The PPM's role in marketing
Usefulness of Private Placement Memorandum (PPM)
Julian Montero: The Private Placement Memorandum (PPM) is the starting point for us when we’re with a client preparing the framework of their deal. We emphasis to our clients that the PPM is perhaps the most significant marketing document that they will have with respect to their project.
It is what the agents will be touching; it is what the investors will be touching; and it will be seen by the marketplace.
As critical as the disclosures are in defining the risk factors, the document has to be useful and it can’t be a race to the bottom in terms of putting all the nasty possibilities out there so that you can limit your potential exposure. You need to make sure that this document is useful and we are regularly in touch with the marketplace, in particular the agents that are driving the process in our industry which tends to be ‘China-centric’.
For example, with respect to the capital stack that is obviously a critical element in this document. How much capital and how much equity does the development group have in the deal, that should be emphasized and clearly articulated.
Kurt Reuss: Julian, I appreciate the concept you’re bringing up. Bob, I would imagine that you might have a different opinion of the PPM as a marketing document for EB-5 projects.
Bob Cornish: Yes I do. I view the PPM not as a marketing document at all. My view as a former compliance officer is that the marketing materials ought to be separate and apart from your PPM and they ought to refer to or incorporate what’s in your PPM.
The PPM is a disclosure document. It needs to disclose risks as best you possibly can. It needs to be in a comprehensible form so that someone performing due diligence can ascertain what the true risk factors are.
I don’t believe the PPM should be touting the project. I believe it should be left to the marketing material to prepare the project for the market. A lot of my thinking stems from FINRA requirements in terms of delineating how fees are split up, what fees are being charged, as well as the various rights and obligations of the parties to the deal.
In many instances, at least in the hedge fund world, if you were truly using your PPM as a marketing piece and you’re dealing with a fledgling broker-dealer, for example, the PPM is going to be submitted to FINRA as part of marketing material and I don’t think an Issuer wants to be in the position of having a substantial rewrite of their PPM following a FINRA review of marketing material. That’s where I come from. I certainly think PPMs do double duty, but just be aware there is risk and reward in doing that.
Kurt Reuss: So we’ve got a situation where the Chinese represent the majority of the market right now and they want to understand the deal from the PPM, and Julian’s point is ‘we’re not looking to scare them off the deal, it’s a competitive market, we know that they’re going to look at the PPM as a source of information’ and Bob’s point is it’s not the place for marketing the project, it’s a place for disclosures and if your PPM is deemed marketing material, you are potentially subject to revisions; so Mike, where do you fall on that line?
Mike Homeier: I think this goes to your comment Kurt about the art of securities work as well as the science. The science says ‘look, your obligation is to disclose all material facts about the investment opportunity before the the US visa seeker makes his decision, so certainly the disclosure obligation is paramount.’
There is an art that an experienced attorney is more used to than a younger attorney. When a younger attorney approaches the PPM it’s ‘get all the information out’ because the PPM is viewed as a protective document, it protects the issuer and gives the investors the information they need.
That's the hard science, get all the information out, the good, bad and ugly; but the art is in how you disclose what you disclose and this ends up having a marketing impact. The words that you use can be blunt and they can be terse and that can come across more negatively than it needs to and by the end of a review an investor or his advisor may say ‘you know, I agree with you, this deal has so many negatives that I’m passing’.
The value of going to experienced securities council is that they are able to straddle between the disclosure and the marketing aspects and actually satisfy both imperatives to a significant degree as a part of EB-5 business plan.
Bob Cornish: I wholeheartedly agree with that. I think where some PPMs really start getting into trouble is when we say “marketing.” In my view, it’s when we start offering pitch-related materials or return projections in a PPM. I advise clients to not put projections on returns and things like that in their PPM.
Julian Montero: I agree with that. Essentially because the PPM is a document that’s touched by pretty much everybody, the disclosures contained are critical to impress upon potential subscribers the good and the bad.
Before we actually finalize terms with a client we make them aware that perhaps they should be restructuring their deal so that what we disclose is able to be presented in a favorable light, and if they choose not to restructure an aspect of the deal, then we let them understand that this may have a negative impact in the marketplace because essentially the document will serve as the main vehicle to explain the offer in to EB-5 investors.
