any investor, while bad PPM can bring potential investors away from you. It is all about how you bring your company in front of potential investors.
Is it really necessary to make a PPM?
No, not really. Unless you are planning to offer your stock to an investment company, there is no need for you to make a PPM. A PPM, however, is very useful to avoid any repercussions if your business is not doing any good.
Take for example you are offering your stock to a best friend who is willing to invest in your company. As long as you two trust each other not to go back on the deal, you do not need to make a PPM because your friend will trust your word. Your friend will then be bound as a ‘co-owner’ of your business because he or she got a stock of your business in their hands. You are not legally bound to pay the investment back, but you would not dare betray the trust that your best friend has given to you, right?
On the other hand, if you are planning to offer your stock to an investment company, you DEFINITELY need to make a PPM. A PPM is like an offering letter that will tell them (the investment company) about your business. If you manage to convince them, then the equity will start coming and you can make more business decisions.
A PPM can only be conceived by investment banks on behalf of a company. If you write it on your own, the PPM will lack integrity and it would be rejected by an investment company.
What are the things that you can find in a PPM?
Not too many. The things you want to emphasize is your company profile, the investor rights, the elaboration of how you are going to use the proceeds, and the risk that entails. All of that is the things that you will usually find in an ordinary PPM, but if you want your private placement memorandum to be more convincing, you can also add several documents that can strengthen your standings like financial statements, business licenses, or any other helpful documents.