Breaking Down the Offering Memorandum

When presented with long documents, it’s tempting to skim them, sign them, and hope for the best. But not so fast! Take the time to do your due diligence now to ensure you’re making smart decisions for your financial future. Our team broke down the basics of what every investor should know about that ever-intimidating document: the offering memorandum.

Key Points

  • What Is an Offering Memorandum?
  • Why Does an Offering Memorandum Matter?
  • What Is Due Diligence?
  • What Documents Can Supplement Due Diligence?
  • 3 Important Things to Remember When Reviewing the Offering Memorandum
  • 5 Important Questions to Ask When Reviewing the Offering Memorandum
  • What Are the Typical Components of a Prescribed Offering Memorandum?
  • How Do I Get Started?

If a company wants to raise money from investors, it will generally provide them with information about the venture. How the information is relayed to investors is governed by our rules regulating the securities industry. The rules vary per jurisdiction, but in general, securities regulators want to ensure that prospective investors know enough about the business to make an informed decision. This is a concept called “disclosure.”

One of the ways privately-held firms meet these disclosure requirements is to issue an offering memorandum (OM). There are two types of OMs: prescribed form and non-prescribed form. “Prescribed form” means the document must be prepared according to a guideline required by the regulators. This article breaks down the prescribed form of the OM.

What Is an Offering Memorandum?

An OM covers a substantial amount of legal and marketing material, including an executive summary, deal structure details, risks and disclosures sections, and an investor suitability form. It can be overwhelming to digest, but we’re here to break it down for you and highlight the crucial elements every investor should be aware of. You’ll likely find it useful not only for researching opportunities from Exempt Market Dealers (like Fundscraper!), but also private placement issuers, private equity and capital firms, and private mortgage funds.

In theory, OMs should provide investors with as much relevant information as possible. In practice, they’re complex documents written by lawyers for regulators.

Why Does an Offering Memorandum Matter?

Oftentimes, everyday investors don’t understand what an OM is or why they’re receiving it. They don’t have the experience or legal/financial/accounting training necessary to decipher 60+ pages of fine print—and that’s okay!

Since investors can only rely on an OM to make their decision, the reality is that many retail buyers do not know what they’re investing in unless they read the OM. They may grasp the general concept that they’re investing in real estate but be unaware of the minutiae that can alter the outcome of a deal. When they later discover unfavourable elements about the project, they often feel lied to and dismayed. Lack of awareness is one of the greatest risks associated with private investments.

At Fundscraper, part of our due diligence is making sure you understand yours.

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What Is Due Diligence?

An investor cannot make a good decision without knowing all of the facts. We call this “doing your due diligence.” You may want to understand the following before deciding to purchase:

  • Management fees
  • Investors’ voting rights
  • Indebtedness of the business
  • How the investment will be repaid
  • Conflicts of interest

All investors should know it’s impossible to disclose everything about an opportunity. A proscribed OM is designed by the regulators to deliver the minimum information the regulator believes a reasonable investor would require to make an informed investment decision.

With that in mind, use the OM as part of your due diligence before making an investment decision. You’ll want to investigate the industry, past performance, and the firm’s management team. Download the Fundscraper Due Diligence Checklist.

An Offering Memorandum is a crucial part of due diligence, but it’s just part of the equation.

What Documents Can Supplement Due Diligence?

The OM may refer to additional documents that prospective investors can receive upon request. For example, if the issuer is a trust (rather than a corporation or partnership), the OM might reference a declaration of trust or a trust indenture – documents that govern its mandate and management. You may want to understand exactly what the powers of the managers are and how the business must be run in far greater detail than what’s being disclosed. Investors should therefore scour through an OM for any mention of additional documentation.

For example, the OM may read, “ABC Trust will issue 1,000,000 trust units, pursuant to Section 4.1.3 of the Declaration of Trust.” While the declaration of trust is technically being disclosed, many investors will not realize that there is an entirely separate set of documentation that they should read before investing.

At Fundscraper, we aim to give you as much documentation, information, and transparency about properties in our marketplace as possible. The “Material Agreements” are available to you in the “Documents” tab of your account—see below.

