A business plan is your blueprint for building your business venture. It explains the operational and marketing strategy for your business and lays out financial projections. In addition to being your road map, the business plan hopefully motivates potential investors and lenders to finance you.
While the business plan is a planning and marketing document, a private placement memorandum (“PPM”) is a legal document used in a private placement offering. The PPM’s primary legal purpose is ensuring compliance with federal and state securities disclosure and anti-fraud laws. Compliance with those laws requires providing investors with accurate and complete information about the company. The PPM is sometimes referred to as an offering memorandum or simply a disclosure statement. A prospectus is the disclosure statement used in a public offering.
Certainly, there is overlap between a business plan and a PPM. They both describe the industry, company operations, and the management team. However, sometimes the disclosures required by securities laws are at odds with the marketing picture companies want to paint through their business plans.
In your private placement memorandum, you must give your investors all information reasonably required to make an informed decision about whether or not to invest in your company. For example, you must tell investors all potential risks as well as the rights of the investors in the company, the minimum and aggregate amounts you will accept prior to closing the offering, and who has the authority to manage the operations of the company.
Depending on the way you structure your offering, there may be specific legal requirements for preparation of the PPM financial statements. For example, if you sell securities to non-accredited investors in a Regulation D, Rule 505 private placement, the financial statements in your PPM must be audited.
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