How to Read a Private Placement Memorandum

A private placement memorandum, often called a PPM, is a disclosure document an issuer may provide to prospective investors in a private offering. It generally describes the business or strategy, the people involved, the terms of the offering, and the risks. Private funds commonly use PPMs alongside other offering documents.

A PPM is usually part of a larger set of documents. These often include a subscription agreement, which is the form a purchaser completes, and a limited partnership or operating agreement, which sets out the legal rights of the parties. The PPM is typically written to explain, while the agreements are written to bind.

Offerings of this kind are often made under SEC Rule 506(b), which does not permit general solicitation, or Rule 506(c), which allows general solicitation but requires that all purchasers be accredited investors and that the issuer take reasonable steps to verify that status. Whether you are eligible to participate depends on your own circumstances. The Hastings Fund is an educational directory, and nothing here is an offer to sell or a solicitation of an offer to buy any security.

Many readers start with the summary of terms and the risk factors, then work back through the rest of the document. Others read it cover to cover with a highlighter and a list of questions. There is no single correct method, and approaches vary with the reader's experience.

Common sections include the investment strategy, the management team and their backgrounds, fees and expenses, how profits are shared, conflicts of interest, restrictions on transferring or withdrawing, reporting and tax information, and legal disclaimers. Readers often compare what the PPM says with what they heard in conversations or saw in marketing materials.

Traditionally, people have also asked their own attorney, accountant or financial adviser to review the documents with them. Some use independent due diligence providers who examine the manager, the operations and the terms. Each of these routes has been used for different reasons and at different levels of detail.

The right fund due diligence provider may help you turn a long, dense document into a clearer set of questions. A first conversation is generally about your situation, what you are considering, and how much time you have. A provider may explain how the sections fit together and point out where terms are unusual or unclear.

You might ask what the provider reviews and what it does not, such as whether it looks at the manager's background, the fee structure, the service providers or the legal terms. It is also fair to ask how the provider is paid, whether it has any conflicts of interest, and whether it is licensed to give the type of advice you need.

Useful questions to bring about the PPM itself may include: How are fees and expenses charged? What are the restrictions on getting money out? What conflicts of interest are disclosed? What happens if key people leave? A provider may help you think these through, but it cannot promise any outcome, and you should rely on your own licensed advisers for investment, legal and tax advice.