Offering Memorandum (Explained: All You Need To Know)

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What is an Offering Memorandum?

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What Is An Offering Memorandum

An offering memorandum is a document that is provided to investors in the context of a private placement outlining the terms of the investment, its main objectives, and the potential risks.

In other words, an offering memorandum is a document where the seller of the securities provides more information to the buyer allowing them to better assess the investment risk and reward.

The main objective of the offering memorandum is to ensure that sellers are not held accountable for selling unregistered securities and the buyers are protected by having more information on the company, its management, and operations allowing them to make a more informed investment decision.

For example, if a private company wants to raise capital by selling securities to outside investors, it must prepare an offering memorandum detailing the terms and conditions of the investment.

You can consider the memorandum to represent a presentation document or business plan where investors are given detailed information about the benefits and drawbacks of investing in a specific company.

Keep reading as I will further break down the meaning of an offering memorandum and tell you how it works.

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Why Is An Offering Memorandum Important

An offering memorandum is an important document that is prepared by issuers and given to potential investors in the context of a private placement.

Private companies are not required to disclose important company information to the public.

As a result, investors only have limited information to assess the potential of purchasing shares in a private company.

To compensate investors for the lack of information, private issuers will prepare an offering memorandum where they will talk about the company’s objectives, mission, management team, operations, and overall plans.

The memorandum is then given to potential investors allowing them to evaluate the potential of the investment and enticing them to buy shares in the private issuer.

Typically, investment bankers will prepare the offering memorandum for their private issuers allowing them to conduct auctions among qualified investors.

The offering memorandum is a private company’s business case as to why qualified investors should invest in equity.

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When To Use An Offering Memorandum

An offering memorandum is used when private issuers are looking to sell securities to qualified investors.

In the United States, every issuer must comply with the securities laws and regulations established by the Securities and Exchange Commission.

In private placements, private issuers are required to offer an offering memorandum to qualified investors so they can better understand the investment vehicle.

It’s important that private issuers consult with their attorneys or advisors to ensure that they are properly meeting the formalities set out in law and regulation.

In general, private issuers can sell securities to qualified investors by following the right formalities.

Qualified investors are individuals having a high net worth or sophisticated investors.

The law sets out the criteria for who may qualify as a qualified investor allowing them to invest in private companies and exposing them to higher levels of risk.

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What Does An Offering Memorandum Include

An offering memorandum is a document providing details about a company providing key information to investors enabling them to make an investment decision.

Typically, an offering memorandum will provide a summary of the offering, requirements for purchases, forward-looking financial information, discuss risk factors, how the company will use the proceeds, present the management team, discuss compensations, board of directors, private capitalization table and dilution, and contain any other legally required information.

The objective is to include enough information about the investment so potential investors have enough data, financial information, and context to be able to make an investment decision.

Companies should be careful in providing accurate information to investors as false or misleading information can result in severe consequences for the issuer and its representatives.

Investors should keep in mind that companies providing an offering memorandum are required to provide objective and factual data.

However, companies also use their offering memorandum as a document outlining the benefits of the investment hoping to attract investors.

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Offering Memorandum vs Prospectus

What is the difference between an offering memorandum and a prospectus?

In essence, an offering memorandum and a prospectus are similar documents intended to achieve a similar end.

Both these documents are legal documents issuers and their investment bankers prepare to offer investors looking to invest in a company.

While an offering memorandum is a document used to inform qualified investors of the terms of an investment in a private placement, a prospectus is a similar document informing the general public about the terms of an investment in a publicly-traded company.

The offering memorandum and prospectus will present the company, the company’s management team, the objectives of the investment, and other material information relating to the investment.

Qualified investors use the offering memorandum as a basis for their due diligence before investing in a private company and the general public uses the prospectus to achieve the same thing with the shares of a public company.

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Offering Memorandum Example

Let’s look at an example of an offering memorandum to better understand what it is and how it works.

Let’s say that Company ABC, being a private company, is looking to acquire a piece of land for exploration purposes.

After looking at its options, it determines that raising equity capital is better than funding the acquisition through debt.

Company ABC will approach its investment bankers to start preparing the necessary documents allowing it to offer securities to qualified investors in a private placement.

One of the documents that the investment bankers will prepare is the offering memorandum outlining the overall details of the investment, the company’s plans, and other material information relating to the investment.

Once the SEC requirements are met, Company ABC or the investment bankers will approach specific investors who are qualified to invest in private placements and may be interested in investing.

If the qualified investor is interested, it will then notify its intentions to the issuer and will ultimately sign a subscription agreement to subscribe to a certain number of shares in the company.

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Takeaways 

So there you have it folks!

What does an offering memorandum mean?

In a nutshell, an offering memorandum is a legal document used to target specific investors or solicit their interest in purchasing shares of a privately held company.

The offering memorandum will contain important information relating to the investment providing investors with enough information for them to make an investment decision.

You can consider the offering memorandum to be the company’s business plan informing investors as to the benefits and drawbacks of the investment opportunity.

Private companies looking to raise equity capital are required to comply with the securities laws and regulations set out by the Securities and Exchange Commission.

As such, private companies are required to provide qualified investors with an offering memorandum so they can better evaluate the investment.

If you’re looking to prepare an offering memorandum or are dealing with one, it’s best that you consult a qualified attorney or speak to your investment banker for more information.

Now that you know what an offering memorandum is all about and how it works, good luck with your research!

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