Benefits of a Private Placement & Costs of a PPM

Private placements have become increasingly popular in recent years. In a private placement, a private or public company can sell a security to a small number of private investors without having to register the security with the Securities and Exchange Commission. Below are several compelling reasons for issuing a private placement.

1. The process can be much faster

Because private placements do not have to go through the bureaucracy-filled regulation process, issuing them is much faster compared to public bonds.

2. No fluctuating interest rates

Private placements have less interest rate risk, as companies generally offer them at a fixed rate. This grants much-needed reassurance in the event of rising interest rates.

3. They have longer maturities

For companies that wish to extend their refinancing obligations past the typical three to five years, private placement transactions can be ideal. They offer much longer maturities than most other financing arrangements.

4. The all-in cost is lower

Between regulatory issues, legal documentation, underwriting expenses and bank fees, issuing a public offering can quickly become expensive. Companies can have a much lower all-in cost when issuing private placements.

5. They offer privacy and control

Discretion is of the utmost importance to many companies and investors. Private placements do not have to go through public filing or disclosures.

A private placement memorandum (PPM), is the legal document provided to prospective investors when selling equity or debt in your business. It is sometimes referred to as an offering memorandum or offering document. It provides investors with the information they need as well as protects the company in the event of an investor complaint. Big law firms have a big overhead, including supporting high salaries for associates and partners. The firms will likely charge at least $35,000 to draft a PPM. This high price tag will choke many startups and entrepreneurs. That's where firms offering professionally prepared templates can help. For a small cost, you can purchase a downloadable template that can be modified to meet the terms of your offering. Many investors prefer a legal council review the final documents, but the time (and cost) required for this is minimal.

Regulation D is an exemption that allows companies to raise capital in what is known as a private placement. There are various rules under Regulation D that are designed to allow for different sized offerings. There are three distinct offerings provided under Regulation D. Each of the three offerings is controlled by a rule: Rule 504, Rule 506(b), and Rule 506(c).

The vast majority of offerings are conducted under Rule 506(b) or 506(c). Each allows for the company to raise any amount of money, but differ as follows:

• Rule 506(b). This is a private offering only to investors with whom the company has a pre-existing relationship. Up to a maximum of 35 investors may be unaccredited, but audited financials would be required if there are any unaccredited investors. There is no limit to the amount that can be raised.
• Rule 506(c). This offering allows for general solicitation, which means the company can advertise the offering, list it on their website, use an equity crowdfunding site such as EquityNet, and/or use social media, email, seminars, radio, TV, print, and any other means to market the offering. All investors must be accredited and there are enhanced requirements for qualifying investors. There is no limit to the amount that can be raised.

Questions to answer in order to select the appropriate PPM Template:

1. Will you create your fund as an LLC or a Limited Partnership?
2. Do you plan to do general solicitation & advertise (ie: crowdfunding)?
3. Do you plan to raise capital from accredited or non-accredited investors?  

Gain access to professionally prepared Private Placement Memorandums that can save you thousands in legal fees.