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, 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. 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. An offering memorandum is a legal document that discloses the terms, conditions, risks, and other information about a private placement. It is not the same thing as a prospectus (those are for issuance of publicly-traded securities).
How Does an Offering Memorandum Work?
For example, let’s say Company XYZ is a private company that operates a chain of restaurants. It wants to raise $20,000,000 to open more restaurants, but it does not want to go public or borrow the money. So it decides to sell equity to investors in a private placement. In order to comply with state and federal securities laws, and in order to inform potential investors, Company XYZ writes an offering memorandum, which it circulates among interested parties. The offering memorandum details the terms of the transaction (such as the minimum investment amount, deadlines for purchasing shares, and investor qualifications), the nature of the business (including recent financials, a detailed description of the company’s operations, management biographies, customer data, financial forecasts, plans for the use of proceeds, and similar information), and the risks of the investment (including tax issues, litigation issues, and other 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. In many cases, the law limits investors to those who are “accredited,” meaning they meet minimum net worth requirements and/or other requirements as dictated by the SEC and state laws.
Why Does an Offering Memorandum Matter?
Offering memorandums (also called private placement memorandums) are vehicles for raising capital. State and federal laws require them for most private placements, and they provide companies with a way to disclose key information to potential investors so that the investors can make informed decisions. This in turn provides protection for securities issuers as well.
Real Estate Offering Memorandum: Elements Every OM Should Include
How do you make an offering memorandum for a real estate deal?
An offering memorandum (OM) is typically published as a PDF and then shared with prospective investors. It covers a substantial amount of legal and marketing material, including an executive summary, deal structure details, risks and disclosures sections, and an investor suitability form. A securities or real estate attorney most often assembles your OM for you while sourcing transaction-related content from you.
The Offering Memorandum begins with an executive summary, which lays out the high-level. In simple terms, the acquiring entity is seeking capital and there’s a brief description of your investment company (which may control or be the acquiring entity), its mission, the deal you’re pitching, a detailed description of the executives’ industry experience, and finally, deal financing requirements.
Right after the executive summary, we jump into the location of the asset. Add images of the property’s location on a map, an aerial view of the site, and a second map highlighting important places (demand generators) near the property such as an airport, public transportation, restaurants and stores.
After describing the property’s physical location, insert multiple images of the actual property. For example, if it’s an apartment unit, add images of the interior, such as the kitchen and bathrooms. If the property is a retail center, show images of the different stores, the parking lot, and what visibility and access looks like from the street.
The investment summary section covers various subtopics, each of which has its own separate section and brief description.
This section shows the amount of equity and debt to be raised, which are then add up to form the total sources of funds. You can copy and paste a screenshot into your OM from an excel model like in the example below. Also included shall be the uses of funds, including purchase price, closing costs, acquisition fee, working capital, and fronted capital expenditure, for example.
The loan terms section is broken into the following subtopics:
• Loan amount: What is the approximate loan amount and the percentage of the purchase price it makes up.
• Borrower: Which entity will be borrowing and what kind of company it is.
• Interest rate: What is the locked interest rate?
• Term: How long is the term, and is it a fixed rate or variable rate?
• Amortization: Does amortization begin right away, or is there a period of interest-only servicing?
• Collateral: What collateral does the lender have on the deal
This table depicts the competitors in your market, where you stand against them, and each competing property’s financial information.
Every industry is different, whether residential, retail or another niche. Briefly describe what the specific industry for your property type is like in today’s market.
Similar to the industry overview, the market overview gives geographic specific insight on the real estate market where your building is located. Include facts about the city, such as population and financial status in addition to real estate market performance.
Every real estate deal has multiple risk factors. This section should include every risk related to the business, tax, accounting, and legality of the property. There are often 10 to 20+ risks and each one should have its own paragraph description.
Real estate deals frequently receive support from accredited investors. This last section in the OM describes what types of investors the deal is suited for, and may be based on rules and regulations with regards to investor accreditation or general solicitation. These are the guidelines that concern the investors’ financial status and their ability to bear the risk of losing an investment.
Pull all of this info together into a neatly formatted document and you’ll be ready to start soliciting investments for your deal. It may take quite some effort to get all of this information, but having a complete and thoughtful offering memorandum that includes the sections suggested here will go a long way to instill confidence in your investors and serve as a guide throughout your process of issuing a new offering.
Real Estate Development Offering Memorandum
A real estate OM, or Offering Memorandum, is a document used to raise capital that outlines the securities rules and regulations, and the company’s terms to investors. When a company is seeking to raise money for building or construction pursues in the general real estate development industry, drafting a Offering Memorandum for such investment purposes is a standard. This is true for single family home projects to commercial developments to housing and condos.
