What is a PPM (private placement memorandum)?

What a PPM is for

A PPM tells prospective investors what they are buying and what can go wrong. It is written for the offering, by or with securities counsel, and given to investors before they subscribe. In a real estate syndication it sits beside the subscription agreement and the operating agreement.

Its weight comes from the anti-fraud rules. Rule 500 of Regulation D states that Regulation D transactions are not exempt from the antifraud, civil liability or other provisions of the federal securities laws. Section 17(a) of the Securities Act and Rule 10b-5 under the Exchange Act reach material misstatements and omissions in an offer or sale, registered or not. A written disclosure document is the record of what investors were told.

When Regulation D requires disclosure

Regulation D sets a specific information requirement in one case. Under Rule 502(b), if a Rule 506(b) offering sells to any purchaser who is not accredited, the issuer must give that purchaser specified information, including financial statement information, a reasonable time before the sale, plus a chance to ask questions. The issuer is not required to furnish it to accredited investors, and Rule 506(c) offerings are accredited-only.

A note to Rule 502(b) adds that an issuer giving this information to non-accredited investors should consider giving it to accredited investors too, in view of the anti-fraud provisions. Separately, Rule 506(e) requires every Rule 506 issuer to describe in writing, a reasonable time before sale, any bad-actor events from before September 23, 2013 that would otherwise have been disqualifying.

So a PPM is not legally required in every Rule 506(b) offering, but disclosure liability applies in all of them. Whether to use one, and what it says, is a decision to make with securities counsel.

What a real estate PPM usually contains

Contents vary by deal and by counsel. A typical real estate PPM covers:

• A summary of terms: the security, minimum investment, offering size, classes, preferred return and profit splits.
• The property and business plan: location, physical description, current operations, planned improvements and the exit.
• Sources and uses: purchase price, closing costs, reserves, fees and the loan.
• The sponsor: managers, background, track record and any Rule 506(e) disclosure.
• Fees and compensation: acquisition, asset management, construction management, refinance and disposition fees, and the promote.
• Conflicts of interest: affiliated property managers, other deals competing for the sponsor’s time, related-party transactions.
• Risk factors specific to the property, the market, the debt, the sponsor and illiquidity, not only boilerplate.
• Projections, if included, with their assumptions and a clear statement that they are estimates.
• Tax and ERISA considerations, transfer restrictions, and how to subscribe, with the operating agreement and subscription agreement attached as exhibits.

PPM vs other offering documents

Investors see several documents. They need to agree with each other:

What to watch for

PPM problems usually come from documents drifting apart:

• Numbers that differ between the deck, the deal page and the PPM. Keep target returns, fees and risks consistent.
• A waterfall summary that does not match the operating agreement. PPMs commonly state that the agreement controls, so model from the agreement.
• Material changes after the PPM goes out, such as new loan terms or a price change. Ask counsel whether a supplement is needed before accepting more subscriptions.
• Generic risk factors that miss the deal’s real risks, such as floating-rate debt or a large lease rollover.
• Describing projections, a preferred return or a distribution rate in a way that implies certainty. They are not guaranteed.

Primary sources

• 17 CFR 230.500 — Rule 500, use of Regulation D (Cornell LII)
• 17 CFR 230.502 — Rule 502(b), information requirements (Cornell LII)
• 17 CFR 230.506 — Rule 506, including 506(e) (Cornell LII)