In Short
- What It Is: An Information Memorandum (IM) is a detailed document used to attract investors by providing a comprehensive overview of a business.
- When to Use It: Typically for later-stage capital raising with sophisticated or professional investors under Australian law.
- What It Includes: Essential details on business goals, market, products, management, financials, and funding plans.
Tips for Businesses
If you’re planning a capital raise, consider an Information Memorandum to clearly convey your business strengths. Include clear information on financials, growth strategies, and your target market to build investor confidence.
Table of Contents
- What is an Information Memorandum?
- When Can I Use an Information Memorandum?
- What Does an Information Memorandum Include?
- Key Indicators of a Well-Drafted Information Memorandum
- Confidential Information Memorandum or Disclaimer
- Stop Orders
- Capital Raising Without an Information Memorandum
- Crowdfunding
- Key Takeaways
- Frequently Asked Questions
For businesses seeking to raise capital, choosing the right approach is crucial to attract investors and comply with regulatory requirements. One key decision is whether to use an Information Memorandum (IM) as part of the capital raising process. An IM is a comprehensive document that provides potential investors with detailed information about your company, its financial position, and the investment opportunity.
Understanding when and why to use an IM can significantly impact the success of your capital raising efforts and help ensure you meet your legal obligations. This article explores the circumstances under which an IM is appropriate, its benefits, and how it fits into the broader landscape of capital raising strategies.
What is an Information Memorandum?
An Information Memorandum, or a Product Disclosure Statement (PDS), provides a descriptive snapshot of your business’s history, current status and projected future position. The primary purpose of this document is to motivate potential investors to invest in your business. However, it is also a document which must be transparent, comprehensive and detailed.
When Can I Use an Information Memorandum?
Under Australian law, you can only use an Information Memorandum for certain types of security offers, including options or shares. Section 708 of the Corporations Act outlines these “exempt offerings,” which include small-scale offerings and offers to sophisticated and professional investors.
You would typically use an Information Memorandum when raising large amounts or for later-stage investment after initial rounds.
You could choose to create an Information Memorandum for your first round of investment, but it is not market practice. Early-stage investors will not want to read such a long and detailed document. Likewise, an early-stage start-up will not have all the information that an Information Memorandum usually contains.
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What Does an Information Memorandum Include?
An Information Memorandum is a marketing document that requires comprehensive and accurate information about your business. Ask yourself, what information would I need if I were buying this company? An Information Memorandum typically ranges from 50 to 75 pages.
An Information Memorandum does not include the same information required in a Prospectus or other disclosure documents. Also, you do not need to lodge it with ASIC.
Nevertheless, it is a detailed document covering:
Purpose, Performance and Goals
Consider your company’s purpose. What are its current goals? How will these be achieved?
Product or Service or Technology
What does your company sell? Describe the products, services or technology that you sell. Likewise, describe the features and advantages compared to your competitors’ products or services. It is also essential to outline product or service development plans and consider how you will continue to innovate. How will you extend the product range?
Management Team
Who’s in your management team? What are their areas of expertise? Include a brief description of each key person, including their skills and how these are relevant to the business’s success.
Market
What is your target market? What are the opportunities? Do not make general motherhood statements that the size of the market is $X billion, and you aim to capture X% of this market. Include detailed size and growth prospects for the products or services that the company provides. Include progress to date and how you will achieve this projected market share.
Legal
Set out the company’s intellectual property rights, including proprietary technology, trade marks, intellectual property rights and know-how. What registered trademarks does the business have? Does it have any patents? If there were or are third-party developers, is all relevant intellectual property assigned to the company? This can, of course, exclude open source technology.
Financial
You should record up to 3 years of financial information, including sales, gross profit and pre-tax results. Discuss results and growth to date, including when the results were higher or lower than projected.
Funding
Provide clear information about how you will spend the funds, including the specific milestones and timeframes.
Glossary of Terms
Your startup business may be tech-based. Consequently, many of the descriptive or informative elements contain ‘buzz words’ or industry slang. In that case, it is essential to explain their meaning to ensure that investors understand the context in which they have been used and what they mean for the business.
