We earlier started unpacking what three key types of disclosure documents start-ups raising capital require. Already, we took the slides out of the pitch deck and answered what information you’ll need and why, as well as how much detail you need to provide investors. Below, we turn our attention to an Information Memorandum.
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 sets out these “exempt offerings” and covers small-scale offerings as well as offers to sophisticated and professional investors.
When Do I Use an Information Memorandum in Practice?
An Information Memorandum is typically used when raising large amounts and/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. An early stage start-up won’t have all the information that an Information Memorandum usually contains.
What Does an Information Memorandum Include?
An Information Memorandum is a marketing document, but it needs to include comprehensive and accurate information about the business. Ask yourself, what information would I need if I was buying this company? An Information Memorandum is approximately 50 to 75 pages.
An Information Memorandum doesn’t include the same information required in a Prospectus or other disclosure documents and you don’t need to lodge it with ASIC. Nevertheless, it’s a detailed document covering:
- Purpose, performance and goals: What is the company’s purpose? What are the current goals? How will these be achieved?
- Product or service or technology: What does your company sell? Describe the products, services or technology. Describe the features and advantages compared to your competitors’ products or services. Outline the product or service development plans. How will you keep innovating? 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 the skills they bring and how these are relevant to the business’ success.
- Market: What is the 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 product or services that the company provides. Include progress to date and how you will achieve this projected market share.
- Legals: 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.
- Financials: Up to 3 years of financials 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 what you will spend the funds on and why, including milestones and timeframes.
You should also succinctly describe your the above information in your Executive Summary.
An Information Memorandum is created to provide detailed disclosure, to minimise the risk that an investor may complain that they were misled or deceived into investing in a company’s securities.
An Information Memorandum must give potential investors accurate, reliable and comprehensive information to make an investment decision. Capital raisings can expose the company and directors to legal risk, and you should take steps to minimise this risk by understanding to include in your Information Memorandum and why.
Questions about capital raising or how to draft your Information Memorandum? Ask our start-up lawyers on 1300 544 755.