Offering Memorandum Definition

What is an Offering Memorandum?

An offering memorandum (OM) is a legal document that spells out the terms and conditions of an investment opportunity for chosen investors (as opposed to an initial public offering, where securities are open to anyone, hence, “public”). It is also known as a private placement memorandum (PPM)[1]. An offering memorandum not only attempts to raise private money but also provides helpful and relevant information to potential investors, including tools to help them perform due diligence.

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Offering Memorandum Overview

An offering memorandum provides an overview of an investment opportunity, whether in real estate or some other investment vehicle. Owners of private businesses often use an offering memorandum to disclose the particular details of the investment. One of the primary objectives of an offering memorandum is to attract a specific group of investors through private placement.

Put another way, it can be looked at like a business plan that is intended to generate interest from a select group of people.

Real Estate Offering Memorandum

In real estate, offering memorandums are commonly used in apartment syndications, along with many other types of commercial investments[2]. In apartment syndications, a lead individual or small team (referred to as the sponsor and/or general partnership), will put a deal together and then raise the money required to do the deal from outside investors.

Along with raising the money to purchase the property, they will also compile a business plan detailing the strategy they will use to increase the property’s value and generate a return on investment for all parties involved.

Offering memorandums may vary in their design and layout. In the real estate sector, this document typically has the following four sections:

1. The Introduction

The introduction of an offering memorandum covers these topics:

  • A brief overview of the investment opportunity (referred to as the offering).
  • A description of the property.
  • The minimum amount required to invest.
  • The date the offering expires.
  • All the risks involved.
  • A suitability agreement, a legally required acknowledgment that the sponsor has reasonable knowledge that the investment is suitable for the investor, based on unique factors, such as age, deal history, competency, and income.
  • A fee and commissions disclosure that outlines what will be paid to the sponsor and other third parties involved.
2. Disclosures

In real estate, there are normally three types of disclosures an offering memorandum will include:

Sponsor Disclosure: One of the primary functions of an offering memorandum is to furnish essential information to prospective investors, one of which is proof that the sponsor is capable of doing the deal. An offering memorandum is required to include a series of disclosures related to the sponsor. These include items such as the name and contact information of the sponsor and a list of fees and profits payable to the sponsor.

The sponsor disclosure also details the sponsor’s background information, particularly their deal history. This might include how much money they have raised and completed and how many units they currently have under management.

Property Disclosure: In this section, the offering memorandum provides key information related to the property. This typically includes items such as estimated project costs and revenue-related documents like the rent roll. The property disclosure also details the business owner’s plans for using the money raised in a private placement.

Risk Disclosure: This discloses any risk associated with the deal. These can range from environmental problems, tenant or market-specific issues, or any other unique risks associated with the property or the sponsor.

3. Operating Agreement

This section highlights how the legal entity (whether an LLC, partnership, or otherwise)[3] that manages the deal will be structured. The operating agreement spells out the roles and responsibilities of the sponsor and other active investors who are implementing the business plan.

SPONSORED: Create Your Own Operating Agreement

Among other things, these include the rights and functions of each person involved, each person’s level of ownership, a termination plan, and the ability to assign or transfer ownership.

4. Subscription Agreement

This final section of the offering memorandum is a copy of the contract the passive investor would sign if they decide to proceed with the deal. It lists the terms of the investment and how much ownership an investor would get for their investment.

An offering memorandum also includes pro forma statements and projected returns, though these are always included as an exhibit and are not technically included in the memorandum itself.

If an investor agrees and signs, all that remains is to transfer funds, and the deal is closed.

Takeaways

In summary, an offering memorandum is a helpful document used to outline the terms and conditions of a deal. It both serves potential private money investors and active investors alike.

Sources

  1. Aponte, A. (n.d.) What Is a Private Placement Memorandum? Nolo. Retrieved from https://www.nolo.com/legal-encyclopedia/what-is-private-placement-memorandum.html
  2. Fairless, J. (2018). What is Apartment Syndication? Retrieved from https://joefairless.com/what-is-an-apartment-syndication/
  3. Nwatu, I. (2016). Basic Information About Operating Agreements. U.S. Small Business Administration. Retrieved from https://www.sba.gov/blog/basic-information-about-operating-agreements

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