Types of Offering Memorandums
There are many varying types of Offering Memorandums. The type of offering will determine the specific nature of the OM. The two-main private placement offering memorandum documents used throughout the world are an equity private placement or a debt private placement.
• Equity: In an equity offering, a company will sell an ownership stake. The most common type of equity Offering Memorandum is one that sells shares or stock in a company. In addition, an limited liability company (LLC) or a limited partnership (LP) may sell units, or limited partnership interests of the company. Some issue sweeteners, like preferred shares or preferred stock.
• Debt: In a debt offering, a company will sell securities such as a bond or a note. In a debt Offering Memorandum, a company will detail the securities being sold, such as the interest rate, maturity date, and other terms of the notes or bonds. In other types of debt issuance offering memorandums a company might offer convertible bonds or convertible notes. In this type of transaction, the debt securities will convert to equity at a pre-determined date.
• Rules: In addition to debt or equity, there are various national and in some cases, international rules that apply to each Offering Memorandum. For example, there is Rule 504, 505 and 506 of Regulation D (Reg D). Included in Reg D is also 506b and 506c offerings. There is also Regulation A (Reg A). A popular rule in the equity and debt private placement sphere is Regulation S (Reg S) and Rule 144A. Whether you require an equity OM or a debt Offering Memorandum, our team at Prospectus.com can assist.
Sections of an Offering Memorandum
There are many features and sections that go into the writing of an Offering Memorandum that is geared for raising capital. Here are just a few segments of the OM:
• Executive Summary: an executive summary is normally a one or two-page summary of the business plan. It’s always suggested to include an executive summary in a private placement offering memorandum document as this help explain what the business does.
• Jurisdictional Legends: the jurisdictional legends are specific country and state regulations governing the sale of securities in each jurisdiction. If it’s a US or Reg D offering, the jurisdictional legend will comprise of various states and rules for raising capital for selling stocks or bonds. If a company is raising capital worldwide they will use international legends that are country specific. Each country has their own rules regarding the flow of capital from outside investors and local investors.
• Terms of the Offering: the terms of the offering will highlight the relevant features of the issuance. Included in the offering term section will be the stock or share price, or bond or note price, investors requirements, use of proceeds, some risks factors, and, if a debt offering, the maturity date and interest rate. The terms of the offering are the main component of a Offering Memorandum.
• Investor Suitability: the investor suitability section of a OM will deal with investor standards. For example, if a company is raising capital and is required to only accept accredited investors then this section would detail that. Or if the suitability standards allow for non-accredited investors, or non-US investors under Regulation S (Reg S), or US investors in a 144A offering, the investor suitability section will detail that, which may include net worth requirements for each investor.
• Risk Factors: the risk factor section will deal with the pertinent risks of the business. Included in the risk factors would be industry specific risks that could materially affect the business, as well as micro and macro risks toward the company, including competitors, and factors outside the control of the company such as natural disasters, recessions and so. Listing the company’s risk factors is important as omissions can come back to haunt entrepreneurs.
• Management Team: the management team section will showcase the team’s skills, including the CEO and the support staff, and possibly even the board of directors or an advisory board. It is wise to include the strengths of the management team as this can help build investor confidence.
• Use of Proceeds: the use of proceeds section is one page or more that details where the company plans on spending the capital they are raising. The use of proceeds is not always the most elaborate chart, but should be a solid breakdown of the plan of where the proceeds from the offering will be spent.
• Tax Implications: the tax section of the Offering Memorandum will detail the implications for an investor. Most OMs will not detail the specific state tax requirements so each investor would be required to speak with their local accountant. For international clients, non-US (or not from the country of one’s offering), the tax implication will be important for profit and loss and each country will have their own rules.
• Subscription Agreement: the subscription agreement is a synopsis of the terms of the entire Offering Memorandum and acts as the contract between the issuing company and the investor. The agreement will outline the terms of the offering, and the securities being sold, such as the bonds, notes, stocks, shares, warrants, or convertible securities.
• Exhibits: one of the final sections of the OM is the exhibits, which are ancillary data related to the business of the company or the securities being sold. Examples of exhibits that go into a Offering Memorandum may be an image of a patent granted, or licenses or a company’s incorporation certificate.
A Offering Memorandum is meant for an issuing company to be compliant with both state and federal laws, no matter where the OM is issued. A company selling securities wants to ensure they do not break any laws when approaching investors and are exempt for registration requirements. For an investor to make an educated decision the OM should contain all the noted data above, including financial projections and past financial performance and of course the risk factors of the business and industry. Risk factor information will not scare away experienced investors who are most likely well aware of such language being placed in an Offering Memorandum. The important thing is make sure your company is compliant with securities laws and regulations when raising capital.
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