startup legal FAQ – 7. What is a PPM?

What is a PPM and why do I need one?

A Private Placement Memorandum, or PPM, is a formal description of the investment opportunity offered by your company. Before taking money from investors (or lenders), you may wish to consider circulating a PPM to inform them of the basic provisions of your business plan, a description of the securities you are offering, and the risk factors that could affect the long-term value of your business.

Or, you can not give a PPM to potential investors, but failure to do so gives rise to the following risks:

1.Your offering of securities may not fit into the “safe harbor” provisions of federal securities laws governing private sales of stock, which could subject you to civil and criminal penalties; and

2. You could be subjected to claims by investors that you have defrauded them.

Promoting the sale of stock in a company is fraught with risks. When selling stock, you’re sort of guilty until proven innocent. The moment you first part an investor from her money, you are risking a lawsuit claiming that you used all manner of treachery to do so. A well-drafted PPM can reduce this risk by helping you prove that your investors were properly warned about the risks of investing in your company and that you have complied with the law.

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