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Offering Memorandum

Also known as a Private Placement Memorandum

What is an Offering Memorandum?

An Offering Memorandum is also known as a private placement memorandum. It is used as a tool to attract external investors, either specifically targeting a known group or soliciting willing investors. The document enables the investor to understand in detail the investment vehicle to assess their interest in engaging in the business. An investment banker often prepares an offering memorandum on behalf of the business owners.

 

Offering Memorandum

 

In investment finance, an offering memorandum is a kind of a detailed business plan that highlights information required by an investor to understand the business. It provides details on the terms of engagement, potential risks associated with the business, and the detailed form of the operations of the business. The document also often includes a subscription agreement that acts as a contract between the two parties, i.e., the investor and the issuing company. Investments formally follow these guidelines and are mostly required by securities regulators. Even as a requirement, the majority of investors always perform due diligence. Prospectuses are similar to offering memorandums though the former is for publicly traded issues while the latter is for private placements.

Private equity companies often prefer the offering memorandum option to other options such as securing a loan or going public in the process of growth. Growth requires an injection of reasonable capital that is obtained from investors through the offering memorandum. For instance, a company can decide to increase the number of branches, which will require a significant amount of funds. The process begins with the firm deciding how much they need for the expansion and how much they will offer for a share. Then, an investment banker drafts the offering memorandum, which must comply with existing procedures and securities laws and regulations. The company then chooses who to issue the document with, depending on their targeted investors, which is in complete contrast with an Initial Public Offering (IPO). An IPO renders everyone eligible to buy shares in the company while an offering memorandum targets specific investors.

 

Offering Memorandum Example

International Metals Trading LLC has a publicly posted an offering memorandum on slideshare.net.  This presentation provides a clear offering memorandum example that can be helpful for gaining a clear picture of what’s typically included in the document and what it actually looks like.

Offering Memorandum Example

View the Full Document here.

 

Contents of the Offering Memorandum

An offering memorandum comprises key information on future growth strategy, upcoming opportunities in the market, client diversification plans, strategy on achieving future projections in the pipeline, details on competitors, and plans to deal with competition. The strengths and weaknesses of the current management team and plans on dealing with the weaknesses, operations scalability, etc. are detailed in the document. The investment banker, financial advisors, and the like, should provide valuable information but the offering memorandum should contain information owned by the company. It should vet and scrutinize every clause to ensure it’s free from omissions and commissions. The document gives the business an opportunity to convince targeted investors, and it should be flawless for this purpose.

 

Example Offering Memorandum Table of Contents:

  1. Summary of the Offering
  2. Business Summary
  3. Requirements for Purchasers
  4. Forward-Looking Information (Financial)
  5. Risk Factors
  6. Use of Proceeds
  7. Management
  8. Compensation
  9. Board of Directors
  10. Capitalization Table and Dilution
  11. Legal Information

 

The document should also present various data comprehensively to show the company’s progress, and present future projections, highlighting various strategies being implemented to cope with challenges. It should present the real picture of the industry in question to show the investor where they are heading. False information is dangerous and can attract heavy fines if it is determined that the investors are deceived into making commitments. The details on the balance sheet should be presented to tell the investor what the business is worth in assets and liabilities, which also helps the investor determine if the share value is worth committing their investment. However, the presentation should be lucrative and hence show a valuable entity that anyone would like to commit their hard-earned money to finance.

 

Importance of Issuing an Offering Memorandum

The document is legally binding, and its importance goes beyond being a necessary document in the process of investment for both sellers and investors. The document protocol helps the investor understand the opportunities being presented in the investment, imminent risks, potential returns, the operations involved, and the general capital structure. The investor gets the general idea of the particular investment, thus its importance to the investor before expression of interest.

The offering memorandum also provides protection for the investor and issuers of securities. The issuer is required to follow to the letter all regulations outlined by the SEC (Securities and Exchange Commission). The SEC promotes fairness in the investment industry by shielding investors in the securities industry from falsified information and aiding the investor in making informed decisions in the process of committing huge amounts of funds. The offering memorandum also presents a professional touch to the seller. Investors cannot commit their money to businesses that don’t look organized or professional in their area of operation. Presenting a memo will then show seriousness and professionalism in the business.

 

Offering Memorandum vs Prospectus

A prospectus is used for public markets while an offering memorandum is used for private markets. The offering memorandum document can also be referred to as an ‘offering circular’ if it does require registration with the stock exchange commission. The offering memorandum and the prospectus share many attributes ranging from the types of disclosures and amounts required to terms and conditions.

Both documents describe the terms of the offer, such as the minimum amount to invest and the qualifications of an investor. The investor is also briefed on the imminent risks such as tax issues, vulnerabilities, transferability issues, and potential returns. Both documents are basically a detailed business plan with in-depth information on management structure, strengths and weaknesses, capital structure, asset values, share values, amount of shares available, financial projections and the like.

 

More Resources

CFI offers financial modeling and valuation courses that count towards the Financial Modeling & Valuation Analyst designation.  To continue learning and advancing your career, these additional resources will be helpful:

M&A Modeling Course

Learn how to model mergers and acquisitions in CFI's M&A Modeling Course! Build an M&A model from scratch the easy way with step-by-step instruction.

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