Key Indicators of a Well-Drafted Information Memorandum
An information memorandum is essentially a marketing document that highlights the essential information potential investors need to know about your startup business. Whilst it is vital to ‘market’ your business as an attractive investment, specific rules from legislation and common law prevent entrepreneurs from including misleading or deceptive information in this document.
Some key indicators of a well-drafted information memorandum include the following:
- the document is clear, professional and does not emphasise presentation over substance;
- negative facts or past events are not omitted but rather balanced against positive ones with clear and evidential data; and
- the data used to predict the business’s future and current states are up to date, accurate and not presented in a misleading way.
Confidential Information Memorandum or Disclaimer
Depending on your circumstances, a complete and well-drafted Information Memorandum will often contain a ‘disclaimer’. You can incorporate this into the document’s body and title it, ‘Confidential Information Memorandum’. This element’s purpose is to limit the use or sharing of the information contained therein and prohibit republication. This section of the document outlines a technical provision that outlines the legal consequences in the event that key business information is leaked.
Stop Orders
Section 739 of the Corporations Act allows ASIC (the financial regulator) to make a ‘stop order’ which prevents offers from being made under a disclosure document if the:
- company or business circumstances have changed since the document was drafted;
- document omits certain information required under legislation; or
- document contains misleading or deceptive statements.
There is also a requirement that the regulator believes that the circumstances are materially adverse from the investors’ perspective.
Capital Raising Without an Information Memorandum
Sections 708 1-7 of the Corporations Act provide ‘key exemptions’ to the requirement to have an information memorandum. These key exemptions include:
- Small-Scale Offerings: These are typically personal offerings between individuals who have past dealings with the company, are associates, or share professional connections. This exemption allows companies to raise up to $2 million in capital from up to 20 potential investors within a 12-month rolling period.
- Senior Managers: These are typically individuals (or their spouses or relatives) who are in key managerial positions within the company. Given their position within the company and access to inside information, they are informed about making capital investment decisions without a disclosure document (information memorandum);
- Sophisticated Investors: This individual either has net assets of $2.5 million and an annual gross income of at least $250, 000 for each of the last two financial years, or pays a minimum of $500,000 for their securities; and
- Professional Investors: This exemption typically applies to individuals who hold an Australian Financial Services License (AFSL) or are professional trustees.
Crowdfunding
Crowdfunding is a method of raising capital that typically involves receiving numerous small investments from a large group of people. It usually falls within the exemption contained in the Corporations Act. Hence, this type of capital raising does not require an Information Memorandum or Product Disclosure Statement.
While previously unregulated, the introduction of the Corporations (Crowd Sourced Funding) Act 2017 by ASIC now provides a legislative framework within which crowdsourced fundraising can operate. It provides that any intermediaries (crowdfunding platforms) must now be Australian Financial Services licensees. In addition to complying with their requirements under the license, intermediaries must:
- have provisions for managing conflicts of interest;
- have adequate risk management provisions in place;
- maintain organisational competence;
- have sufficient human, financial and technological resources; and
- have internal and external dispute resolution mechanisms in place.
These recent legislative amendments reduce regulatory requirements for startups seeking to raise public funding for their business. It also provides some investor protection mechanisms.
Key Takeaways
An Information Memorandum must provide potential investors with accurate, reliable, and comprehensive information to facilitate an informed investment decision. Capital raising can expose the company and directors to legal risk. Hence, you should take steps to minimise this risk by understanding what to include in your Information Memorandum and why.
If you have further questions about capital raising or drafting your Information Memorandum, our experienced capital raising lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
An Information Memorandum (IM) is a comprehensive document that provides potential investors with detailed information about your business, including its history, current status, and future projections. In Australia, an IM is typically used for later-stage capital raising involving sophisticated or professional investors, as outlined under Section 708 of the Corporations Act. It is not commonly used in early-stage fundraising rounds due to its length and the level of detail required.
An Information Memorandum should provide a comprehensive overview of the business, including its mission, objectives, products or services, and competitive advantages. It should highlight the management team, market analysis, and include financial information such as historical performance and future projections. Additionally, it should outline the funding requirements and how the capital will be used.
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