3 Important Things to Remember When Reviewing the Offering Memorandum

  1. Regulators do not endorse investments.
    While an OM may reference securities regulators and state that it has been filed with the authorities, that should not be construed as being endorsed by the regulator as a good investment. The Canadian Securities Administrators, the body representing the 13 provincial and territorial securities regulatory authorities across Canada, are not responsible for performing due diligence on behalf of investors with respect to OMs. Rather, it and its members exist to protect the integrity of the capital markets and to enforce the law.
  2. Consider hiring independent counsel.
    While an OM may contain dozens of pages written by lawyers, accountants, and auditors, those professionals are representing the issuer, not the individual investor. Thus, investors should hire their own advisors before deciding to invest. Do not allow yourself to feel a false sense of security by knowing that the investment was assembled by professionals.
  3. Look for penalties, sanctions, and/or bankruptcies.
    An OM should disclose whether any members of management have any legal or serious financial blemishes. Use that information to help form an opinion about whether your money would fall into reliable hands.

Never make assumptions about a prospective investment. It’s best to hire an independent counsel to review the OM and the terms of the deal with you.

5 Important Questions to Ask When Reviewing the Offering Memorandum

  1. How are the funds being used?
    Never assume that all, or even most, of your money will be deployed into the targeted undertaking. The OM should disclose what, if any, fees will be paid to sales agents, how much will be advanced towards legal and administrative costs, whether there is any debt to service and how much will actually be deployed into the targeted undertaking. Moreover, investors should also understand what the continuing expenses of the venture will be over and above administration fees. These expenses can seriously dilute any available returns.
  2. How is cash being distributed?
    An investor should have a good understanding of how the fund receives income, how it intends to employ it, and how it will distribute any returns to investors. Once the underlying investments make returns to the fund, how much of those returns will be passed onto individual investors and how is that calculation determined? Do the managers earn a piece of the returns? Are there other parties that will share in those returns? Never assume that all or even most of the returns earned by the issuer will be passed onto investors. The flow of funds can turn a seemingly lucrative investment into a poor one.
  3. How liquid is my investment?
    Investments made via OM are less liquid than publicly traded securities on large stock markets. It is not uncommon for one’s capital to be locked up for a period of years in a given investment. Thus, an investor’s ability, or lack thereof, to sell the holding should be clearly disclosed in the OM. Note: Even in offerings where investors can easily redeem their shares, management usually reserves the right to reject redemption requests at their sole discretion.
  4. How am I being taxed?
    The tax implications of any investment are critically important for every investor to understand. What might be considered “tax advantageous” for one investor may be a disaster for another. (To complicate matters, investors and issuers are often taxed differently.) Where an issuer can provide a legitimate tax advantage to an investor, the investor must be fully aware of what the consequences might be if the issuer was to lose its unique tax status. Before investing, it’s important that the investor consult a professional about the tax consequences of the investment.
  5. What are your rights?
    As an investor, you can never assume that you have the ability to voice your opinions or influence management decisions. It’s important to search within the OM for your rights as an investor. For example, do you have the ability to vote, and if so, on what issues? How powerful is each individual vote? Can you attend annual general meetings? Are you able to request financial statements and other internal documents?

If you know what to look for and what questions to ask, you’ll be empowered to make smart investment decisions for your future.

real estate investment documents

What Are the Typical Components of a Prescribed Offering Memorandum?

The following are typical elements in a prescribed OM for a typical real estate investment in a hard asset like a building or development.

