A business plan and a private placement memorandum serve different functions. A business plan is used as a marketing document and presents the company from a marketing point of view. It necessarily contains operational information, forward-looking statements, anticipated revenues, potential markets, information about partners, directors and also possibly financial projections of revenue and income. On the other hand, a private placement memorandum (PPM) is a full disclosure document presented in a format that is more factual, pessimistic, realistic and down-to-earth. It must contain all the bad news risk and potential downfall or liability of the company. It will include the list of competitors, an industry market analysis and a description of the management chain. It must list all possible scenarios involving the company that could go wrong. It must address the competition regardless of how gloomy the prospects of the competition or how sophisticated the competition.
You are automatically subject to the securities law if you are seeking investments in your company. Your offering memo must include full material disclosure. If you are found to have failed to make full disclosure in your offering memorandum it may be grounds for the investment to be rescinded. Furthermore, you could be held liable for the funds if it was your failure to make full disclosure.
We typically recommend that you paste your business plan as an addendum to the PPM. However, you need to remove any statements from the business plan that are inappropriate for the document. Too often, included in the business plan are statements that change it from a business plan to an offering document. In these cases, adding a disclaimer doesn’t mean you get a free pass. You still have made it an offering document. This would include statements such as the amount to be raised, what the deal is, exit strategy, pricing, etc.
To begin with, let’s make it absolutely clear that prior to accepting any money from an investor, any investor, you must provide the investor with a Private Placement Memorandum and Subscription Agreement. Assuming that your corporate organization is a limited liability company you will also need to provide them with an LLC Operating Agreement. However, the very first document you need to prepare is the business plan because the information in the plan will ultimately be incorporate and included in the Private Placement Memorandum.
The differences can be described in the following manner.
1- Federal and State Securities Laws (Regulation D aka Reg D) require that you provide each and every investor with a “disclosure” document. The Private Placement Memorandum must meet the disclosure requirements required by the law. The business plan does not meet that requirement.
2- When preparing a business plan,you should have placed a legend on the front page that reads:
“This is a business plan. It does not imply and shall not be construed as an offering of securities. Prospective investors are not to construe the contents of this document as an investment, legal or tax advice from either the Company or the prepares of this document. Any prospective investor should consult with professional investment adviser’s and gain professional legal and tax advice”.
The information that is contained in the business plan is also included in the Private Placement Memorandum.
3- Many people don’t construct and build their business plan with the idea that it ultimately will be added to the PPM. This creates 2 problems for them. One: there could be verbiage in the business plan that is not appropriate for the PPM. Second: is that you could include information in the business plan that inadvertently changes the business plan into an improper offering of securities.
As a rule of thumb. We only will send our clients and potential investors a Private Placement Memorandum for these reasons
1- Ultimately you must provide the investor the PPM before you take any money from them so why not give it to them up front.
2- If the investor decides to invest, you want them to send a check and sign and return the documents immediately. If they must wait to receive the PPM, you give them time to think, and may change their minds.
3- The PPM is the legal disclosure document required by Federal Securities Law. Why risk violating the law with a business planwith an improper disclosure document. If you are going to err do so on the side of caution. Give the prospective investor the PPM.
4- Any representations you make in a business plan is for all intents and purposes, non-binding. Why would we want to give our clients and investors a document that carries the legal disclosure responsibilities of a used car advertisement?
5- In a PPM if you misstate the information either through actual deed or even omission the transaction can be rescinded by the SEC. If you intentional mislead, misstate or omit information you can be held criminally liable. We are not going to give our clients any document that the document’s creator can’t be held legally accountable. Of course, this works to your advantage because since prospective investors do not know you they have a certain comfort factor in that your PPM must meet a very high standard of truth. This tends to add credibility to your document and presentation.