Understanding Private Placement Documents
Private placements are investments in privately-held small businesses and have long been a desired investment vehicle for institutions and high net worth families. A private placement involves the selling of securities (debt or equity) to investors to raise funds for a company whose shares are not publicly traded. These offerings are becoming increasingly common as equity crowdfunding platforms allow people to conduct syndications in real estate, agriculture, and other businesses in a more automated and systematic fashion. Private placements are also desirable for investors who simply want to hold assets that are not tied to the stock market.
As a passive investor in a real estate-related private offering, you own a security interest in an operating company that owns a single property, multiple properties, or is developing one of those projects. Private placements can pay monthly, quarterly, or annual distributions, as well as distributions of capital gains when the property is liquidated.
The vast majority of private placement syndications fall under the Securities Exchange Commision exemption for Rules 506(b) and Rule 506(c). The documents for these syndications are fairly straight forward, but their length and volume of legalese can be intimidating to first time investors. Here are the common documents you will most likely see when analyzing a private placement offering:
Offering Summary
Most offerings are accompanied by some sort of offering summary which may take the form of a slide deck, glossy brochure, or text-based executive summary. On a crowdfunding platform, the offering summary outlines the general aspects of the deal, including market characteristics, information on the management team, deal structure, minimum investment amount, and who is eligible to invest. The offering summary is a “teaser,” designed drive investors into further due diligence.
The PPM
If you’ve ever invested in a mutual fund, you were sent a prospectus that discusses that fund’s investment strategy, composition, and management. Similarly, the Private Placement Memorandum, or PPM as it is commonly known, contains disclosures and risk factors associated with a particular offering. PPMs usually contain language such as “highly speculative” and “you may lose some or all of your principal investment.” Like stocks, bonds, and any other investment, there are never guarantees in private placements, and this language is included to protect the deal sponsors from future investor lawsuits. PPMs may have a variety of exhibits, such as the offering supplement or one or more of the below documents.
Subscription Agreement
The Subscription Agreement is signed (electronically or manually) and is an official agreement that tells how much of a particular offering (generally in units or membership interests) the investor is actually purchasing. The subscription agreement may also be tied to a Limited Partnership Agreement if that’s how the investment is designed.
Suitability Questionnaire
This document must be filled out and signed to determine whether or not you are eligible to participate in a specific offering. Based on the SEC exemption, you may be required to be an accredited investor, and list things such as your income, net worth, and previous investment experience. At some point, you may also be asked for a letter from an attorney, CPA, or financial advisor verifying your accreditation status.
Every private placement is unique. As with any investment, it’s wise to consult your tax professional, legal representative, or financial advisor before investing in a private placement.
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