Memorandum Documents
Memorandums, or information memorandums, or Private Placement Memorandums, are documents that are used to raise funds for companies. The memorandum document is produced before a sale, equity or bond float, to be distributed to prospective buyers – including detailed information about how a company operates, what is sold, the services offered.
Often, these memorandums would also include terms of a bond, sale, merger or otherwise in a single, unifying document. Whilst not always strictly necessary for compliance reasons, the memorandum is customary to provide to investors, as it brings together financial fundamentals about both company and offering, alongside other intangibles about a client’s business; directors, projections, working culture, products, services, marketing and much more.
The memorandum brings a lot of credibility as an investment product and encourages investors to back an issuing. Swordblade works significantly with clients to ensure that the best insights and information are demonstrated to investors through the memorandum.
What does a memorandum document contain?
The document itself would be created by advisers like Swordblade, in conjunction with connected lawyers/solicitors in whichever territory that an offering was being made. The memorandum is first used as a marketing document, aiming to ‘sell’ the company, and aiming to acquire the maximum value for directors to be able to achieve stated business aims.
An example contents’ page of an information memorandum:
- Executive Summary.
- Investment Thesis.
- Overview of the Market.
- Overview of Target Company/Bond Offering/Equity Offering Etc.
- Products and Services.
- Revenue Profile.
- Employee Profile.
- Customer Profile.
- Financials – Historical and Projected.
- Management Structure.
However, it must be noted that for each deal the memorandum document will change significantly depending on what is most necessary to explain or promote to investors based on whatever a company is offering. Swordblade liaises with clients to understand the fundamentals behind business plans, which helps to support the creation of memorandum documents that are unique and professional for presentation to investors.
As mentioned, dependent on the market and territory an offering is being made in, the memorandum document can change radically in its structure and style, usually down to regulatory changes between jurisdictions.
US Private Placement Memorandum:
Sometimes called an offering memorandum, a private placement memorandum is used to raise funds in the US. A PPM is a document used to raise capital, which includes details of the securities being offered to investors, alongside vital company information as outlined in the previous section. Usually, an issuer sells securities in the form of debt or equity – i.e., notes, bonds, shares or occasionally warrants. These securities are offered usually to accredited investors, who are often high net worth individuals or institutional investors.
Private placement memorandums are usually offered in terms of debt, and equity.
- Debt:
- A company will detail the securities being sold, including the interest rate, maturity date, coupon details, and other parts of the offering specific to each client, such as whether the bond or note offered is convertible into equity at a later date (see convertible bonds for more).
- Equity:
- A company sells an ownership stake, often via selling shares or stock of the company. Alongside this, an LLC or LP can sell units or limited partnership interests of a company. Some companies also use ‘sweeteners,’ such as preferred shares (known as preferred stock).
The PPM is intended to add protection to a company and provide clear terms and conditions to buyers, by disclosing the overall business strategy and the risk that the business is taking on. This places the onus on an investor to do due diligence before deciding to invest. This means that if the business fails, there is sufficient protection from investors looking to recoup their investment.
Furthermore, the PPM is a professional presentation of an investment offer and outlines the opportunity for investors. It demonstrates credibility and integrity to those who are considering the investment, which is reassuring for investors that the issuer has conformed to best practices.
US Private Placement Memorandum Rules and Regulations.
US SEC Rules 504, 505 and 506 of Regulation D have to be followed, including 506b and 506c offerings. Furthermore, SEC Regulation A and Regulation A+ must also be followed. Any offerings advanced within the equity and debt private placement include those governed by SEC Regulation S and Rule 144A.
Rule 504: Exempts from registration the offer and sale of up to $10 million of securities across a 12-month period. After the first sale of securities, a company must notify the SEC within 15 days, but this is only notification.
Rule 505: Companies must meet four conditions to make an offering under rule 505.
- No more than $5 million of securities can be sold in any 12-month period.
- Securities can only be sold to up to 35 non-accredited investors (but unlimited qualified accredited investors). An accredited investor can be anyone or any institution with greater than $5 million in assets, or individuals earning at least $200,000 a year, and a net worth over $1 million.
