Public investors speculate and private investors accumulate – accumulate wealth.
That first sentence explains the difference between public and private investors. Public investors are all about timing. They want to buy at the bottom before prices rise and sell at the top before prices drop. It’s a fool’s errand with very few retail investors beating the market (or professional managers for that matter) but it doesn’t stop millions of investors from trying.
Public investors have short attention spans. That’s because Wall Street makes it easy for them to buy and sell their positions at the drop of a hat.
Wall Street liquidity encourages what amounts to nothing more than gambling.
That’s why savvy investors turn from the public markets for the fertile grounds of the private markets where wealth can be generated from tangible assets that cash flow and grow over time.
To raise capital from the public, a company must register with the SEC and offer its securities through the lengthy and expensive IPO registration process or qualify to offer its securities through one of the private offering exemptions.
Private offerings may not be required to jump through the same rigorous hoops as public offerings to offer their securities to the investing public, but there are certain strict requirements they must comply with to claim exemption from registering with the SEC.
One of the major requirements a private offering needs to satisfy to claim exemption from registration is to provide adequate disclosure to prospective investors to make an informed decision.
Besides being a requirement to qualify for exemption, a PPM is also a window into the company soliciting your capital.
If your goal is to accumulate wealth through investment in a tangible asset that cash flows and appreciates, there are a host of questions you need answered from the company soliciting your money before investing.
Questions like:
- What is the company investing in?
- In what geographic markets will the company be investing?
- What type of security am I buying?
- What’s in it for me?
- How long am I in it for?
- What kind of return can I expect to make?
- What kind of experience do the managers have?
- What is the manager’s skill set?
- What is the state of the market for this type of investment?
- How are the managers compensated?
- How is my investment secured?
A properly drafted PPM should answer all of these questions and more.
The long investment windows of most private offerings make it vital that you know exactly what you’re getting into and any associated risks involved.
Many PPMs can tell you all you need to know about investing in a company.
It can also raise red flags to prevent you from making a huge financial mistake:
- Sloppy and shoddy PPMs can tell you a lot about the managers/promoters of a private offering.
- Shoddily written PPMs with unrealistic projections or incoherent strategies should all be red flags.
At a minimum, a competently prepared PPM should provide the following disclosures:
- Company name along with date and place of organization.
- Description of securities being offered and terms of the offering.
- Business description:
- Asset class
- Acquisition costs
- Market Positioning Strategy
- Geographic focus
- Industry knowledge
- Company and market data
- Development or renovation plan
- Financial projections
- Exit strategy
- Management:
- Experience
- Track Record
- Expertise
- Infrastructure
- Compensation
- Financials:
- Projected Sources of Funds
- Use of Funds
- Proformas
- Risk Factors.
- Entity Documents (i.e., bylaws, operating agreement, limited partnership agreement, etc.).
- Notices and Disclaimers to Investors.
- Legal and Tax Matters.
- Exhibits.
Unlike with public offerings where the SEC doesn’t care if you read a company’s prospectus or not, with a private offering the SEC is adamant that every prospective investor receive a PPM to properly assess the risks and viability of the proposed business.
It’s a vital document that you should insist on receiving from every private opportunity and that you should read very carefully.
