7 Mistakes You're Making with Your Fund PPM & How to Fix Them Before the SEC Notices)
If you're raising capital for your fund, you know how critical it is to get everything right. A Private Placement Memorandum isn't just a legal formality—it's your shield against SEC enforcement actions and the foundation that protects both you and your investors. But here's the thing: most fund managers are making costly mistakes that could land them in serious hot water.
Whether you're working on a PPM private equity deal, launching a PPM venture capital fund, or preparing a PPM hedge fund offering, these seven mistakes could derail your entire fundraising effort. Let's dive into what's going wrong and, more importantly, how to fix it before regulators come knocking.
1. Going DIY Instead of Getting Proper Legal Guidance
The Mistake: Trying to save money by drafting your PPM document yourself or using generic templates from the internet.
Legal fees can feel overwhelming when you're trying to preserve capital for your fund. But attempting to create your own fund PPM is like performing surgery on yourself—possible, but probably going to end badly.
Why This Kills Deals: Securities law isn't something you can wing. Every private equity PPM needs to comply with federal and state regulations that change regularly. One missed disclosure or improperly structured security can trigger SEC investigations, investor lawsuits, and regulatory penalties that cost far more than proper legal counsel.
The Fix: Partner with experienced securities attorneys from day one. It's an upfront investment, but it's far less expensive than defending against SEC enforcement actions later. Your legal team should understand your specific fund structure and have experience with similar offerings.
2. Playing Risk Factor Roulette
The Mistake: Downplaying risks or providing incomplete risk disclosures in your PPM fund documentation.
Some fund managers think comprehensive risk factors will scare investors away. Others simply don't realize how many potential risks they need to address. Both approaches are dangerous.
Why This Backfires: Investors aren't stupid. They know investments carry risks, and they're more likely to trust managers who are upfront about potential problems. Failing to disclose material risks creates legal liability. If things go south and investors can prove you didn't warn them about foreseeable risks, you're looking at fraud claims.
The Fix: Be brutally honest about every risk your fund faces: market risks, operational risks, regulatory risks, key person risks, liquidity risks, and more. Work with your legal team to ensure your risk factors are comprehensive without being so broad they're meaningless. Avoid "mitigating language" in your risk factors. Don't soften the blow; state the risks clearly.
3. Playing Hide and Seek with Material Information
The Mistake: Providing incomplete financial information, vague business plans, or burying important details in footnotes.
Some managers think they're being clever by keeping certain information close to their chest. Others simply don't realize what qualifies as "material information" that must be disclosed.
Why This Creates Problems: Incomplete disclosures are a fast track to securities fraud allegations. Investors need complete, accurate information to make informed decisions. If you're not providing it, you're violating your fiduciary duty.
The Fix: Your PPM document should include audited financial statements (when available), detailed financial projections with underlying assumptions, clear explanations of how you'll use investor capital, and transparent information about fees and expenses. If you're unsure whether something should be included, err on the side of disclosure.
4. Speaking in Legal Gibberish
The Mistake: Using unclear, ambiguous, or overly complex language to describe investment terms.
Investment terms might seem straightforward to you, but if your investors can't understand what they're agreeing to, you've got a problem.
Why Ambiguity Hurts: Unclear terms lead to disputes, litigation, and regulatory scrutiny. Regulators specifically look for clear, plain English disclosure in fund documents.
The Fix: Write like you're explaining things to a smart friend who isn't a securities lawyer. Define all technical terms, explain your fund structure clearly, and make sure investor rights and obligations are crystal clear. Your private equity PPM should pass the "would my mom understand this?" test.
5. Getting Creative with Financial Projections
The Mistake: Including overly optimistic financial projections or unrealistic performance expectations.
It's natural to want your fund to look as attractive as possible, but inflating projections is a recipe for disaster.
Why Aggressive Projections Backfire: If your fund underperforms relative to projections disclosed in your PPM hedge fund documentation, investors can claim fraud or misrepresentation. Even if your projections seemed reasonable at the time, you'll need to defend every assumption if things don’t work out.
The Fix: Base all projections on conservative, defensible assumptions. Include clear disclaimers that projections are forward-looking statements subject to risks and uncertainties. Consider having independent accountants review your projections. It's better to over-deliver on modest projections than under-deliver on aggressive ones.
6. Treating Record-Keeping Like an Afterthought
The Mistake: Failing to maintain comprehensive records of your compliance policies, procedures, and investor communications.
Many fund managers focus so much on raising capital that they neglect proper documentation and record-keeping systems.
Why Poor Records Are Dangerous: The SEC evaluates compliance based on your paper trail. If you can't document your compliance efforts, regulators will assume you weren't compliant. Poor record-keeping is itself a compliance violation that frequently results in fines and sanctions.
The Fix: Establish comprehensive record-keeping systems from day one. Document all compliance policies and the specific actions you take to implement them. Maintain records of all investor communications, due diligence efforts, and versions of your fund documents.
7. Treating Marketing Like the Wild West
The Mistake: Creating marketing materials that don't comply with SEC Marketing Rules or contain misleading performance information.
Social media, websites, and digital marketing create new opportunities—and new compliance risks.
Why Marketing Mistakes Are Costly: The SEC’s Marketing Rule has specific requirements for testimonials, endorsements, and performance advertising. Non-compliant marketing materials are low-hanging fruit for enforcement actions.
The Fix: Have your legal team pre-approve all marketing materials before distribution. Ensure any performance advertising complies with current SEC guidance. If you’re using social media or digital marketing, familiarize yourself with SEC guidance on these channels.
Don't Let These Mistakes Sink Your Fund
Preparing a proper fund PPM isn't where you want to cut corners. The upfront investment in experienced legal counsel and comprehensive documentation is far less than the cost of defending against SEC enforcement actions or investor litigation.
Your PPM document should be customized to your specific fund structure and investment strategy, not built from generic templates. It should clearly explain your business plan, comprehensively address all material risks, provide transparent information about fees and expenses, and respect your investors' intelligence by using clear, understandable language.
If you recognize any of these mistakes in your current fund documentation, contact our securities law team to discuss how we can help protect your fund and your investors.
Remember: The best time to fix compliance issues is before they become problems. Don’t wait for the SEC to notice—take action now and ensure your fund documentation meets all regulatory requirements and serves as the strong foundation your fundraising efforts deserve.
Ready to make sure your fund documentation is SEC-proof? Contact Randall & Associates today to schedule a consultation with our securities law team.
CALL US TODAY AT (928) 585-6255 or schedule a time to talk with an attorney HERE.
Don’t wait until it’s too late—take the first step toward protecting your fund and your investors!