What To Look For In A Private Placement Memorandum


Few things are quite as satisfying as knowing you’re locked into a sound investment that’s going to earn you a solid return on your money. Real estate is almost always a good place to invest capital to get a decent return. According to Forbes, real estate is one of the better options that helps investors build real wealth consistently.

Knowing which tax breaks are available is important, but so is understanding the power of leverage. Perhaps the most important factor to consider, however, before investing hard-earned cash into any company’s offerings, is the PPM, or Private Placement Memorandum.

What Is a Private Placement Memorandum?

A PPM is a type of disclosure document. Typically, it’s used by smaller businesses, such as real estate companies, to encourage prospective investors to take the plunge. A PPM is immensely important because it gives you the facts on the business in which you’re about to invest. Sometimes referred to as an offering document or offering memorandum, the contents of a PPM are regulated by law and alert you to such things as the terms and risks of the investment.

What Should Be Included in a Private Placement Memorandum?

Before committing to becoming an investor in any company, you’ll need certain information, much of which you’ll find in the company’s PPM, including:

The Introduction. This is where you should be able to read more about the company itself. The introduction should not only contain the terms of the investment; it should also briefly outline who the company is and what they’re about.

The Summary. The summary details the capitalization of the company, or what the company is worth both before and after your investment.

The Risk Factors. In this section, any risks to the company should be laid out in terms you can easily understand. Listed under risk factors, you might find such information as current litigation they’re facing or their lack of operating history if they’re a start-up organization. Risk factors are simply cautionary statements made to help you understand exactly what you and your investment may be up against.

The Company Description. In the company description, you may find the bios of upper management, the company’s mission statement, a description of exactly what they do, company goals, performance history, and more. In this section of the PPM, you’ll more about the personal side of your potential investment.

The Use of Proceeds. How will this company use your invested funds?

The Description of Assets. This section should detail exactly what is being offered in exchange for your investment dollars, including your rights and restrictions within the company.

Procedures. Here you’ll find more information regarding exactly how you’ll go about becoming an investor.

•Exhibits. Exhibits are basically just the attachment of pertinent documents to the PPM. This could include information like financial statements, company certifications, and more.

Why Are PPMs Usually Only Given to Accredited Investors?

An accredited investor is usually either an organization such as a financial institution or a business with net profits over $5 million. It’s a term that can also apply to individuals who have a high net worth totaling at least $1 million or an annual income of over $2 million.

In other words, accredited investors can take substantial investment losses without losing their quality of life. Most non-accredited investors can’t make that same claim, and for this reason, are often limited in their abilities to invest in companies that offer a PPM as part of the investment process.

While an organization or real estate company may elect to offer shares to non-accredited investors, the number they’re allowed to approach is limited to just 35 in a single round of funding. Why? A daunting amount of disclosure paperwork must be generated for companies who accept money from non-accredited investors, which often makes the experience too costly for the company. For this reason, it’s best to wait until you can fulfill the requirements of accreditation before seeking out your first real estate investment.

When You’re Ready to Invest

Real estate investment is a solid way to build a portfolio over time. Still, it’s not something that should be entered into lightly. Before signing on the dotted line, make sure you’ve weighed all the necessary factors and have a financial plan in place. What are your goals? What is your risk tolerance? How much money can you afford to lose if the investment fails?

Talk to a financial advisor when you’re ready to dive into real estate investing so you’ll know what to expect and what’s expected of you. Investing is a big commitment that can help earn dollars for you and for the real estate company you’re supporting. Do it right, and you’ll both profit.