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What Is A Prospectus And An Offering Memorandum?

What Is The Difference Between A Prospectus And An 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.

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.

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.

An offering circular is a prospectus for a new security listing. It is delivered to individuals and brokerage houses who are interested in potentially purchasing the newly issued mutual fund or stock. It may be slightly abbreviated from the final, long-form prospectus, but is still required to contain specific information. Offering circulars are required to contain certain pieces of information that are meant to be helpful to a prospective investor in deciding whether or not the investment is suitable for their interests. This information includes items such as the issuer of the security, the objective of the mutual fund or the purpose of the stock issue, the terms of the issue, and any additional information that could be helpful to a prospective buyer.

An offering circular should not be confused with a red herring or preliminary prospectus. The preliminary prospectus, or red herring, is issued during the IPO process and is intended to generate interest in the new issue. It lacks many of the specifics regarding the new issue. The offering circular is a more complete document and should be viewed before making a final decision about an investment. An offering circular allows investors to access information regarding a new issue. It provides them with very important information about the security such as financial information about the issuer, the objective of the fund or purpose of the funds being raised, and other terms of the security issuance. The offering circular is a legal document and is a requirement for many, but not all, new issues. It is important to distinguish it from the red herring, or preliminary prospectus, which lacks significant details about the new issue. The red herring is a promotional item passed out to potential investors early on in the IPO process to solicit indications of interest and does not include the crucial information that an investor should review before purchasing a security. However, this important information is included in the offering circular.

What Is a Prospectus?

A prospectus is a formal document that is required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering for sale to the public. A prospectus is filed for the stock, bond, and mutual fund offerings. A prospectus is used to help investors make a more informed investment decision.

How a Prospectus Works

Companies that wish to offer stock or bond for sale to the public must file a prospectus as part of the registration process with the SEC. Companies must file a preliminary and final prospectus. However, the SEC has specific guidelines as to what’s listed in a prospectus for various securities. The preliminary prospectus is the first offering document provided by a security issuer and includes most of the details of the business and transaction. However, the preliminary prospectus doesn’t contain the number of shares to be issued or price information. Typically, the preliminary prospectus is used to gauge interest in the market for the security being proposed. The final prospectus contains the complete details of the investment offering to the public. The final prospectus contains any finalized background information as well as the number of shares or certificates to be issued and the offering price.
A prospectus includes some of the following information:
• A brief summary of the company’s background and financial information
• The name of the company issuing the stock
• The number of shares
• Type of securities being offered
• Whether an offering is public or private
• Names of the company’s principals
• Names of the banks or financial companies performing the underwriting
Some companies are allowed to file an abridged prospectus, which is a prospectus but contains some of the same information as the final prospectus.

Types of Prospectuses: Mutual Funds

In the case of mutual funds, a fund prospectus contains details on its objectives, investment strategies, risks, performance, distribution policy, fees, expenses, and fund management. Because the fees that mutual funds charge take away from investors’ profits, the fees are listed in a table near the beginning of the prospectus. Fees for purchases, sales, and moving among funds are included. The format simplifies comparing the costs of various mutual funds. Typically, high-cost funds charge fees in excess of 1.5 percent, whereas low-cost funds charge 1 percent or less.

Example of a Prospectus

PNC Financial filed a prospectus to the SEC in 2019 requesting a new issuance of debt. The senior note being offered to the public is a bond or a promissory note to pay a specific yield by maturity. For review, senior notes are debt securities, or bonds, that take precedence over other unsecured notes in the event of bankruptcy. Senior notes must be paid first if assets are available in the event of company liquidation. A senior note pays a lower coupon rate of interest compared to junior unsecured bonds since the senior debt has a higher level of security and a reduced risk of default. A prospectus is a document that companies and others file with the Securities and Exchange Commission when they are offering new shares of a security to the public. One of the most common reasons for issuing a prospectus is when a company is making an initial public offering, putting shares of stock up for sale for the first time. Mutual funds issue a prospectus at regular intervals because they routinely make new shares available.

Issuer Information

Among the most salient details in the prospectus for a new stock are the descriptions that the company offers of itself, its assets, its operations, its goals and its business plan. The prospectus also features a section known as “certain considerations,” which explains any particular risk factors that could impede the success of the company and harm a shareholder’s investment in its stock. Other company information includes an examination of the competition, pending legislation and the broader economy and its influence on the company. A prospectus for a stock also features a financial statement for the company and the opinion of an independent auditor about the company’s financials. A bond prospectus similarly features relevant financial information about the corporation or public entity issuing the bond.