  • Executive Summary: Lays out the high-level description of the investment company (which may control or be the acquiring entity), its mission, the deal being pitched, a detailed description of the executives’ industry experience, and the deal financing requirements.
  • Location: If the OM is promoting a real estate opportunity, it will include the location of the asset. These images may include the property’s location on a map, an aerial view of the site, and a second map highlighting important places near the property such as an airport, public transportation, restaurants, and stores.
  • Investment Summary: Covers various subtopics, each of which has its own separate section and brief description.
  • Property Description: Describes where the property is located, when it was built, how large it is, any repairs it may need, and the current occupancy.
  • Purchase Price: The price for which the property will be purchased and how the purchased price will be financed.
  • Total Capitalization: Describes the “capital stack,” which shows the different layers in the financing of the project. Typically it would be first mortgage debt, next second mortgage, next preferred equity then finally equity. It’s really important to know where your investment dollars are in the “capital stack.” Traditional investment wisdom says the higher up you are, the safer your return.
  • Preferred Return: An investor who earns a “preferred return” means they will get a return on their money before ordinary investors. A “preferred investor” generally comes after debt and before a common investor. Preferred investors will have different return expectations than ordinary investors.
  • Projected Returns: Sometimes an OM will provide an indication of return. It is important for the investor to read the fine print wherever performance returns are disclosed. In a prescribed OM, certain kinds of “future-oriented financial information” must be prepared in accordance with strict guidelines. A licensed advisor can help an investor understand what is really behind an issuer’s projected return boast.
  • Manager or Sponsor: The sponsor company that controls the investment entity. This entity is often referred to as the “promoter.”
  • Property or Asset Manager: A description of the asset manager and their fees, which investors should review closely. They’re generally paid to the issuer, manager, and promoter before anything is paid to the investor.
  • Proposed Structure: The structure of the deal between investors, sponsors, asset management, and property management. An old adage to understand a deal is “follow the money.” Learn who gets paid what, and when.
  • Distributions: How surplus cash, i.e., the profits, are distributed to parties.
  • Acquisition Fee: This can be anything: a flat sum paid on closing; a flat fee plus a continuing interest. Always ask why are these fees being paid this way and if it’s reasonable given the terms of the deal.
  • Management Authority: How the manager holds control over the management and affairs of the property.
  • Proposed Use of Proceeds: How your investment dollars are being used. This could include acquiring the property, making repairs, and maintaining the property.
  • Estimated Sources and Uses: The amount of equity and debt to be raised, which then adds up to form the total sources of funds. Also included should be the uses of funds, including purchase price, closing costs, acquisition fee, working capital, and fronted capital expenditure.
  • Loan Terms: Where applicable or relevant, the loan terms section is broken into the following subtopics:
    • Loan amount: What is the approximate loan amount and the percentage of the purchase price it makes up?
    • Borrower: Which entity will be borrowing and what kind of company it is?
    • Interest rate: What is the locked interest rate?
    • Term: How long is the term? Is it a fixed rate or variable rate?
    • Amortization: Does amortization begin right away, or is there a period of interest-only servicing?
  • Competitive Set: A table depicting the competitors in the issuer’s market.
  • Industry Overview: Every industry is different, whether residential, retail, or another niche. This section describes what the specific industry for the property type is like in today’s market.
  • Market Overview: Similar to the industry overview, the market overview gives geographic-specific insight into the real estate market where the building is located.
  • Risk Factors: This section should include every risk related to the business, tax, accounting, and legality of the property. A typical OM includes 10-20+ risks and each one should have its own paragraph description.
  • Investor Suitability: Real estate deals frequently receive support from accredited investors. This last section in the OM describes what types of investors the deal is suited for, and may be based on rules and regulations with regards to investor accreditation or general solicitation. These are the guidelines that concern the investors’ financial status and their ability to bear the risk of losing an investment.

How do I get started?

As you can see, an OM is a complicated document. Don’t just rush through it and assume the best! Take the time to do your due diligence before you invest your hard-earned nest egg.

It’s critical to have a licensed dealer assess whether the investor is first eligible to participate in the investment and then, secondly, whether the investment is a suitable investment for the investor. That’s where Fundscraper can help!

If you’d like to learn more about private real estate investment, visit and sign up. Once you are part of our community, you’ll have access to the resources our members enjoy that help them explore real estate investment!

Start Investing in Real Estate Today

Explore the investments available on Fundscraper.

What Is an Offering Memorandum?

“Prospectus” and “Offering Memorandum” may sound like ancient Roman philosophers. But they’re actually documents that inform prospective investors about what’s being offered and on what terms. We put together an overview of what they include and how they function.

Key points:

  • What Is a Prospectus?
  • What Is an Offering Memorandum?
  • How Is an Offering Memorandum Regulated?
  • Eligible Investors vs Non-Eligible Investors
  • How to Start Investing Today

There are two ways for an issuer to raise capital in Canada: publicly or privately. When done publicly, a prospectus is used; when done privately, a term sheet or offering memorandum is used. In both cases, the purpose of the document is for the issuer to inform a prospective investor about the security’s history and credentials, what’s being offered, and on what terms. These documents simply tell a story. Let’s take a closer look at what they include and how they function.

