What Is an Offering Memorandum?
An offering memorandum is a legal document that states the objectives, risks, and terms of an investment involved with a private placement. This document includes items such as a company's financial statements, management biographies, a detailed description of the business operations, and more.
An offering memorandum serves to provide buyers with information on the offering and to protect the sellers from the liability associated with selling unregistered securities.
Key Takeaways
- An offering memorandum is a document issued to potential investors in a private placement deal.
- The offering memorandum spells out the private placement's objectives, risks, financials, and deal terms.
- An offering memorandum is essentially a thorough business plan intended for sophisticated investors to use in their due diligence.
Understanding an Offering Memorandum
An offering memorandum, also known as a private placement memorandum (PPM), is used by business owners of privately held companies to attract a specific group of outside investors. For these select investors, an offering memorandum is a way for them to understand the investment vehicle.
Offering memorandums are usually put together by an investment banker on behalf of the business owners. The banker uses the memorandum to conduct an auction among the specific group of investors to generate interest from qualified buyers.
An offering memorandum, while used in investment finance, is essentially a thorough business plan. In practice, these documents are a formality used to meet the requirements of securities regulators since most sophisticated investors perform their extensive due diligence. Offering memorandums are similar to prospectuses but are for private placements, while prospectuses are for publicly traded issues.
Example of an Offering Memorandum
In many cases, private equity companies want to increase their level of growth without taking on debt or going public. If, for example, a manufacturing company decides to expand the number of plants it owns, it can look to an offering memorandum as a way to finance the expansion. When this happens, the business first decides how much it wants to raise and at what price per share. In this example, the company needs $1 million to fund its growth at $30 per share.
The company begins by working with an investment bank or banker to draft an offering memorandum. This memorandum complies with securities laws outlined by the Securities and Exchange Commission (SEC). After compliance is met, the document is circulated among a specific number of interested parties, usually chosen by the company itself. This is in stark contrast to an initial public offering (IPO), where anyone in the public can purchase equity in the company.
The offering memorandum tells the potential investors all they need to know about the company: the terms of the investment, the nature of the business, and the potential risk of the investment. The document almost always includes a subscription agreement, which constitutes a legal contract between the issuing company and the investor.
Offering Memorandum vs. Summary Prospectus
While an offering memorandum is used in a private placement, a summary prospectus is the disclosure document provided to investors by mutualfund companiesbefore or at the time of sale to the public.
This written document is an abridged version of the final prospectus that allows investors to see pertinent information regarding the fund's investment objectives and goals, sales charges and expense ratio, focused investment strategy, and data on the fund's management team. Relevant tax information and broker compensation are also included in the disclosure document. A summary prospectus provides investors the information they need from thefinal prospectusquickly and in plain English.
FAQs
Offering memorandums are similar to prospectuses but are for private placements, while prospectuses are for publicly traded issues.
What is the difference between prospectus and private placement memorandum? ›
Private Placement Memorandum vs.
prospectus is that a private placement memorandum explains the terms and conditions of a private placement. A prospectus is an offering document that performs the same function but for publicly traded issues, such as companies selling common stock or introducing an IPO.
What is the difference between an offering circular and a 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.
What is memorandum of prospectus? ›
A offering memorandum and a prospectus is a document that used to raise capital and is handed to investors for investment consideration and hopefully funding. The document spells out the offering terms and what the investor will receive in return for his or her capital.
What are the three parts of a prospectus? ›
A prospectus is typically made up of three parts – the Summary Note, the Registration Document and the Securities Note.
What is a prospectus also known as? ›
A prospectus is an advertisem*nt or an invitation from a company to the general public to subscribe or purchase shares or debentures issued by the company. This invitation to purchase shares is also known as the initial public offering (IPO), through which a public company can raise the funds it requires.
What is the difference between offer document and prospectus? ›
The prospectus is the final document containing all details, including the issue price and issue size, as well as all information from a draft document with updated and recent amendments. An offer document is a document issued in case of an IPO. There are various types of offer documents.
What are the 4 types of prospectus in company law? ›
There are different types of prospectus, namely the red herring prospectus, shelf prospectus, abridged prospectus, and deemed prospectus.
Is memorandum of association a prospectus? ›
Memorandum of association for a company is like the constitutional law for a country. It is the document which contains the rules regarding constitution and activities of the company. It is a fundamental charter of the company.
Why do companies use prospectus? ›
The primary purpose of a prospectus is to provide potential investors with the information they need to make informed investment decisions, including the potential risks involved with the investment. By law, companies that offer securities for sale must provide potential investors with a prospectus.
The prospectus is a legal document, which outlines the company's financial securities for sale to the investors. According to the companies act 2013, there are four types of the prospectus, abridged prospectus, deemed prospectus, red herring prospectus, and shelf prospectus.
What is the difference between prospectus and business plan? ›
The business plan shows one has done their due diligence and learned about the market. The private placement memorandum or prospectus is required for the regulatory aspect of your business and can provide legal protection for a company and fot one's personal liability.
Why is it called a memorandum? ›
A memorandum (PL: memoranda; abbr: memo; from the Latin memorandum, "(that) which is to be remembered") or a briefing note is a written message that is typically used in a professional setting. Commonly abbreviated "memo," these messages are usually brief and are designed to be easily and quickly understood.
What is a memorandum appropriate for? ›
A memo (also known as a memorandum, or "reminder") is used for internal communications regarding procedures or official business within an organization.
What purpose does memorandum serve? ›
A memo (or memorandum, meaning “reminder”) is normally used for communicating policies, procedures, or related official business within an organization.
What is the difference between prospectus and offering memorandum in Canada? ›
There are two ways for an issuer to raise capital in Canada: publicly or privately. When done publicly, a prospectus is used; when done privately, a term sheet or offering memorandum is used.
What does offering memorandum mean in real estate? ›
An offering memorandum – or OM – is a key legal document used in the private placement of commercial real estate. The OM provides buyers with information about the property and the offering, protects the Sponsor from potential liability, and serves as a tool for winnowing down the pool of bidders.
