# Offering Memorandum vs. Prospectus: Definitions and Examples

## What Is an Offering Memorandum?

An offering memorandum, or [private placement](https://www.investopedia.com/terms/p/privateplacement.asp) memorandum (PPM), outlines the objectives, risks, and terms of a private investment. It serves investors by detailing [financial statements](https://www.investopedia.com/terms/f/financial-statements.asp), business operations, and management credentials to inform their due diligence. While similar to a prospectus, an offering memorandum exclusively targets private investors.

### Key Takeaways

*   An offering memorandum is a legal document used to inform potential investors about the objectives, risks, and terms of a private placement.
*   It serves as a comprehensive business plan intended for sophisticated investors to aid in their due diligence process.
*   Offering memorandums contrast with prospectuses, as they are designed for private placements rather than publicly traded issues.
*   Investment bankers typically draft offering memorandums to help businesses attract targeted groups of investors.
*   Unlike public offerings, private placements through offering memorandums are targeted at a specific number of potential investors.

## How Offering Memorandums Work in Private Investments

An offering memorandum, also known as a private [placement](https://www.investopedia.com/terms/p/placement.asp) memorandum (PPM), is used by business owners of privately held companies to attract a specific group of outside investors. For these select investors, an offering memorandum is a way for them to understand the investment vehicle.

Offering memorandums are usually put together by an investment banker on behalf of the business owners. The banker uses the memorandum to conduct an auction among the specific group of investors to generate interest from qualified buyers.

An offering memorandum, while used in investment finance, is essentially a thorough business plan. In practice, these documents are a formality used to meet the requirements of securities regulators since most [sophisticated investors](https://www.investopedia.com/terms/s/sophisticatedinvestor.asp) perform their extensive [due diligence](https://www.investopedia.com/terms/d/duediligence.asp). Offering memorandums are similar to prospectuses but are for private placements, while prospectuses are for publicly traded issues.

## Real-World Scenario: Using an Offering Memorandum

Often, private equity companies aim to grow without incurring debt or going public. If, for example, a manufacturing company decides to expand the number of plants it owns, it can look to an offering memorandum as a way to finance the expansion. The business first decides how much money it wants to raise and the price per share. In this example, the company needs $1 million to fund its growth at $30 per share.

The company begins by working with an investment bank or banker to draft an offering memorandum. This memorandum complies with securities laws outlined by the Securities and Exchange Commission ([SEC](https://www.investopedia.com/terms/s/sec.asp)). After meeting compliance, the document is shared with select interested parties chosen by the company. In contrast, during an initial public offering (IPO), the public can buy company shares.

The offering memorandum informs potential investors about the company, detailing terms, business nature, and investment risks. The document almost always includes a subscription agreement, which constitutes a legal contract between the issuing company and the investor.

## Comparing Offering Memorandums and Summary Prospectuses

An offering memorandum is for private placements, while a summary prospectus is given by mutual [funds](https://www.investopedia.com/terms/f/fund_company.asp) to investors at or before public sale.

This written document is an abridged version of the final [prospectus](https://www.investopedia.com/terms/p/prospectus.asp) that allows investors to see pertinent information regarding the fund's investment objectives and goals, sales charges and expense ratio, focused investment strategy, and data on the fund's management team. Relevant tax information and broker compensation are also included in the disclosure document. A summary prospectus provides investors the information they need from the [final prospectus](https://www.investopedia.com/terms/f/finalprospectus.asp) quickly and in plain English.

## The Bottom Line

An offering memorandum is a crucial document for investors interested in private placements, offering a comprehensive overview of the objectives, risks, and terms associated with the investment. It serves to inform potential investors and protect sellers by outlining unregistered securities. Unlike a prospectus meant for public offerings, the offering memorandum caters to sophisticated investors performing due diligence for private investments. Understanding its components, such as management details and financial statements, equips investors with the essential information needed to make informed decisions about private equity opportunities.