What is a Private Placement Memorandum?

There are many paths available to entrepreneurs looking to raise funding for their business. Going public through an IPO or direct public offering is one option, but if your intention is to raise capital while keeping your organization private, you’ll need to turn to private investors. This often includes wealthy individuals as well as banks, insurance companies, and pension funds, all of whom are frequent targets for capital requests. A well-crafted private placement memorandum is one of the most valuable tools for giving them the information that they need and winning their trust.

The private placement memorandum is sometimes called an offering memorandum. It is very much like the prospectus that public companies prepare for potential investors, containing key information that these key decision makers can easily scan and consume without the distraction, flash and color of a marketing document.

For private investors, every funding request represents potential benefits and risks. Decision makers need solid information to evaluate a company’s upside. Among other things, they want:



•  An explanation of what the company does and how it makes money

•  Details of how much funding is being sought

•  The potential risks and rewards of investment

•  Whether a company is scalable

•  Details on how the company is structured

•  Details about the management team

•  Proof that the product or service is relevant and validated

•  Details on the company’s marketing strategy



Though there is no one right format for a private placement memorandum, there are certain elements that it should always contain, including: 



• Executive Summary – This is an introductory statement that outlines what the company does and what funding is being sought.
• Business and Management Section – More granular information on the company’s earnings, operations, management team and history.
• Use of the Investment – Detailed explanation of why the funding is needed and what it will be used for.
• Financials – Granular information on income, expenses, profits and liabilities. Also includes past financial data and projections. 
• Risks – Liabilities, competition, pending litigation and other concerns that could negatively impact investment outcomes must be fully disclosed in this section.
• Summary of Offering Terms – What type of investment the company is seeking, what the company’s overall capitalization is currently and what is expected after funding is received. This section will provide details on number and price of shares being sold, total expected proceeds, and what investors will receive in exchange for their investment. Also provides information on exit strategies and shareholder rights in case of liquidation.
• Investor Suitability – Information on what type of investors the company is seeking funding from.
• Subscription Procedures – Details on how a potential investor can become involved.
• Disclaimers – Every private placement memorandum should contain the legal disclaimers required by law.