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Private Placement Memorandum (PPM) Templates- Why To Beware Most DIY, Discount or Free Forms

A common issue faced by entrepreneurs, founders, start-ups, and other small businesses is how to get documents when they need to raise money for their venture or enter into various agreements, hire employees, or protect their intellectual property.  The cash strapped individuals often look to discount or free services online to help them do things like obtain sample templates, incorporate, or get other form documents they can use.  There are definitely times you can use these sample form templates or online services and there is a link to some document / forms websites, term sheet resources, and sample financing documents on my Top Startup Resources page.  There are private placement memorandum (commonly referred to as PPM) templates online that can give a starting point and I go over what a PPM is, why you need one, and what should be in one on this page.


When it comes to do it yourself legal services, you can save money by doing certain things yourself.  Most lawyers don’t create a contract or other document from scratch in most cases, they have sample forms they have used in the past or they get samples through practice guides or other attorneys.  The service you are paying for with the attorney is to tailor the form to your specific needs; however, the additional invaluable service is their guidance and recommendations for other things that you need to consider. For example, if your friend offers to loan your newly formed corporation money, you may find a sample loan or promissory note template and just use that.  However, you may not know about state and federal laws that you could violate by putting in improper terms or failing to file the required securities exemption filings.  This can affect the future of your business and you could end up having to refund the money paid or may be prohibited from offering or selling any security in the future (this includes most forms of raising money, whether loan or sale of stock).  Another example is the online incorporation services that people use.  The founder may not realize that simply filing incorporation papers with the secretary of state.  There are securities law exemption filings usually required and failure to comply with record keeping, corporate governance, and corporate procedures can result in the founder having personal liability for the corporation’s debts or other obligations.  The founders suddenly find themselves losing the limited liability protections of the corporation and may even have to file a personal bankruptcy to avoid the liability.

A PPM template could be used, but the disclosure of risks, securities law compliance, and other issues are those things that need to be changed to fit the specifics of the transaction taking place.  In addition, laws change over time and vary by state, so a template may have been fine in one state in 2001, but you have no idea if what you are getting really is the most up to date and local form you could use.  An example is the change recently made by the US Securities and Exchange Commission to the definition of an “accredited investor” which can affect qualifying for securities law exemptions and certain parts of a PPM or the host of related documents (which use usually don’t get with discount DIY services).  You can read about the change to accredited investor here.

[As a simple example, today (June 4, 2012), I went to several well-known, online document services/sites to view their PPM templates (which they claim are up to date) and didn’t find any that had the new definition of what an accredited investor is implemented where they discussed accredited investor status.  That was passed into law, then implemented by new rule by the SEC in December 2011.  That’s six months after the new rule went into effect and over a year after the proposed changes were signed into law.]

So with this brief warning, use forms, templates and discount services at your own risk, but at least call an attorney to see if you can get some free guidance to understand all the potential issues or steps you need to take.

I think that forums like the relatively new Docracy are interesting ideas for shared documents through an open sourced legal document idea. They allow sharing of forms that tell you where the original form came from, e.g. a reputable law firm, and changes that may have been made to the original. This helps eliminate the question of quality and lets the other party in on what the other side is looking for by the changes they made. Somewhat like Series Seed docs, this can be a viable low cost option. Just remember that it needs to address all issues that may arise and doesn’t come with professional guidanceim seeing tons of similar cases. That experience and their network can be invaluable to save you time and headaches in the long run. I brush my teeth, floss, eat right and work out, but I still go in for regular physicals and dental exams. Trust in the pros, but if you can’t afford it, at least go in every so often to get a Small Business Legal Check Up.

Shameless plug:   In addition, I go over some of the common issues and questions faced by new companies on this page.  For a free initial consultation with me, contact me.