An Information Memorandum provides accurate details about your business’ history, current position and projected future growth to attract prospective buyers and investors. It must contain transparent, comprehensive and accurate information to enable investors to assess the functions and profitability of your company.
The main aim of an Information Memorandum is to help your business raise capital by attracting potential investors. It is typically used after early-stage investment when raising large amounts of capital at later investment stages. The Information Memorandum is required for certain types of security offers, including options or shares. However, section 708 of the Corporations Act 2001 (Cth) outlines ‘exempt offerings’ such as small-scale offerings and offers to sophisticated investors.
What is included in an Information Memorandum?
It is useful to assume the position of a prospective buyer or investor to identify the information you would want to know about the business if you were in their position. This document must have detailed, up to date information about the business and include the sections listed below.
This section should outline the business’ purpose, performance, vision and goals. It should also explain how the business’ goals will be achieved and demonstrate how the investors’ funding will be used.
Product, Service or Technology
Describe the products and services that the business sells, including information about their features and how they compare to other products and services in the market. This section should also outline advantages that your product line or services have over your competitors as well as any product or service development plans.
Who is involved in your business’ operations? This section should detail suppliers, procurement, production and distribution. It should go into the systems and processes used, quality control and marketing and sales. Also, it must describe the business’ management team by briefly outlining each person, their relevant skills and their role in the business.
What is Your Target Market?
Identify your business’ position in the industry and compare it with competitors. What is your target market and where are the development opportunities? It is important to include detailed information about size and growth prospects instead of a brief overview. You may also provide information on your key consumers, including market analysis and consumer purchase trends.
Describe the business’ intellectual property (IP) rights, including any registered trademarks, patents and other IP. Does your business have any IP arrangements with third parties? It is important to detail whether IP is assigned to the company or others.
You should provide your balance sheet and cash flow statement in this section. Also include your business’ financial records of up to 3 years with sales, gross profits, current trading and pre-tax revenue.
It is important to be clear on how you will spend the investors’ funds and why funding will be used in that way. You can set out milestones with timeframes for use of the funds.
Other Key Considerations
Above all, the Information Memorandum should be clear and professional. Make sure the document draws on clear, evidential data in its balanced coverage of negative and positive facts about the business. It is common for a ‘disclaimer’ to be included, limiting the use or sharing of information in the document and prohibiting republication. A disclaimer can set out legal repercussions for the leaking of key information. Additionally, you may consider including a glossary of terms to explain the meaning of any industry phrases for potential investors or buyers.
Certain offers do not require companies to provide disclosure via an Information Memorandum. The main exemptions outlined in section 708 of the Corporations Act 2001 (Cth) cover:
– Personal offerings between individuals who have dealt with the company in the past. Companies are allowed to raise up to $2 Million in capital from up to 20 potential investors in any 12-month rolling period;
– Senior managers within the company because they are in a position to access information about the company and make informed capital investment decisions;
– Investors with either net assets of $2.5 Million and an annual gross income of at least $250,000, or paying a minimum of $500,000 for their securities;
– Individuals who are holders of an Australian Financial Services Licence or are professional trustees.
The Information Memorandum must provide potential investors with accurate, reliable and comprehensive details about the business so they can make an informed investment decision. By knowing what to include in the Information Memorandum, you can reduce legal risk to the company and directors.