An offering memorandum (OM), also known as a private placement memorandum (PPM) is a legal document that states the objectives, risks, and terms of an investment involved with a private placement. It is similar to a prospectus used in an Initial Public Offering, or thorough business plan for the issuance of a bond or other security and amongst other things can include
- a company’s financial statements
- management biographies
- description of the business operations
An offering memorandum attracts a specific group of outside investors and provides these buyers with information on the offering in a way for them to understand the investment vehicle. It also protects the sellers from the liability associated with selling unregistered securities. 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.
See also Offering Circular.
Offering Memorandum Example
A company for example may have decided against going public or borrowing additional finance. It still wants to raise a large sum of money to expand, so instead decides to sell equity to investors in a private placement.
In order to comply with state and federal securities laws, the firm informs potential investors by writing an offering memorandum which is distributed among the interested parties. The offering memorandum details the terms of the transaction, such as
- customer data
- deadlines for purchasing shares
- detailed description of the company’s operations
- financial forecasts
- investor qualifications
- litigation issues
- management biographies
- minimum investment amount
- plans for the use of proceeds
- recent financials
- tax issues
- the nature of the business
- the risks of the investment
- additional company-level, industry-level, and economy-wide vulnerabilities
The offering memorandum usually includes a subscription agreement, which is the formal contract between the issuer and the investor for the purchase of the investment. Often, legal limitations will limits the investor base to those who are “accredited“. This means they meet requirements as dictated by the SEC and state laws such as minimum net worth.
