Offering Memorandum

What is an Offering Memorandum?

An offering memorandum, sometimes called a private placement memorandum, is a legal document issued to potential investors in a private placement deal. It states the deal terms and conditions of the investment opportunity including potential risks and liabilities.

An offering memorandum provides a potential investor with relevant information about a company like in depth financial statements, financial performance, management biographies, description of business operations, and any other information that will help an investor perform due diligence.

Generally, a business owner will hire an investment banker to draft the offering memorandum. The memorandum is a legally binding document and must adhere to the Securities and Exchange Commission (SEC) laws.

Purpose of an Offering Memorandum

The main purpose of an offering memorandum is for business owners of privately held companies to attract investors. The memorandum generates interest by allowing a potential investor to understand the risks, returns, operations, and capital structure of a business.

Offering Memorandum are often used for investment opportunities from:

• Exempt market dealers
• Private placement issuers
• Hedge funds
• Private equity firms
• Private capital firms
• Venture capital firms
• Private mortgage funds

The offering memorandum provides disclosures to the investor which is an important concept in investing. If an investor does not know all the facts about an investment opportunity, they cannot make a good decision about the investment.

Some information that should be disclosed in an offering memorandum includes:

• Management fees
• Investors’ voting rights
• Indebtedness of the business
• How the investment will be repaid

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Real Estate Offering Memorandums

Offering memorandums are used in real estate much like in any other investment opportunity. They are commonly used in apartment syndications and other types of commercial investments. The purpose of real estate offering memorandums is to secure investors to raise money to purchase property. Much like any other business plan, the offering memorandum will outline plans to increase property value and potential returns on investments.

Real estate offering memorandums will vary on format but should include the follow sections:

Section 1: Introduction

The introduction will include an overview of the investment opportunity, a description of the property, the minimum amount of capital required to invest, a date the offer expires, and all risks involved in the investment.

Section 2: Disclosures

Generally, there are three types of disclosures in a real estate offering memorandum.

• Sponsor Disclosure

The sponsor disclosure is proof that the sponsor is capable of entering the deal. This disclosure will include items such as the name and contact information of the sponsor and a list of fees and profits payable to the sponsor. It will also contain the sponsor’s background information including their deal history.

• Property Disclosure

The property disclosure contains information about the property. It will usually include estimated costs of projects, and revenue information. The property disclosure should also include the business owner’s plans for using the money raised in private placement.

• Risk Disclosure

The risk disclosure outlines any risks that an investor should be aware of. Some risks include environmental problems or market issues.

Section 3: Operating Agreement

The operating agreement outlines the structure of the proposed deal. It will state the roles and responsibilities of the sponsor and other investors who will be involved in the business plan. It should also contain the rights and roles of every party involved like level of ownership, termination plan, and requirements to transfer ownership.

Here is an article about Operating Agreements .

Section 4: Investment Summary

The investment summary is a large section of the offering memorandum that covers various subtopics which all have their own section and description. These subtopics include:

• Property description
• Investment opportunity
• Purchase price
• Total capitalization
• Preferred returns
• Manager/Sponsor
• Property/Asset manager
• Proposed structure

View some of our Real Estate Lawyers here .

Section 5: Subscription Agreement

The subscription agreement is a copy of the contract that would be signed should an investor agree to proceed with the deal. It should include all terms and how much ownership an investor would be entitled to.

For information on real estate appreciation, read this article.

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What’s Included in an Offering Memorandum

Every offering memorandum will be custom tailored depending on the investment, however each one must include certain detailed information to ensure the investors have all the information they need for due diligence.

Section 1: Introduction

The Introduction lays out the basic deal terms and offering. It will also provide the investor with some basic information about the company.

Section 2: Summary of Offering Terms

The summary of offering terms, or terms sheet, includes the capitalization of the company, liquidation preferences, conversion rights, voting rights and protective provisions for the investor.

Section 3: Risk Factors

This section will outline possible risks that an investor should be aware of before entering into the contract. Any risk that could impact the investor’s investment should be included in this section.

Section 4: Company Description

The company description should describe what the company does and provide a detailed history of the company including past performance and future goals. Also included in this section should be a description of the company’s competition, advertising strategy, intellectual property, and any other relevant information that an investor may be interested in.

Section 5: Use of Proceeds

Investors are generally interested in how their investment will be used. This section should describe how the company plans to use their funds.

Section 6: Description of Securities

A description of securities will outline the rights, restrictions and class of securities being offered to investors.

Section 7: Subscription Procedures

Subscription procedures are instructions for the investor about how to invest in the offering.

Section 8: Exhibits

In this section, the company can include any supplemental information that an investor may need to make an informed decision. Some examples of what may be included in exhibits are financial statements, shareholder agreements, and any licenses held by the company.

Here is an article that goes over a terms sheet .

Offering Memorandum vs Prospectus

An offering memorandum and a prospectus are very similar documents, however, while an offering memorandum is used for private placements, a prospectus is for publicly traded issues. A prospectus is used when a company is looking for public funds.

These documents share many similarities, and both serve as a detailed business plan to inform investors about their potential investment. Just like an offering memorandum, a prospectus will include terms of the offer, business structure, value, risks, and financial projections.

How to Make an Offering Memorandum

Generally, offering memorandum are drafted by an investment banker hired by the company. An effective offering memorandum should highlight your company’s strengths and provide all the relevant information an investor needs for due diligence.

Here are some things to consider when creating an offering memorandum:

• Readability - Design is important for an offering memorandum. Your document should be easy to read and aesthetically pleasing. Consider the font used, headings and subheadings, bolding key points, and utilizing bullet points for quick scanning.
• Imagery - Photos are especially important for a real estate offering memorandum. Be sure to include high quality professional photos to showcase your property to the investor.
• Writing Style - An offering memorandum is a business document and should be clear, concise, and direct. It needs to be able to be read and understood with ease. Eliminate “fluff” language, keep paragraphs short, and be sure that there are no grammatical errors.
• Call to Action - A clear call to action will encourage your potential investors to take the next step forward in the deal.

Get Help with Offering Memorandums

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