Offering Information

In addition to issuer information, a prospectus for a stock or bond offering includes information about the security itself. It describes the number of shares or bond certificates being sold in an offering, the price, the underwriter and how the security will be available for purchase. For either a stock or a bond, the prospectus should specify how the company or public entity that is selling the security will use the funds that are being raised from the sale. If the prospectus is for a stock, it will include information about its dividend policy and it will describe the different classes of stock and the voting rights for shareholders.
Mutual Fund Activity, Objectives and Leadership
A mutual fund prospectus details the performance of the fund, often including both recent quarterly results and those from previous calendar years. It also specifies the various goals for the fund and the basic overarching investment strategies that guide it. For instance, the prospectus for a fund might indicate that the fund invests in American stocks with strong long-term growth potential. This type of description gives investors an opportunity to review a fund’s objectives to make sure that they match the investors’ own goals. The identity of the managers who are steering the fund also often appears in the prospectus.

Mutual Fund Fees, Expenses and Guidance
A mutual fund prospectus provides investors with guidance to help with their role as shareholders. For instance, it gives investors instructions on their tax obligations related to the shares that they own, and it also details instructions on how to buy and sell shares of the fund. The prospectus provides a reliable place for investors to track down the various fees that are attached to owning shares of the fund, such as the amount of the management fee. In addition, the prospectus is a document that an investor can study in order to understand all of a fund’s expenses to determine if it is operating efficiently enough for the investor’s taste.

Summary Prospectus

A summary prospectus is the disclosure document provided to investors by mutual fund companies prior to or at the time of sale. The written document is a truncated 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.

Offering Memorandum

Securities, such as private placement transactions that are exempt from full registration under federal securities law, provide investors disclosure information through an offering memorandum. This disclosure document, often referred to as a private placement memorandum, includes a summary of the offering terms, risks associated with the investment and a full description of the issuing company. An offering memorandum also details how the funds raised will be used, information on the company’s management team and previous financial performance as available. The disclosure document for private placement transactions is substantially longer than a summary prospectus and must be given to prospective investors prior to completing a sale. For issuers considering selling stock in the company or selling debt securities to investors a well-tailored and written prospectus is mandatory, particularly in light of the current economic conditions. A prospectus offering document can bring added protection to your business and is often required to raise either debt or equity capital in the public and private markets. A well written prospectus will tell the story of the company, from the minute details of the types of securities being offered, e.g. stock versus bonds, to the management team, the market, the risk factors and the overall prospectus model of the company, among many other features. The final part of the prospectus is reserved for the subscription agreement, which is an essential component of any prospectus as the subscription agreement is the contract between the issuer and the person buying the debt or equity securities. Although the prospectus is first and foremost a document used to raise capital, the structure and presentation of the prospectus can add value to a company’s products and services and team by portraying them in a well-polished format. A prospectus shows an investor that one is serious and has gone the extra length to ensure regulatory compliance and good business practices. Without a formal document that outlines the company’s prospectus and securities structure it is often difficult to raise capital from any serious investor.

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.

Securities Lawyer

When you need legal help from a securities lawyer in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

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About the Author

People who want a lot of Bull go to a Butcher. People who want results navigating a complex legal field go to a Lawyer that they can trust. That’s where I come in. I am Michael Anderson, an Attorney in the Salt Lake area focusing on the needs of the Average Joe wanting a better life for him and his family. I’m the Lawyer you can trust. I grew up in Utah and love it here. I am a Father to three, a Husband to one, and an Entrepreneur. I understand the feelings of joy each of those roles bring, and I understand the feeling of disappointment, fear, and regret when things go wrong. I attended the University of Utah where I received a B.A. degree in 2010 and a J.D. in 2014. I have focused my practice in Wills, Trusts, Real Estate, and Business Law. I love the thrill of helping clients secure their future, leaving a real legacy to their children. Unfortunately when problems arise with families. I also practice Family Law, with a focus on keeping relationships between the soon to be Ex’s civil for the benefit of their children and allowing both to walk away quickly with their heads held high. Before you worry too much about losing everything that you have worked for, before you permit yourself to be bullied by your soon to be ex, before you shed one more tear in silence, call me. I’m the Lawyer you can trust.