What Is a Prospectus?

If you elect to raise money from the public, you have to use a prospectus. A prospectus is a highly detailed document that is prepared by an issuer together with its lawyers and auditors under complicated rules that govern our public capital markets. A prospectus tells the story of the issuer and why buying the securities of the issuer is a good investment.

The document is first filed with the regulatory authorities who will actually review the preliminary drafts to ensure it complies with legislation requirements. The regulators do not assess the worthiness of the investment; they simply assess whether the document provides the disclosure required by law. This document is generally the only document an issuer can use to solicit the public. There are severe financial and criminal penalties if an issuer fails to use a prospectus to solicit the public or uses it improperly.

For a new issuer, a prospectus can be hundreds of pages and cost in excess of a million dollars taking into account such things as legal, auditing, and printing expenses. It is extremely expensive to raise money under a prospectus. The advantage, though, is that anyone can purchase securities that are qualified for distribution under a prospectus.

exempt market dealer canada

What Is an Offering Memorandum?

If you elect to raise money privately, you often use a term sheet or offering memorandum. Both documents function to inform a prospective investor about the specifics of the investment.

A term sheet is an abbreviated soliciting document that carries significantly less regulatory burden than an offering memorandum. It’s a bare-bones, skeletal overview of a securities offering with just a summary and the terms of purchase and sale. And we mean bare-bones: By regulation, a term sheet can have no more than three lines of text to describe the business of the issuer!

An offering memorandum is a more robust document. It describes, in detail, everything a prospective purchaser needs to know about a security being sold so they can make an informed investment decision, including:

How Is an Offering Memorandum Regulated?

Instead of mandating the contents of offering memorandums, regulators put the onus on issuers to ensure the information they put before investors is accurate. How do they enforce it? By giving them the right to sue an issuer or cancel their subscription in the issuer’s security if a misrepresentation is found in the offering documents.

Wherever an offering memorandum is used, the issuer must (except in very limited circumstances) provide potential purchasers with various contractual rights of action and rescission for any misrepresentation. The actual granting of the right will often be found in the subscription agreement (the agreement by which one purchases the relevant securities).

An offering memorandum is supposed to provide “prospectus-like disclosure.” This often results in many prospectuses being hundreds of pages long and nearly indecipherable. When the offering memorandum is not required to be in a prescribed form, the rule of thumb is to provide the information that an ordinary subscriber of exempt market security would expect upon which a reasonable decision can be made. At the heart of disclosure, it must not contain (i) a misrepresentation or (ii) an omission that would be tantamount to a misrepresentation.

An offering memorandum is supposed to provide prospectus-like disclosure.

What Is the Exempt Market and What Is an Exempt Market Dealer (EMD)?

Instead of raising money from the public, an issuer may raise money privately in the “exempt market.” This is the most common route issuers take. Raising money from the private capital market is also governed by extensive legislation. What makes it easier is that a prospectus is not required.

The exempt market describes a section of Canada’s capital markets where securities can be sold without the protections associated with a prospectus. Examples of activity in the exempt market include:

  • Canadian and foreign companies, both public and private, selling securities to institutional investors and qualified investors
  • Canadian and foreign hedge funds and pooled funds selling securities to institutional investors and qualified investors

Investors who buy securities through prospectus exemptions generally do not have the benefit of ongoing information about the security they are buying or the company selling it. They also often do not have the ability to easily resell the security. There is a presumption that given the wealth or expertise of the investor, or the quality of the security for which is being subscribed, the extensive protections provided by the prospectus requirements are not necessary.

An exempt market dealer (EMD) is a firm that has been licensed to distribute investment securities that haven’t been qualified by a prospectus, but are exempt from the prospectus requirement based on the rules and regulations of each province where the EMD is registered to carry on business.

Exempt market pro: The cost saving is tremendous.

Exempt market con: An issuer is only permitted to solicit certain groups of investors — ones the regulators believe do not need the disclosures and provided by a prospectus.

Eligible Investors vs Non-Eligible Investors

An eligible investor is an individual who makes $75,000 (or makes a combined $125,000 with a spouse) in each of the last two calendar years and expects to make the same in the current year. Alternatively, an eligible investor is an individual who has $400,000 of net assets.