- The company must inform investors that securities are restricted and cannot be resold within six months of initial registration.
- The offering cannot be advertised for general solicitation.
Rule 506(b): Companies can raise an unlimited amount and can sell to an unlimited amount of accredited investors.
- Must not generally solicit or advertise to market the securities.
- Cannot sell securities to more than 35 non-accredited investors (who must have sufficient knowledge and experience in financial and business matters to be able to evaluate and make a decision).
Rule 506(c): Permits issuers to generally advertise and solicit an offering, so long as the following conditions are met.
- All purchasers in the offering are accredited investors.
- The issuer takes reasonable steps to verify accredited status.
- The issuer is certain other conditions in Regulation D are satisfied.
SEC Regulation A: An exemption from registration for public offerings, set into two tiers. Tier 1, for offerings of up to $20 million within a 12-month period; and Tier 2, for offerings of up to $75 million in a 12-month period. Companies offering under $20 million can choose which tier they fall into.
SEC Regulation A+: An offering that allows private companies to raise up to $50 million from the public. Similar to an IPO, Reg A+ allows companies to offer to the general public rather than just accredited investors – but must file with the SEC first and get approval before launching. Despite this, associated fees are generally much lower and disclosure requirements less burdensome, which can make this worthwhile.
SEC Regulation S: A safe harbour rule that defines when an offering of securities would be deemed to come to rest abroad – therefore making it no longer subject to registration obligations imposed under the Securities Act. Subject to two general conditions:
- The offer or sale must occur in an ‘offshore transaction’ – meaning the buyer is offshore at the time, or the transaction occurs on certain ‘designated offshore securities markets.’ The transaction must not be pre-arranged with a US buyer.
- No ‘directed selling efforts’ can be made in the US by the issuer, distributor or affiliates (Swordblade).
Rule 144A: An SEC rule that provides a non-exclusive ‘safe harbour’ exemption from the registration requirements of the Securities Act for certain offers and sales of qualifying securities by certain persons (not including the issuer) – as long as the offering is only sold to Qualified Institutional Buyers.
Information Memorandums (Non-US):
An information memorandum is a document used to raise capital through debt or equity, or increasingly, to broker M&A deals. The IM is a document that is critical to raising capital, highlighting any key insights that investors must be aware of, the benefits of the transaction, any risk or costs an investor may occur – so that an educated decision can be made by investors on whether the offering is appropriate for them.
An IM document will demonstrate the valuation of a business for investors to see, but omits pricing of the company or its core business – to ensure the issuer has an advantage by not giving away its bottom-line pricing, maintaining the best interests of a client by keeping prices higher. Prospective buyers will also do their own valuations and return with an offering price.
What Constitutes an IM Document?
IM documents would generally include the following details:
- Summary of sale and the structure of the offering.
- A thorough description of the business, its products and services.
- Competitive analysis and any barriers to entry for the competition.
- Risk factors.
- A description of industry trends and overall market opportunities.
- An introduction to the management and leadership team, alongside their credentials.
- The potential scalability of the company, and other growth opportunities, including future products and services.
The document would normally be around 20-30 pages, highlighting the most important aspects and opportunities that your investment offers, similar to a pitch deck (see here for Pitch Decks). This document would be much meatier, including further analysis, projections and explanations that are still accessible to the investor.
Other sections to cover could include any investment highlights, company history, key success factors, long term goals and ambitions, and potentially a letter from the director – which could help to demonstrate a more personal touch for investors.
Next Steps
If your company is planning to go public and raise funds on the capital markets, we look forward to hearing from you.
The easiest way to get started is to request a free evaluation. By providing minimal information about your company and capital needs, we will be able to provide you with a quick assessment by email. In most cases we can tell you if your business is ready to go public, or not yet.
We’ll also let you know if we think that Swordblade & Co are a good fit for your flotation plans, and anything else that we may think can help you.
Alternatively, if you are ready to talk in depth about floating your company, we recommend you arrange a paid consultation with one of our partners. It can usually be scheduled within a few days and is the fastest way to get detailed advice.
