What is an Offering Memorandum?

An offering memorandum, also known as a private placement memorandum, is a legal document that allows for the sale or private placement of securities such as shares, bonds and debentures in Canada.  The purpose of an offering memorandum is to include important information to distribute to potential investors to raise capital to meet a company’s business objectives.  An offering memorandum includes information such as the business’ goals, risks of investing, information regarding the management of the company, the business’ financial statements and the terms of the investment opportunity.  Offering memorandums can be used for all types of businesses from real estate developments to funding private loan companies.

What is the Difference Between a Prospectus and an Offering Memorandum?

When a company wants to sell securities in Canada, they are legally required to file a prospectus with the relevant provincial regulators if they don’t qualify under the prospectus exemptions.  A prospectus is a lengthy document that provides investors with thorough and accurate information of the business.   There are four forms of the prospectus: long-form prospectus, short-form prospectus, shelf prospectus and post-receipt pricing prospectus.   The purpose of a prospectus is to make a public distribution by providing information that is easy enough for a potential investor to read and understand to make an informed investment decision.  National Instrument 41-101 General Prospectus Requirements (NI 41-101) outlines the specific requirements to be disclosed in the content of a prospectus.  Form 41 101F1 Information Required in a Prospectus sets out the form requirements.

A prospectus is generally prepared by legal counsel and can be costly.  It can take months to complete a prospectus to meet the extensive disclosure requirements.   The issuer must meet the filing requirements of the jurisdictions in which they intend to make a distribution.  For example, a business that files a prospectus in Quebec is required to have the prospectus translated in French.  Once a prospectus is filed, the issuer will become a “reporting issuer” in the jurisdictions in which it filed the prospectus.  This means that the issuer is required to follow continuous disclosure rules and ongoing reporting requirements such as publicly filing annual financial statements and all material contracts.  

When a business sells securities using an offering memorandum, they are relying on the Offering Memorandum Exemption.  National Instrument 45-106 – Prospectus Exemptions (NI 45-106) sets out the exemptions available for businesses to utilize if they are raising capital without the use of a prospectus.  There are two forms of the offering memorandum available to issuers: reporting issuers and non-reporting issuers.  Reporting issuers can rely on Form 45-106F3 – Offering Memorandum for Qualifying Issuers.  Non-reporting issuers must use Form 45-106F2 – Offering Memorandum for Non-Qualifying Issuers which is a longer form and must contain several key pieces of information that would assist potential purchasers in deciding whether the investment is right for them.  The cost of having an offering memorandum prepared is generally less expensive than the preparation cost of a prospectus.  While there are still ongoing obligations for issuers utilizing an offering memorandum, such obligations are not as substantial as the obligations attached to the distribution of a prospectus.  

Creating an Offering Memorandum

The onus of proper and sufficient disclosure and compliance lies with the issuer.  Although Forms 45 106F2 and 45-106F3 provide guidance on the required disclosure, issuers are often omitting or inadequately disclosing material facts resulting in correspondence from their applicable securities commission.  Failure to comply could ultimately result in a Cease Trade Order which prohibits an issuer from making distributions.  While some companies prefer to utilize in-house resources to prepare their offering memorandum, retaining a securities lawyer provides a level of expertise and knowledge that will assist the issuer in avoiding as many deficiencies as possible.

Contents of an Offering Memorandum

Although an offering memorandum is not as lengthy as a prospectus, it is still a large document.  Below is the content found in an offering memorandum:

1. Cover Page: a summary or overview of the offering.  Information such as the name of the issuer, the minimum and maximum capital they are wanting to raise, the type of securities being offered and the cost per security.  

2. Cautionary Page: includes information regarding forward-looking statements, illiquidity and eligibility to purchase.

3. Table of Content: lists the major sections of the offering.

4. Glossary: common terms used within the offering are defined.

5. Sections of the Offering Memorandum:

a. use of available funds, description of how the issuer intends to use such funds, reallocation and any working capital deficiency;

b. business and structure of the issuer including disclosure of any related parties and conflicts of interest, development of the business including short and long-term objectives and material agreements;

c. information regarding the directors, officers, managers and shareholders of the issuer including compensation and a description of their experience;

d. capital structure of the issuer including debt and prior sales;

e. information regarding the securities being offered including the term, interest payments, subscription procedure and the jurisdictions where distributions will be made;

f. income tax consequences;

g. compensation paid to sellers;

h. risks associated with investing in the offering;

i. issuer’s reporting obligations;

j. resale restrictions and redemption rights;

k. purchaser’s rights;

l. financial statements of the issuer; and

m. date and certificate.

Examples of Offering Memorandums

SEDAR is an online website that allows users to search for public documents either by entering the name of the issuer or by selecting a letter to see a list of issuers.  Examples of offering memorandums can also be found by going to the websites of the various securities commissions in Canada.  For example, offering memorandums can be found on the British Columbia Securities Commission by clicking here.

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