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Offering memorandum is simply a legal document that states the objectives, terms and risks of an investment which are involved with a private placement. This document also includes items such as the financial statements of a company, management biographies, a thorough description of the business operations and much more. An offering memo also serves in order to provide the buyers with information on the offering as well as to protect the sellers from the liability dealing with the sales of unregistered securities. AN offering memo is also known as Private Placement Memorandum (PPM). It is used by the business owners of the companies which are privately held in order to attract a specific group of external investors. For these investors, an offering memo has always been a way of understanding the investment vehicle. These memos are generally put together by a capable investment banker on behalf of the business owners. The banker tends to use the memorandum in order to conduct an auction among a specific group of investors for generating interest from qualified buyers. An offering memo, is essentially a refined business plan, while being used in the field of investment finance. Practically, these documents are nothing but a formality used to meet the requirements of the securities regulators, as majority of the sophisticated investors tend to perform their own due diligence extensively. Offering memorandums are also similar to a prospectus, but are meant for private placements. A prospectus is made for issues that are traded publicly.
In several cases, the private equity companies wish to increase their level of growth without taking on any debt or going public for their capital. For instance, if a manufacturing company decides to expand the number of plants that it owns, it can view an offering memo as a way of financing the expansion. When this happens, a business organisation initially decides how much it is willing to raise and at what price per share. The concerned company starts by working with an investment bank or banker for drafting an offering memo. This memo complies with the securities laws which are outline by higher authorities. After this compliance is met, the document is circulated among a specific number of interested parties which are usually chosen by the company itself. This differentiates from an IPO (Initial Public Offering), where anyone in the public can purchase a share in the company. The offering memo thus tells the potential investors all that they require to know about the company, including the terms of the investment, the nature of the business and the potential risk of the investment. This document generally includes a subscription arrangement which also constitutes a legal contract between the issuing company and the investor.
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