What is an Offering Memorandum?

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 issuances 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.