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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 just soliciting willing investors in general. The document enables the investor to understand in detail the investment, so as to help them assess their interest in participating in the deal. 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 a detailed description 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. A prospectus is similar to an offering memorandum, but the former is for publicly-traded issues while the latter is for private placements.

Business growth requires an injection of capital that is obtained from investors. The offering memorandum is part of the investment process. For instance, a company may decide to increase the number of its offices, which will require a significant amount of funds. The process begins with the firm deciding how much they need for the expansion. 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. It is much like the process of doing an IPO, but an offering memorandum is aimed at a private placement investment rather than the company seeking funds going public.

 

Offering Memorandum Example

International Metals Trading LLC has a publicly posted an offering memorandum on slideshare.net.  This presentation (below) 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 the company’s future growth strategy, upcoming opportunities in the market, strategy for achieving future projections, and details on competition in the marketplace. How the current management team plans on dealing with 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 also contain information directly from the company. Every clause should be scrutinized and vetted to ensure it’s free from errors or omissions. The document is meant to give the company 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 present data to show the company’s progress, and provide future projections, highlighting various strategies being implemented to cope with challenges. It should present a realistic picture of the industry the company operates in and show the investor clearly what the company’s prospects and goals are. False information is dangerous and can attract heavy fines if it is determined that investors have been 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. Ultimately, the presentation should portray the company as a valuable entity that anyone should feel fortunate to have the opportunity to invest in.

 

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 offering memorandum also provides protection for the investor and for 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 by 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 memorandum shows 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 requires 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 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, and financial projections.

 

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 CFI resources will be helpful:

  • Investment Teaser
  • Term Sheet Template
  • Confidential Information Memorandum
  • Definitive Purchase Agreement

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