An eligible investor can invest up to $30,000 in any one calendar year and, if a securities dealer has determined it’s suitable, up to $100,000 in any calendar year.

A “non-eligible” investor is a person who does not meet this minimum requirement. As such, they may only invest up to $10,000 in any calendar year.

private placement memorandum real estate

How to Start Investing Today

Intrigued but still not sure where to start? Fundscraper can help. We’re an EMD registered to sell securities in the Provinces of Ontario, our Principal Jurisdiction, British Columbia, Alberta, Quebec, and Prince Edward Island. We recommend learning more about the Fundscraper Property Trust, a private investment vehicle that lets you invest in real estate with as little as $5,000.

Fundscraper has employed the rules of the exempt market to facilitate investment in the private real estate market. Our offerings are unique to Canada – Fundscraper is the only online investment platform today where anybody can learn about, become qualified to invest in, and actually subscribe for in a secure and transparent environment private real estate investment opportunities that have been vetted for consideration. Join our community of investors today and start growing your nest egg.

Start Investing in Real Estate Today

Explore the investments available on Fundscraper.

Are there any risks?

Yes. Risk factors are generally described in every offering listed on the Fundscraper platform. With respect to offerings like Fundscraper Property Trust, an offering memorandum is provided and investors are especially encouraged to read the section of the offering memorandum entitled “Risk Factors”. Before you make an investment decision, work with a Fundscraper dealing representative to find out what is most suitable for you!

What if a project does not raise the intended amount of capital?

Funds are held in trust and are deployed to the project only after a minimum threshold of capital has been raised. If a minimum threshold of capital is not achieved, then all funds will be fully returned to investors, plus any interest that may have accrued, less any expenses.

What happens if a project I invested in doesn’t complete on time?

  • In the due diligence process, Fundscraper’s Investment Committee will source projects that will have a projected buffer built into the project timeline so that there are allowances in scheduling to keep the investment horizon on pace.
  • Preferred equity investments will continue to earn a preferred rate of return.
  • Some project investments will have an outside date where the sponsor company is obligated to complete the project and allow the investors to exit the investment. Should this not occur, the sponsor company will be able to exercise its option to extend the project duration or will raise additional capital to allow existing investors to exit.
  • Debt investments have a fixed maturity date and few options to extend without penalty. Therefore, the sponsor company will be responsible for paying the interest and principal on time, or else be in default of the loan.
  • In any event, you should consult the particulars of any offering as detailed in the offering as posted on the Fundscraper platform or any posting supplement. 

What happens if a loan I invested in is repaid early by the sponsor company or borrower?

It depends on the particular investment. The borrowing sponsor company may or may not be obligated to pay an early repayment fee. However, in some instances, a borrowing sponsor company will be obligated to pay an early repayment fee which will be distributed to the investors.

Can I sell my securities?

Securities purchased through the Fundscraper platform are issued pursuant to the rules governing the exempt market. Any resell of such securities must comply with these rules and any such resell may be subject to the prior written consent of Fundscraper. Subscribers wishing to resell their securities should advise Fundscraper and consult a legal adviser familiar with the exempt market rules.

Are the investment securities backed by any collateral or securitized by any asset(s)?

a) The investment offerings provided on the Fundscraper platform range in security seniority and asset collateral. Each investment will have its own characteristics.
b) For equity investments, Fundscraper will always ensure that the investment is tied to a direct interest in the property itself.

How long should I expect to hold my investment?

There is generally no “minimum term” – the term of mortgages we invest in vary widely and we endeavour to pass on flexibility to our investors so they can move in and out of our opportunities as they present on our platform.

However, Fundscraper investments, like all real estate investments, should be viewed as a long-term (5+ years) investment. We do offer shorter terms (subject to renewal) that are less than 12 months through our Fundscraper Property Trust Investment Vehicle Single Asset Mortgage Pools. If you need cash early, subject to a fee, you have redemption rights as set out in our Offering Memorandum under Redemption Rights. 

What is the minimum investment?

The minimum investment amount ranges from $5,000 through to $250,000. Each investment offering or project has its own investment minimums.


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