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Before they start raising capital, fund managers must prepare an essential document called a Private Placement Memorandum (PPM). Though preparing one isn’t terribly complicated, it can be time-consuming, and there are definite pitfalls you’ll want to avoid.
Here at Fund Launch, we have helped launch over 300 funds. When it comes to PPMs, we know the steps involved, and we’re excited to share our insider knowledge with you today.
Below, we’ll walk you through the ins and outs of preparing a PPM, outline the key elements to include, and get you one step closer to launching your own fund.
What Is a Private Placement Memorandum (PPM)?
The Private Placement Memorandum (PPM) is a legal document that provides investors with the detailed information they need to make informed investment decisions.
Generally, these documents are informed by deep research and prepared with the help of a qualified securities attorney to ensure compliance with the most recent regulations.
The stated goal of the PPM is to protect investors by providing them with all the relevant information they need to make an informed decision about whether to invest in the fund.
In addition to high-level summaries and overviews, the document will also go into detail about the experience of the management team, the fund’s investment strategy, the risk factors involved, and the exact terms of the offering.
A well-constructed PPM not only informs investors but also protects fund managers from potentially misleading investors or mishandling their funds.
Importance of a Private Placement Memorandum
From a legal standpoint, it’s hard to overstate the value of a well-crafted PPM. When properly crafted, the PPM ensures compliance with the latest securities laws and regulations enforced by the SEC.
Because the PPM also provides full disclosure of potential risks, it protects managers from legal liabilities while simultaneously protecting investors from making potentially bad or poorly planned investments.
Best of all, providing detailed information about the inner workings of the fund allows for the sort of transparency that builds trust and credibility with investors.
Key Elements of a Private Placement Memorandum
Though the contents of a PPM will always vary to some degree depending on the types of investment (real estate, venture capital, private equity, etc.), most PPMs typically include some combination of the following elements.
- Summary of Offering Terms: Provide a high-level overview of the fund’s objectives, strategies, and specifics, including investment terms, minimum investment amounts, subscription process, and investor eligibility criteria.
- Risk Factors: Describe in detail the specific risks associated with the investment, breaking them down into the following categories: 1) industry risks, 2) company risks, and 3) security risks. In addition to anticipating questions investors might ask, you’ll also need to research what details you’re expected to include in order to stay in compliance with all regulations for risk factor disclosure.
- Description of the Management Team: Lay out your team’s experience and track record. This data helps investors assess the fund’s potential. Because this section is intended to build confidence in your team’s credibility, include detailed biographical and background information about the managers, founders, directors, and key officers.
- Market Opportunity and Investment Strategy: Outline the investment opportunity, market analysis, target sectors, and the fund’s projected approach to generating returns.
- Expenses Disclosure: Explain which expenses the fund will cover.
How to Create a Private Placement Memorandum
Everything goes better with a plan.
Therefore, before sitting down to draft a PPM, take time to think through the steps involved.
Step One: Gather all necessary information.
Having everything you need at your fingertips before you get started ensures that you won’t have to go on tangents and rabbit trails to chase down details mid-project. This greatly lowers your frustration and cuts down on the time it takes to prepare your document.
Step Two: Draft each section.
Seen as a whole document, the PPM may look overwhelming. Drafting one section at a time allows you to lock in and check sections off, chipping away at the project little by little.
The next thing you know, the entire document is drafted.
Step Three: Review for accuracy and completeness.
There’s a reason why writers call first drafts “rough drafts.” After the initial writing phase, there’s always room for improvement.
Take time to review your document for clarity, accuracy, and completeness.
When it comes to a well-crafted PPM, accuracy and thoroughness are your best friends. Only the most precise and comprehensive information can prevent investor misunderstandings and help you avoid potential legal issues.
Step Four: Seek further input.
Once the PPM is fully drafted and revised, getting another set of eyes on your work is also invaluable.
While you can always confer with your colleagues or other members of your team, consulting further with legal and financial advisors can save you a world of hassle down the road.
Qualified advisors (like the ones at Fund Launch) can ensure the PPM 1) meets all current legal standards, 2) accurately reflects the fund’s financial projections and strategies, and 3) avoids common PPM pitfalls.
Common Mistakes to Avoid in a PPM
Unfortunately, fund managers drafting their first PPMs often make rookie mistakes. While this is certainly understandable, it’s also avoidable.
Common mistakes include:
- Insufficient risk disclosure
- Overly optimistic financial projections
- Lack of clarity in the fund’s strategy
Calling these mistakes “common” does not diminish their importance. In fact, the reverse is true.
Such mistakes can severely impact the success of a fund launch.
Even if you’ve done so unintentionally, failing to fully disclose risks, offering financial projections that are not in line with practical reality, and not being clear about the strategies guiding your decision-making will eventually leave your investors confused and disappointed—if not downright mad.
At the very least, such errors can lead to investor mistrust and ongoing difficulties raising capital.
Worst case scenario, you could face serious legal challenges.
Fortunately, though, there are practical steps you can take to avoid these pitfalls.
To avoid common mistakes related to PPM preparation:
- Conduct thorough research. Rather than simply plugging boilerplate risk factors into your document, take time to conduct thorough research and dig into specifics. Depending on the type of fund, consult with experts in related fields to gain all the market analysis you need.
- Establish a rigorous review process. After using a checklist to review the document yourself, consult with your team or other peers to see if any members have further insight or notice anything you’ve overlooked.
- Seek professional advice. Professional legal and financial advisors can play a critical role at this stage. Though they charge fees for their services, the rewards are well worth the investment.
The Role of Fund Launch in Helping You Create a PPM
If you’re feeling overwhelmed at the thought of creating your first PPM, we don’t blame you. We’ve been there and know exactly how it feels.
Fortunately, you don’t have to do it all on your own.
Fund Launch can assist in drafting a comprehensive PPM.
We offer templates to get you started, advisory support along the way, and comprehensive review processes to help bring the project home.
As our name indicates, we’ve helped over 300 funds launch. We know the ins and outs of the industry and are well acquainted with PPM best practices.
When you’re ready to draft your own PPM, connect with us here at Fund Launch. Need a little more info before you pick up the pen to draft your PPM? Try our free training instead.
Tapping into our practical expertise will save you time, help ensure compliance, and increase your chances of launching a successful fund straight out of the gate.
Let’s Get to Work
As you now know, crafting a solid Private Placement Memorandum (PPM) is a vital first step to attracting investors.
This is a process you can’t simply phone in.
However, by accessing templates and key resources, learning how to avoid common pitfalls, and consulting with expert advisors, you can create a PPM and start launching your fund in no time.
To access professional guidance and support, come take the next step with Fund Launch.
DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.
