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A business plan and a private placement memorandum serve two distinct purposes. A business plan is used as a marketing document and presents the company from a marketing point of view. It contains operational information, forward-looking statements, anticipated revenues, potential markets, information about partners and directors, and possibly financial revenue and income projections. On the other hand, a private placement memorandum (PPM) is a comprehensive disclosure document presented in a factual, realistic, and down-to-earth format. It must contain all the company’s bad news, risks, potential downfalls, or liabilities. It will include a 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 are or how sophisticated the competition is.
You are subject to securities law if you seek investments in your company. Your Offering Memorandum should include full material disclosure. If you are found to have failed to make full disclosure in your investors, it may be grounds for their investment to be rescinded. Furthermore, you could be liable for the return of their funds.
I recommend adding your business plan as an addendum to the PPM. However, you need to remove any inappropriate statements from the document.
Before accepting any money from an investor, the investor or their lawyer will require you to provide a Private Placement Memorandum, Subscription Agreement, and an Operating Agreement if it is organized as an LLC. This works to your benefit. The Subscription Agreement is signed by the investor and returned to you with their investment check. Suppose you are sued and the Plaintiff claims that you failed to tell them the truth and/or misrepresented the facts or risks. In that case, the Subscription Agreement should contain a statement that, by the Investor’s signature, acknowledges that the Investor a) received a copy of the Offering Documents and b) they were given every opportunity to ask you any questions.
However, you should prepare the business plan because its information must be incorporated and included in the Private Placement Memorandum. Typically, the business plan outlines the amount of money that needs to be raised in the Offering and how the funds will be allocated (a Use of Proceeds clause).
The information in the business plan differs from the information in the Offering Memorandum, which is why you wish to add the business plan as an addendum to the PPM. Additionally, as you discuss your Offering with potential investors, you will likely realize information that should be added to the business plan and identify other details that should be removed. If you have developed the business plan, it is your document and should be relatively simple to make changes.
I often see that entrepreneurs do not build their business plan with the idea that it will ultimately be added as an addendum to the Private Placement Memorandum (PPM), also known as offering documents. This creates two problems for them:
(I recommend adding language to the Offering document that specifies that the language in the PPM takes precedence over the language in the business plan addendum.)
Review all the documents for conflicting statements once you have the offering documents and the business plan addendum.
Have Questions? Need Clarification? Call Mr. Shields at 1 239-378-1226. Consultations are free.
