Private Placement Memorandum

Also known as the offering memorandum. A document that lays out the risks, objectives and terms of an investment, in addition to documenting the syndicator’s business operations and condition.

What is a Private Placement Memorandum in syndication?‍

A private placement memorandum is a legal document that describes the terms of a real estate investment through syndication. It documents everything from private capital structure, to risks, objectives, to terms of an investment and also the syndicator’s business operations and conditions.

This memorandum is a mandatory, full disclosure document that requires the syndicator to communicate everything to the investors beforehand. This way the investors will have a clear understanding of the deal and its terms to decide whether they want to go ahead with it. 

Apart from the aforementioned purposes, it also reflects the syndicator’s track record, acts as a due diligence of the industry and provides additional information that the investors may not have looked for by themselves. 

What are the requirements of a private placement memorandum?‍

The private placement memorandum is typically provided in the form of a booklet that has all the information regarding the entire process of the real estate syndication deal, from start to finish. The contents in this memorandum should include the following:

• Investor Qualification or Requirement: A PPM must clearly state the criteria that investors must meet to qualify for the syndication. There can be more than one type of investor involved in the syndication and at different tiers so the profit share varies. The PPM should clarify all these things.
• Syndicator and Management Information: Syndicators must provide all information about the syndication and the management including but not limited to, vision, unique value proposition and litigations. Furthermore, the PPM should also include all the parties involved in the management of the project. 
• Risks: It is mandatory by law to disclose all the risk factors involved with the project such as conditions under which the project may fail, taxation and legal issues that may be encountered and any requirement of additional funds during the project. 
• Distribution Plan: The PPM should be as detailed as possible in terms of the distributions of returns and profits amongst the investors and the syndicator. It should clearly state how much the investor will receive based on his equity share and include information on payment terms, return threshold, waterfall structure split, etc. 
• Conflicts: The PPM should include details on how conflict of interests will be resolved during the course of the project and also outline what constitutes conflict of interest amongst the investors and the syndicator. 

Is a private placement memorandum legally binding?‍

A private placement memorandum is legally binding as the SEC requires every company or syndication to provide full disclosure to the investors regarding the sale of securities in a private placement offering. It allows investors to know everything about the investment and help them decide whether they want to go ahead with the investment or not. Additionally, it safeguards the syndicator from any legal action being taken against the syndication if the PPM does include all the facts and the investor still claims otherwise. 

Conclusion‍

PPM is an extremely important and mandatory document that is required to be produced before a syndication goes into action. It allows the investors to get all the information about the deal and the syndicator. It also complies with the legal requirements of a private placement offering and secures the syndicator from any fraud being claimed by an investor.