Offering Memorandum - Definition
An Offering Memorandum, or an “OM”, also called a “private placement memorandum, also called a “PPM” or an “offering memorandum“, among other names, is a document that details both potential, the terms of the offering, and the risks associated with the selling or offering of private via private placement. The offering memorandum or private placement memorandum is used for a ‘private offering‘; a sale of or securities between private parties, as opposed to a public offering. In a public offering, the main disclosure document is not a private placement memo, but a ‘prospectus‘. Both the offering memorandum or private placement memorandum and prospectus share many similar attributes, but they differ in terms of the amount and type of needed disclosures.
The question is always asked: is it essential to hand investor a private placement memorandum (PPM) when conducting a private placement offering? The short answer is ‘yes’. This should be done for three main and basic reasons: a) the private placement memorandum offering document details the terms of what you offering the investor. Meaning, the investor should clearly understand what he/she is getting in return for his/her investment; i.e. the type of they are to receive, the terms of the stock, the pay out structure and much more, and b) having a private placement memorandum adds protection to you and your company. You are to disclose, among many things, the SEC rules and regulations related to your offering, whether you are conducting a Regulation D 504 private placement offering, a Regulation D 505 private placement offering, a Regulation D 506 private placement offering, score offering, or other type of private offering. Additionally, a detailed risk factor section is imperative in any private placement memorandum. It is essential that you lay out the reasonable risks associated both with your company and industry as well as the private placement offering itself. Having solid risk factors in the private placement memorandum will add protection, and c) giving an investor a private placement memorandum simply looks good. It shows that you are serious about SEC compliance and serious about receiving private capital from investors.
Private Placement Memorandum Recap - Clarity, Protection and Look
The offering memorandum or private placement memorandum (PPM) is to bring clarity and detail to your private offering. Thus, if an investor reads your offering memorandum document or private placement memorandum, they will be able to make an educated decision whether to invest or not.
The offering memorandum or private placement memorandum (PPM) ideally should offer some type of protection to you and your company when navigating through the various SEC rules while raising private capital. The PPM lists the SEC disclaimers and rules, as well as the important risk factors. Risk factors should be detailed so that, in the case where investment is lost, an investor cannot say you did not want adequately warn them in the offering memorandum or private placement memorandum regarding the pitfalls of the business.
Giving an investor a private placement memorandum simply looks good and professional. It says a lot when you give an investor a PPM document. It shows you went though the sometimes painful but necessary steps involved in conducting a private placement.
Offering Memorandum Characteristics
What goes into an Offering Memorandum (PPM)?
The private placement memorandum, or offering memorandum, comprises many important components. Some of these characteristics have to do with SEC rules in relation to conducting a private placement offering, while others have to do with the company’s securities.
SEC Rules for Private Placements
The SEC has a myriad of rules when it comes to private placements and what a company must comply with while conducting a private placement offering. These rules come into effect when writing the private placement memorandum. For instance, if a company is seeking to raise $10 million, there is good chance that the company offering the private placement will need to limit the number of non-accredited investors to 35 or less (whether they are allowed to accept even one non-accredited investor also depends on many factors). A non-accredited investor in a private placement is simply defined as a person who does not have a certain amount of net worth or ‘sophistication’. Thus, an ‘accredited investor’ is one who has a certain net worth and ‘sophistication’ and can invest in private placements more easily.
A Company’s Private Placement Securities
In a private placement memorandum, a company details not only the SEC rules and regulations that is to be followed while conducting the private placement, but the company itself is to detail what it is actually offering for the investment. These SEC rules are numerous, but the most common forms of private placement offerings fall under Rule 504 of Regulation D, Rule 505 of Regulation D, or Rule 506 of Regulation D (click here to view more on Reg D 504, Reg D 505, and Reg D 506). Example: if I was investing $1 million into your company I would want to know what I am to receive in return for my private placement investment. I would want to know the type of stock I am getting in return for my investor; I want to know the terms of the private placement; the length of the private placement or the offering; how many shares or units are authorized to be issued (basically I would want to learn about dilution); and I would of course like to know when, once I give my private placement capital, I will receive my initial investment back with a profit.
All of this can be translated into what is known as the ‘terms of the offering’. In the private placement memorandum section that deals with such issues, it is offered called the ‘offering terms’ or ‘terms of the offering’. In these terms, or ‘private placement memorandum term sheet’ or just ‘term sheet’, the investor should be able to make an educated decision regarding investment. This of course does not mean the investor will not or should not read the business plan. The private placement memorandum, as opposed to the business plan, should tell the investor what he/she is receiving in return for the investment; the business plan, as opposed to the private placement memorandum (PPM), is to detail the vision of the company. Often, the business plan is encompassed throughout the private placement memorandum.
Offering Memornadum (PPM) and the Subscription Agreement
In additional to the private placement memorandum (PPM) elucidating the SEC rules and the terms of the offering (and much more), a proper PPM must have a subscription agreement. The subscription agreement in a private placement is essentially the ‘contract’ for the investor to buy the private stock or securities. Along with the subscription agreement in the private placement memorandum is the investor questionnaire. Essentially, the investor questionnaire is essential for any offering memorandum (PPM) to contain. The prospective investor is to fill out the attached questionnaire and divulge such information as their net worth, other investments, and much more. Usually, a private placement memorandum and its PPM disclaimers will allow the company to reject an investor’s subscription (his/her investment) if there is discrepancies in the investor questionnaire. For instance, if the company only wants to accept accredited investors, if the prospect’s questionnaire is not clear that he/she is in fact an accredited investor the company can reserve the right to reject his/her investment. Both the subscription agreement and the investor questionnaire are needed to have a proper private placement memorandum.
Bird’s Eye View of an Offering Memorandum
• SEC Rules
• Summary of the Offering
• Terms of the Offering
• Who May Invest in the Private Placement
• Potential Returns to Investors
• Management Summary
• Capitalization Structure
• Risk Factors
• Conflicts of Interests
• Fiduciary Duties of the Manager or CEO
• Description of Securities
• Transferability Issues
• Summary of the Operating Agreement or By Laws
• Account Matters
• Tax Issues
• Forward Looking Statements
• or Summary
• Investor Questionnaire
• Subscription Agreement
• And much more