What Is a Private Placement Memo?
In a private placement, a company sells equity or debt to one or more private investors. A private placement memo or memorandum outlines the investment opportunity with details on the company, its products or services, the securities for sale, the use of funds, financial data, risk factors and the terms of the offering.
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Preparing the Memo
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Typically, the company hires investment bankers to draft the memo. The bankers act as trusted intermediaries between the company and potential investors. Investors rely on bankers to conduct due-diligence on the company and objectively present the risks and benefits of the opportunity. Attorneys provide legal advice on the memo.
Securities Offered
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Securities offered in a private placement range from common shares, preferred shares, convertible bonds, regular bonds or custom-tailored investments negotiated between the parties. Investors often include banks, insurance companies and pension funds.
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Issuers
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Private placements are often associated with startups or small companies looking for expansion capital. However, large companies routinely use private placements to raise billions of dollars. In 2008, Goldman Sachs raised $5 billion in a private placement with Warren Buffett’s Berkshire Hathaway.
Benefits
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Private placements can bring in capital at critical stages in a company’s growth. For example, a small company may raise $1 million to cover initial expenses on its first large order, following which its valuation may jump allowing it to do an initial public offering, or IPO.
Reporting Requirements
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Securities offered do not need government approval. Private placement memos need not be registered or cleared with the Securities and Exchange Commission.
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References
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