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 u 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 mutual fund companies before 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 the final prospectus quickly and in plain English.
A private placement memorandum (PPM) is a legal document provided to prospective investors when selling stock or another security in a business. It is sometimes referred to as an offering memorandum or offering document. A PPM is used in “private” transactions when the securities are not registered under applicable federal or state law, but rather sold using one of the exemptions from registration. The PPM describes the company selling the securities, the terms of the offering, and the risks of the investment, amongst other things. The disclosures included in the PPM vary depending on which exemption from registration is being used, the target investors, and the complexity of the terms of the offering. A private placement memorandum (PPM) offers an in-depth look at a business and its operations. Companies who are raising funds from private investors will create such a document. This process is also known as a private placement. It usually involves money from investment or pension funds, banks, or insurance companies, though individual wealthy investors can also be involved. If your business is going this route, you will need to create a private placement memorandum (PPM).
How to Secure Private Placement Funds
Private placement can involve an equity or debt offering. Private placement differs from an initial public offering because the company is remaining private. To seek private placement investment, you’ll likely need a lawyer and have to present a basic business plan. Perhaps the key component of your business plan will be the PPM. It is not designed to be a marketing document. It is thorough, and it’s starkly informational. It is designed to offer everything an investor needs to know before putting money into a company. This document is also referred to as an offering memorandum. In many ways, it serves the same function for private entities as a prospectus issued by public companies serves.
There are a number of crucial things outlined in a PPM, including.
• The nature of the business. What does the company do? How does it generate revenues?
• The terms of the investment. How much money is the company looking to raise? What’s in it for the investor?
• The potential risks of the investment.
• The management team and structure.
There are no strict rules about how a PPM must be formatted, but they often look very similar because of the information required. The items in a PPM most often include the following items. However, the sequence of information varies by the company.
• Introduction or Executive Summary: A short statement about the company and its main businesses, and a brief outline of what the company is seeking in a private placement.
• Disclaimers and other Legalese: This is the mumbo jumbo many people will gloss over, but is likely required by law. This can include information for people in specific states in what is known as jurisdictional legends.
• Investor Suitability: Usually, a company is seeking capital from a certain type of investor. They may prefer to hear from only accredited investors, or investors based in the United States. The company may also require investors to have a certain level of net worth.
• Subscription Procedures: This explains and provides instructions on how someone can take advantage of the offering. This is often placed at the very end of a document.
• Summary of Offering Terms: The nuts and bolts of what the company is asking for. This usually looks like a term sheet and should include details about the overall capitalization of the company both before and after the injection of new capital. It will include the number of shares being sold, the price, and the total expected proceeds. Here’s also where the company should explain what investors may receive in terms of voting rights, as well as their rights if the company were to be liquidated.
• Business and Management Section: A more detailed explanation of what the company does and how it earns its revenues. This should also include biographical information about each owner and member of the management team.
• Financial Information: From a potential investor’s point of view, this may be the most crucial section. It’s time to provide detailed information on the company’s revenues, expenses, profits, and liabilities. All of the hardcore numbers that any investor wants should be included, and this section should have past financial data and future projections. Skimp on this section and you are likely to see investors bow out.
• Use of the Investment: This outlines in details why the company needs the money, and what would happen to the company without this injection of capital. This section shows in nitty-gritty detail how the money will be spent. When possible, there will even be an itemized tabled showing how funds will be allocated. This section also includes the compensation owners and executives will receive.
• The Risks: This section is often the largest part of the PPM, as the company must outline anything negative that might impact the ultimate return on the investment.
The PPM is important because it provides the investor with all of the prescribed data they will need to make an investment decision and includes the actual documentation to effect the investment transaction. PPMs are designed as a stand-alone document – meaning that there need not be other information presented to the investor for them to make an accurate investment decision. Private Placements or Private Stock Offerings are “private” equity/debt transactions and are considerably less expensive to complete than an initial public offering such as an IPO (for the purpose of raising capital). A private placement memorandum (PPM), also commonly known as an offering memorandum or offering document, is a vitally important legal document that discloses the objectives, risks and terms of a proposed investment in your company. Your PPM will be distributed to potential investors whenever your company sells stock or another type of security in a private placement.
Your PPM will provide important facts and figures about your company and its business that are useful to potential investors, including:
• Your company’s industry;
• Descriptions of the products you sell and/or services you provide;
• Product and economic projections;
• Company financial statements;
• Management biographies;
• The terms of the offering and the planned uses for the money raised through the offering;
• The risks associated with the proposed investment.
