What it means
The document is often called a private placement memorandum, or PPM, and the two names are used interchangeably. It typically runs to several dozen pages and is assembled by the company with its lawyers, usually alongside a placement agent who will introduce investors.
It is not written as a marketing brochure, although a good one still has to tell a coherent story about why the business deserves the money. A standard memorandum contains an executive summary, a description of the business and its market, management biographies, historical and projected financial information, the terms of the securities, an itemised use of proceeds and a long risk factors section.
The risk factors matter far more than newcomers expect, because they define what the investor has been told and therefore cannot later claim to have been surprised by. Experienced investors read that section first.
Legally, the memorandum sits inside an exemption from public registration, which is why it carries restrictions on who may invest and on reselling the securities. Investors normally have to certify that they meet an income or net worth test, and subscription documents accompany the memorandum to record that certification.
Distributing it widely or advertising it publicly can jeopardise the exemption itself. The commercial content people focus on is the use of proceeds and the fee structure.
Investors want to see how much of their money reaches the business rather than the placement agent, and how the promoter is rewarded once returns begin to flow. A memorandum that is vague on either point invites hard questions.
It is worth being clear about what an offering memorandum is not. It is not audited unless it says so, it is not a guarantee of the projections it contains, and it is not usually reviewed in advance by a regulator.
The disclaimers at the front, which most readers skim, say precisely that.
In practice
Real-world examples.
Example
A regional brewery raises $4,000,000 from 20 investors at $200,000 each. Its memorandum discloses that the founder has personally guaranteed an existing bank loan, a fact that changes how the new investors rank if the business fails.
Example
A logistics company issues $15,000,000 of unlisted five year notes at 9%, an annual interest cost of $1,350,000. The memorandum sets out the covenants, the security over the vehicle fleet and what happens on a missed payment.
Example
A medical device startup circulates a memorandum whose risk factors flag dependence on a single component supplier. One institutional investor uses that disclosure to negotiate a covenant requiring a second source within 18 months.
Formula
Calculation
An offering memorandum is a disclosure document rather than a calculation, but every one contains a use-of-proceeds table, and that table has to add up.
A property fund raising $12,000,000 in 48 units of $250,000 each would show:
Gross raise = 48 x $250,000 = $12,000,000.
Placement agent fee at 5% = $12,000,000 x 0.05 = $600,000.
Legal, audit and printing costs = $250,000.
Net proceeds available to the fund = $12,000,000 - $600,000 - $250,000 = $11,150,000.
If the fund intends to buy $10,400,000 of property and hold the balance as a repair reserve, the reserve is $11,150,000 - $10,400,000 = $750,000, which is 6.25% of the gross raise. An investor subscribing for one unit of $250,000 owns 1 / 48 of the fund, or 2.08%, and can see that roughly 93 cents in every dollar subscribed reaches the fund rather than the intermediaries.Case study
Seen in the real world.
The story below is illustrative and the company is fictional. Marlstone Storage Partners, an invented self-storage syndicate, set out to raise $8,000,000 through 32 units of $250,000 to buy and refurbish two sites.
Its first draft memorandum ran to 30 pages, projected 14% annual returns and devoted half a page to risks. Two prospective investors declined on the basis that the projections were unsupported and the sponsor's fees were not itemised. The sponsor rewrote the document with a full fee schedule, showing a 4% placement fee of $320,000 and $180,000 of legal and audit costs against the $8,000,000 raise, leaving $7,500,000 for the properties.
The revised memorandum also added 11 pages of risk factors covering occupancy assumptions, interest rate rises and planning delays. The raise closed in seven weeks. The sponsor's conclusion was that the disclosure investors said they disliked was the very thing that let them commit.
Watch out
Common mistakes.
- Reading the offering memorandum as a marketing document and skipping the risk factors, which are the part that defines what you were actually told.
- Assuming the financial projections have been audited or approved by a regulator, when in most private offerings neither is true.
- Confusing an offering memorandum with a prospectus, when the prospectus is the public market equivalent and carries a much heavier legal and review burden.
Questions
People also ask.
Who prepares an offering memorandum?
The issuing company with its lawyers, usually alongside a placement agent, and with input from its accountants on the financial sections.
Do I have to be a qualified investor to receive one?
In most jurisdictions yes, because the exemption being relied on limits the offering to professional, institutional or high net worth investors who certify their status.
What should I check first?
The use of proceeds, the fee structure and the risk factors, because together they tell you how much of your money works for the business and what can realistically go wrong.
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