A document that summarizes information relating to the stock, bond, or other security offered via private placement
Experienced financial professional with eight years in audit and financial reporting, holding an MSc in International Money Finance and Investment from Durham University, along with dual bachelor's degrees in Finance and Economics with financial applications from Southern Methodist University.
Reviewed By: Parul Gupta
An offering memorandum is a legal document that summarizes information about the security offered via private placement. Due to its nature, the document is also commonly referred to as a Private Placement Memorandum (PPM).
Securities offered via private placement are available to a limited number of investors. These securities are not registered under the law but are sold using one of the exemptions.
This memorandum is prepared on the company's behalf for prospective investors. The document enables potential investors to understand the specifics of the deal and helps them decide whether to participate.
The document typically includes information on the company and its operations, its financial statements , information on the offering, and more.
Alternatively, securities can be offered via public offering when they are available to all investors. When securities are offered via public offering, a document called a prospectus is prepared.
The offering memorandum and the prospectus have many similarities, ranging from the type of information included to terms and conditions. For example, both documents describe the terms of the offer, information on the issuer, risks associated with the investment, etc.
As mentioned earlier, it is a legal document that summarizes information relating to the security offered.
More specifically, it provides an overview of the company issuing a security, the terms of the offering, risk factors associated with an investment, information on the use of proceeds, and more.
An offering memorandum content will vary depending on the type of security sold, the governing body of the transaction, the targeted investors, the complexity of the transaction, etc.
Having said that, the basic outline of the document is as follows:
1. An introduction
It outlines the basic terms of the offering, including all the necessary disclosures required by the respective law.
2. Summary of the terms
It outlines the material terms of the offering as well as the capital structure of the company before and after the offering.
3. Risk factors
It outlines factors that may impact the investors’ investment decisions. For example, risk factors could be industry-specific, company-specific, etc.
4. Company information
It outlines information about the company. This section may include detailed information on the company’s operations, its management, and any other relevant information that could be relevant to the potential investor.
5. Use of proceeds
It provides information on the use of funds raised due to the offering.
6. Description of securities
It outlines information on the securities offered, including the rights, restrictions, etc.
7. Subscription procedures
It covers the investing instructions.
8. Exhibits/appendices
These include any supplemental information and other information that could be material to the investment decision.
Many people prepare an offering memorandum – investment bankers, lawyers, the company’s employees and management, and external auditors, among others. Therefore, the preparation takes time and lots of resources, including financial resources.
An offering memorandum, also known as an information memorandum or private placement memorandum, plays a crucial role in financial transactions, particularly when a company is raising capital through private placements or offering securities.
Here are key points explaining the importance of an offering memorandum:
1. Legal Requirement
It is often a legal requirement for private placements and securities offerings, providing a comprehensive disclosure of information to potential investors.
2. Investor Protection
Safeguards the interests of investors by providing them with the necessary information to make informed investment decisions.
3. Regulatory Compliance
Ensures compliance with regulatory requirements and securities laws governing private placements, reducing legal risks for both the issuer and investors.
4. Record of Agreement
Serves as a formal document recording the terms agreed upon by both parties, reducing the likelihood of misunderstandings or disputes in the future.
5. Marketing Tool
Acts as a marketing tool for the company, presenting its strengths, market position, and growth potential to attract potential investors.
Comparison Between Offering Memorandum and Prospectus
