Offering Memorandum

What is an Offering Memorandum?

An Offering Memorandum, also known as an OM, is basically a document that gives all of the details that go along with selling private stock through the process of private placement. An offering memorandum is used for private offerings instead of public offerings. Private offerings are the process in which stock is sold between private parties. There are definitely some similarities between the private offerings and public offerings, but they also have their differences.

Private Placement Memorandums

Many people wonder if it is always necessary to use a private placement memorandum while in the process of doing a private placement offering. Essentially, yes it is. There are three reasons that this should be done.

  • Private placement memorandum documents detail the terms of the offering.  The investor is then able to understand what they are going to get out of the investment. 
  • Private placement memorandum documents help to offer an added sense of security and protection to your business.  This is due to the fact that you must disclose the regulations of your offering.  This is true no matter what type of private offering you are conducting.  Along with the regulations, you must also include the risks associated with your private placement offering.
  • Private placement memorandum documents help make your business look good.  This shows that you mean business and that you are focused on remaining compliant with the SEC rules and regulations.

Private Placement Memorandum – Overall Clarity, Security and Image

Now that we have seen that the three main reasons for private placement memorandums are essentially clarity, security and image, let us take a closer look at each of these reasons.

Clarity:

An offering memorandum helps to provide clarity to your investors. When you provide an offering memorandum document, you will give your investors the opportunity to make informed decisions when it comes to their investments.

Security:

An offering memorandum that has been effectively put together will offer a sense of security for your business. It will provide the regulations and risk factors that show that your business is in compliance with the SEC rules. Investors will not be able to come back and say that they were not warned in the event they lose money.

Image:

An offering memorandum helps your business look more professional. If you give investors an offering memorandum document, you are showing them that you took the time and effort to complete all necessary steps before conducting your private placement.

Characteristics of an Offering Memorandum

What is included in the Offering Memorandum?

Generally, an offering memorandum will be made up of a variety of different components. Many of the characteristics of the document are related to SEC rules and regulations when it comes to private placement offerings. Other characteristics deal with the security of the company.

SEC Rules and Regulations

The SEC has a lot of rules and regulations for conducting private placement offerings. Companies must be in compliance with all of these rules. When composing an offering memorandum, it is important to keep all of these rules in mind. For example, if a particular company is looking to raise $10 million, they should limit the number of non-accredited investors chosen to a maximum of 35. Non-accredited investors are basically people that don’t have a very high net worth. Accredited investors are people that have a higher net worth, and are therefore able to make private placements easily.

Private Placement Security

In an offering memorandum, companies will not only include the SEC regulations, but they will also include the details regarding private placement security. There are a variety of different SEC rules, but most of them will have to do with Rule 504, 505 and 506 from Regulation D. Investors will want to know what they are going to get out of their investments. They want to know the type of stocks that are going to be invested in, as well as the private placement terms. Most importantly, they will want to be aware of when to expect to see their investment along with their profit.

This is basically referred to as the “terms of the offering”. In an offering memorandum, the terms will be made available to the investors in an effort to ensure that they are able to make informed decisions when it comes to their investments. While they will have access to the terms of the offering, they will probably still want to see your business plan. Offering memorandums tell the investor what they will get out of the investment, while the business plan will give them an overview of your company.

Subscription Agreements

Along with the SEC regulation and terms of the offering, offering memorandums must also include a subscription agreement. This agreement is basically like a contract that the investor agrees to in order to buy the private stocks or securities that are offered. Alongside the subscription agreements, there is also a questionnaire for the investor to complete. This questionnaire is essential, and includes questions regarding the investor’s net worth, other investment obligations, and other important information. Based on the questionnaire, companies can reject the investor’s subscription if they notice any discrepancies. This is why investors should be very clear when completing their questionnaires.

Offering Memorandum in a Nutshell

The following should be included in the offering memorandum:

  • SEC rules and regulations
  • Summary of what is included in the offering
  • Terms of the offering
  • Eligible investors
  • Return on investment
  • Summary of management
  • Structure of capitalization
  • Risks involved
  • Associated conflicts of interest
  • CEO duties
  • Description of any securities
  • Issues involving transferability
  • Operating agreement summary
  • Litigation
  • Account information
  • Tax information
  • Future statements
  • Business plan information
  • Investor questionnaire
  • Subscription agreement

This is a generalized list of things that must be included in the offering memorandum, but there may be much more necessary.

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