What Is An Investment Memorandum?

An investment memorandum is a legal document that a company presents to potential investors to explain the objectives, risks, and investment terms surrounding a funding round. This includes financial statements, management biographies, company details, and many more items that help give a detailed view of the business and financial plan going forward.

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. 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. 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.

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.

Who prepares the Offering Memorandum?

When any company goes through a sale process, it hires an investment banker. The first step of the banker is to understand the company and gather as much information as possible from top management to come up with a profile the company.

The banker prepares the CIM and uses it as a marketing document, which is intended to make the company look attractive as the objective is “not just to sell, but to sell for maximum value.” The reason an investment banker tries to sell a company at the maximum value is because they represent the best interest of their client (the seller), and that their commission is based on the sale price.

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.
Offering Memorandum Table of Contents:
• Summary of the Offering
• Business Summary
• Requirements for Purchasers
• Forward-Looking Information (Financial)
• Risk Factors
• Use of Proceeds
• Management
• Compensation
• Board of Directors
• Capitalization Table and Dilution
• 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.

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.

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.

What is a Private Placement?

As the name suggests, a private placement is a private alternative to issuing, or selling, a publicly offered security as a means for raising capital. In a private placement, both the offering and sale of debt or equity securities is made between a business, or issuer, and a select number of investors. There may be as few as one investor for any issue. The three most important features that would classify a securities issue as a private placement are:
• The securities are not publicly offered
• The securities are not required to be registered with the SEC
• The investors are limited in number and must be accredited
Companies, both public and private, issue in the private placement market for a variety of reasons, including a desire to access long-term, fixed-rate capital, diversify financing sources, add additional financing capacity beyond existing investors (banks, private equity, etc.) or, in the case of privately held businesses, to maintain confidentiality. Since private placements are offered only to a limited pool of accredited investors, they are exempt from registering with the Securities and Exchange Commission (SEC). This affords the issuer the opportunity to avoid certain costs associated with a public offering as well as allows for more flexibility regarding structure and terms. One of the key advantages of a private placement is its flexibility. The most common type of private placement is long-term, fixed-rate senior debt, but there is an endless array of structuring alternatives. One of the key advantages of a private placement is its flexibility. Private placement debt securities are similar to bonds or bank loans and can either be secured, meaning they are backed by collateral, or unsecured, where collateral is not required. In addition to senior debt, other types of private placement debt issuances include:
• Subordinated Debt
• Term Loans
• Revolving Loans
• Asset Backed Loans
• Leases
• Shelf Issues
Traditionally, middle-market companies have issued debt in the private placement market through two primary channels:
• Directly with a private placement investor, such as a large insurance company or other institutional investor
• Through an agent (most often an investment bank) on a best efforts basis who solicits bids from several potential investors – this is typically for larger transactions: $100MM+.

A private placement issuance is a way for institutional investors to lend to companies in a similar fashion as banks, with a buy-and-hold approach, and with no required trading or public disclosures. Historically, insurance companies refer to investments as purchasing notes, while banks make loans.

Private Placement Securities

In a private placement, the shares of stock or debt instrument are considered securities under both federal and state securities laws. Consequently, any transaction involving the shares or debt must be registered under such securities laws or be exempt from registration. Typically, the offeror is an emerging growth company that has few capital alternatives, although more mature companies tend to be more successful in this process.