A PPM is normally created by the Company’s investment bankers, lawyers, accountants and other professionals on behalf of a business owner. Unlike a prospectus, which is produced when stock or other securities are registered under federal securities laws and become available for purchase by anyone, a PPM is not normally made available to the public. Instead, you will distribute your PPM to a limited number of pre-screened investors to solicit offers to purchase stock or other securities, as described in the PPM. Your PPM will normally be distributed along with the Subscription Agreement and Investor Questionnaire that your investors will sign if they agree to the terms of your offering.
Why is a Private Placement Memorandum important?
Securities laws prohibit a company (“issuer”) from making false or misleading statements to investors when selling its securities, regardless of whether or not public registration of the offering is required. Specifically, Rule 10b-5 of the Federal Securities Exchange Act of 1934 requires that any information provided to investors “must be true and may not omit any material facts necessary to prevent the statements made from being misleading.” A properly-written PPM ensures your company’s compliance with these anti-fraud laws by fully informing prospective investors about your company and the offered investment. Potential investors receiving your PPM will learn about your business and management team, as well as your company’s prior performance, future prospects, the terms of the offered security, the planned use of the funds to be raised, and the risks of the investment. A well written and detailed PPM, thus, protects your company and its management from liability. PPMs typically follow a standard format, and sophisticated investors expect them to be carefully drafted, contain accurate and current information about the company, and provide a balanced, objective description of the potential benefits and risks of the investment.
What does a Private Placement Memorandum include?
Information provided using a standard PPM format will typically include:
• A summary of the offering.
• Information related to the capitalization of the company, both prior to and after the proposed investment is made, as well as language concerning other capitalization-related issues, such as liquidation preferences, conversion rights, anti-dilution provisions, voting rights, and more.
• Risk factors that may impact the investor’s investment, including both general risks (those that are found with similar investments) and risks unique the issuer and its securities.
• Relevant company facts, including company history and historical performance, product and services descriptions, company goals, advertising and marketing strategies, company suppliers and customers, and other related information.
• General industry and competition information.
• Management team information, including the business backgrounds, special skills, fiduciary duties, and other relevant biographical information for each team member.
• An item-by-item list with descriptions of how the company intends to distribute and use the moneys received through the private placement.
• A detailed description (not an estimation) of any and all compensation to be taken by the founders or any other related parties from the proceeds of the private placement. Forms of compensation include salaries, consultant fees, asset sales and purchases, and any other forms of direct or indirect compensation. Compensation information must also be disclosed in your SEC Form D filing, which is accessible to the public at large.
• Summary of terms relevant to the offering, including rights, restrictions, price, minimum subscription amounts, applicable management fees, withdrawals, investor qualification standards, and others. This summary should be prepared by your attorney at the end of the PPM process to allow for inclusion of all cited terms.
• A detailed description of the securities offered (class, attributes, etc.,) including language regarding the ability of the company to change its capitalization through different classes of shares and distribution of dividends.
• Instructions for investing in the offering.
• Supplemental information and documents that may influence a potential investor’s decision to invest, including copies of investment contracts, financial statements, and organizational documents, such as operating and shareholders agreements, contracts, licenses, etc.
Reasons to consider using a Private Placement Memorandum
• A well-prepared PPM will mitigate risks from potential liability and litigation if your investors lose money on their investments.
• Similarly, a PPM can protect your company from liability for possible violations of the federal and state securities laws.
• Some of your potential investors are not accredited investors.
Reasons to not use a Private Placement Memorandum
Not all offerings require the use of a PPM. Here are a few examples of situations where a PPM is not necessary:
• When the cost associated with paying professional fees to lawyers, investment bankers and accountants to ensure legal compliance is prohibitive. For example, PPMs usually include audited financials of the issuer.
• When your company is in its very early stages and your potential investors are limited to (1) friends and family or (2) angel investors who are sophisticated enough to conduct their own due diligence and negotiate their own investment deal.
• When all of your potential investors are accredited investors. Keep in mind, however, that although securities laws technically do not require a PPM with accredited investors, not using a PPM presents risks. Use of a PPM will likely reduce your liability exposure.
A company can be more selective about who buys its shares if it sells them in a private placement. Shares sold in an initial public offering or IPO, are offered to the general public and tend to attract more attention. However, private placement allows a company to raise money without going public and having to disclose financial information. A company can remain private while still gathering shareholder investments.
When you need legal help with a PPM in Utah, please call the Securities Lawyers at Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506