4 Tips For Building A Marketable Private Placement Memorandum

According to the SEC’s report, Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, Regulation D offerings more than doubled, from 18,295 in 2009 to 37,785 in 2017. Those deals, along with other types of private offerings, raised a total of $3 trillion in 2017.  The increase in unregistered securities offerings has continued into 2020. Specifically, the number of real estate offerings has accelerated quickly thanks to the U.S.’s seemingly never-ending commercial real estate boom.  Consequently, single-asset and fund structured real estate private placements have saturated the market seeking investors for various property types built on core, value-add, and opportunistic strategies.   

A sponsor should be prudent when picking its securities counsel as this sector demands that counsel cautiously navigate a complex and rapidly evolving regulatory framework.  Counsel must ensure obedience with federal and state law when structuring the offering and drafting the private placement memorandum (PPM) and ancillary documents. Additionally, counsel should effectively advise the sponsor on the legalities associated with the marketing of the offering to potential investors.  

After confirmation that a PPM is legally obedient consisting of accurate, truthful, and current information, how can a sponsor position its offering so that the PPM stands out in a congested market?

1. Present a Clear and Concise Project Overview. The PPM should include a straightforward presentation answering the Who, What, Where, Why, and How questions.  Far too often, PPMs fail to adequately present the players, the “Who”, involved with the project such as identifying and describing the operator/property manager, general contractor, architect, engineer, and/or developer. In the event that one or more of these key parties hasn’t been chosen as of the date of the effective offering date, the PPM should concisely articulate the sponsor’s considerations and requirements for engaging such a future participant. In other instances, PPMs involved with real estate development and rehabilitation projects lack a full explanation of the “How” by failing to include an easy to follow timeline that incorporates the projected dates for design and engineering, permitting, construction, and operational milestones.  Further, many times sponsors provide pages upon pages of confusing and irrelevant market analysis hoping to answer the “Why” for investors. Sponsors should cite the most relevant aspects of the market to support project assumptions instead of overwhelming the investors with multifarious analyses better suited for Nobel Prize laureates in economics. 
2. Stand Out from the Pack with Great Imagery. Scientific experts posit that the brain is able to process images approximately 60,000 times faster than it processes a similar amount of written information.  There are certain parts of the PPM better expressed in images such as the ownership structure. A well-designed ownership chart is a great mechanism to ensure full disclosure of the ownership structure, related affiliates, and relationships among one another.  Further, real estate development and rehabilitation offerings should present honest, reasonable, and well-designed graphical renderings of the anticipated improvements. This helps define the mission and position the product for sale to investors. 
3. Please the Senses.  Sponsors should confirm that the PPM is aesthetically pleasing to the potential investor. Most PPMs consist of hundreds of white paper with black type and underwhelming images and charts.  I previously acted as counsel for a 506(c) offering that was marketed on an online crowd funding platform. This particular PPM sought to raise money for a large mixed-use development. Within four hours, this below the radar sponsor raised $3 million.  This sponsor achieved a quick capital raise, in part, by employing an affordable graphic designer to meticulously format his PPM and heighten the overall presentation with high-end, eye catching imagery.  
4. Include a User Friendly Subscription Booklet. All subscription booklets were not made equal.  Too many lawyers, after many hours of carefully drafting the PPM, will half haphazardly throw in their standard form subscription booklet. I encourage sponsors to push back against their counsel in this regard to achieve both a legally compliant and user-friendly subscription documents. 

Shae Armstrong is a corporate finance attorney with the national law firm of Stinson LLP in Dallas, Texas. Shae is recognized for his work involving private funds, investment companies, and loan arrangements with a focus on cross border transactions.  Shae has advised U.S. House and Senate offices, committees of the U.S. Congress, and policy and industry trade groups on alternative and international investment and lending matters. Shae’s work has been cited in numerous publications including the New York Times, Wall Street Journal, Dallas Morning News, The Guardian, and The Washington Times. Shae is also a Certified Financial Crime Specialist through the Association of Certified Financial Crime Specialists (ACFCS) and he advises his clients on matters including anti-money laundering and the Foreign Corrupt Practices Act (FCPA). He earned bachelor’s degree in accounting from Tulane University’s Freeman School of Business, a J.D. from the University of Tulsa, and an executive global masters in management from the London School of Economics and Political Science. Mr. Armstrong is licensed by the Supreme Court of Texas and the U.S. Court of International Trade.