What are Accredited Investors and what is a Private Placement Memorandum?

EPGD Law Accredited Investors

When a company is seeking to raise capital, one of the most important things a company can do is disclose as much information as possible about the company. The reason for such disclosures is to protect the company in the event things fall apart and the investors try to sue the company for securities fraud for example. Such disclosures will be used as the company’s defense. One of the best ways to provide such disclosures is through a document called a Private Placement Memorandum (aka PPM).

What is a Private Placement Memorandum? What Should a Private Placement Memorandum Include?

Private Placement Memorandum (PPM) is a document that reveals any and all pertinent information an investor may need to make an informed investment in a Regulation D offering. Pertinent information will include the company’s structure, offering structure, disclaimers, risks of the investment, financial information, legal structure, and information about the ownership and management.

Why Should I have a Private Placement Memorandum? Is it Worth it?

A private placement memorandum is typically recommended as a form of protection. A private placement memorandum, drafted correctly, minimizes the risk of liability the issuer may be exposed to when offering or selling securities. This memorandum can protect the company in circumstances where the investor seeks a claim against the issuer if things fall apart. The PPM will be used as the issuer’s defense, which will make it extremely harder for an investor to win a claim against the issuer. If there is no private placement memorandum in place, the financial consequences can be costly.

A private placement memorandum can appear costly, which deters some issuers from seeking counsel assistance at the onset. However, this form of protection is far less costly than litigation regarding an issue that could have been disclosed and placed in the memorandum from the beginning.

What is an Accredited Investor? Do Accredited Investors need a PPM?

Pursuant to Regulation D, an accredited investor is any person who falls within the enumerated categories, or who the issuer believes at the time of the sale to fall within any of the categories. There are separate requirements to qualify as an accredited investor for an individual versus an entity.

An individual must meet one of these categories to qualify as an accredited investor:

  • Any natural person with a net worth of $1 million (individually or jointly with spouse);
  • Any natural person with annual income of minimum $200,000 ($300,000 if joint) for two previous years and an expectation of the same earning for the present year;
  • A broker that acts in a fiduciary capacity and demonstrates sufficient knowledge or job profession; or
  • An officer of the issuer of the security being offered or sold, or any officer of a general partner of that issuer.

An entity must meet one of these categories to qualify as an accredited investor:

  • An institution that acts in a fiduciary capacity and demonstrates sufficient knowledge or job profession;
  • Private business development;
  • Organization with assets in excess of $5 million and not created for the specific purpose of acquiring securities;
  • Any entity in which all equity owners are accredited investors; or
  • Trust with assets exceeding $5 million and not created for the specific purpose of acquiring securities.

Although you may not necessarily need to provide a PPM to an accredited investor, there are still certain disclosures that you would have to make, therefore having a PPM serves as an “insurance policy” even if the investors are only accredited investors.

If you are looking to raise money for your company, use an experienced attorney that can help you with your legal structure, make sure you qualify under a certain exemption, and draft the necessary documents. It’s worth the investment!

EPGD Business Law is located in beautiful Coral Gables, West Palm Beach and historic Washington D.C. Call us at (786) 837-6787, or contact us through the website to schedule a consultation.

*Disclaimer: this blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*

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Eric Gros-Dubois

Eric P. Gros-Dubois founded EPGD Business Law in 2013 and is the current head of the firm’s corporate, estate planning, and tax practice, and manages the firm’s Washington D.C. office. With a JD and MBA, and a specialization in finance, Eric is able to step back and view the legal world through a commercial lens while also acting as a trusted business advisor for his clients. He does his best to be solutions oriented, and tries to think like a business owner, not just a lawyer.


*The following comments are not intended to be treated as legal advice. The answer to your question is limited to the basic facts presented. Additional details may heavily alter our assessment and change the answer provided. For a more thorough review of your question please contact our office for a consultation.

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