Investment Memorandum

This section of the memorandum is placed at the very beginning of the document and represents a “squeeze” from the subsequent more detailed description of the company, its business, type of securities offered, expected volume of proceeds from the sale of shares, methods of using attracted funds, and, in addition, may include basic financial company performance indicators for recent reporting periods. It also provides the full details of the company and methods of communication with its leaders.

This section lists the risks that are associated with the implementation of the proposal made by the company. These are risks that pose a potential threat and which may have a negative impact on the company's activities in the present or in the future. The most common risk factors are:

• adverse trends in the company or loss on core activities;
• the need for additional funding;
• the danger of “erosion” of a controlling stake for public investors;
• negative trends in the market of the industry to which the company belongs;
• seasonal nature of the business;
• the presence of strong competitors;
• Strong company dependence on a limited number of customers or suppliers.

Factors and possible actions that can neutralize, mitigate or eliminate the negative impact of risk factors or, conversely, have a positive effect on the situation should also be described. For example, having mentioned the dependence of the company on the activities of a key specialist, the deprivation of which may have tangible consequences for the company’s activity, as a potential danger, it should be added that the company’s management is working to strengthen its personnel policy and create a personnel reserve. We can mention the incentive and motivation system operating in the company.

The memorandum should describe in sufficient detail the main directions of spending investments attracted as a result of the sale of shares on the public market. As a rule, these directions are described in general terms, without unnecessarily detailed, for example: so much money will be spent on paying off current debt and replacing loans received, such and such amount will be spent on investments in fixed assets, such and such part will be invested in research and development, etc.

In this section, the company should explain its current dividend payment policy, list past changes in the accrual and payment of dividends, and list existing restrictions and exceptions. For example, very often joint-stock companies prefer not to pay dividends, but to direct all retained earnings to finance current activities or to develop the company. Restrictions may be associated, for example, with obligations for servicing current loans or with rules governing the scope of the company.

This section in chronological order contains information on the ownership structure of the company until it is converted to public and in shares after the sale of part of the shares on the public market.

If there is a cost inequality between the IPO price per share and the net book value of tangible assets per share, there is an effect called “dilution”. The implications of this “erosion” for future investors and owners should be described in detail. Typically, this information is provided in tabular form.

The final version of the issue prospectus should indicate: the price of shares offered for public offering, the number of members of the syndicate of underwriters, the type of agreement with the underwriters and other relevant information explaining the nature of the existing agreements between the issuing company and the underwriters;

This part of the document is one of the most voluminous. It provides a detailed and comprehensive description of all areas of business carried out by the company. Sections to be described:

• type of business the company is engaged in;
• list and characteristics of the main production facilities;
• customer base, including separate export deliveries or clientele;
• volume and directions of R&D , including expenses in this direction;
• regulatory framework and legal environment in the industry of the company;
• litigation and litigation;
• for each of the market segments serviced by the company, explanations should be given and a “breakdown” should be given by turnover, profit, assets, products and services, R&D volumes, main consumers, order volumes, inventory size, suppliers, patents, competitive situation, etc. P.;

This kind of information includes any events that have had or are capable of, in one way or another in the future, having a material impact on the company’s activities, and which may affect the interests of shareholders present in the company or intending to invest in it. The detailed procedure, volume, composition and frequency of the provision of this information is regulated by resolution No. 32 of the Federal Securities Commission of Russia dated 12.08.98 “On Approving the Regulation on the Procedure for Disclosing Information on Material (Events and Actions) Affecting the Financial and Economic Activities of the Issuer of Issued Securities”. In addition, Federal Law dated 05.03.99 No. 46-FZ “On the Protection of the Rights and Legal Interests of Investors in the Securities Market” in article 12 leads to the possibility of fines “on officials in the amount of up to 200 minimum wages, on legal entities or individual entrepreneurs in the amount of up to 10,000 minimum wages ”for various violations, including - and for“ violation of the order and timing of disclosure (publication) of information ... by the issuer .. ”The statement of material facts is included in the disclosure system itentom.

When preparing a version of the investment memorandum and prospectus according to foreign standards for distribution to investors, it is best to be guided by the requirements for the composition and contents of this section of the US Securities and Exchange Commission (SEC). These requirements are listed in Form No. 1 attached to the registration application filed with the SEC and require the following main reporting documents:

• balance sheets for at least two reporting years preceding the date of placement, with the appendix of an independent auditor's report;
• reports on profits and losses, cash flows, changes in the share capital for each year of the three years preceding the date of placement, with the appendix of an independent auditor's report;
• summary data on the results of financial and economic activities, given in one table, for five years preceding the date of placement;
• Applications describing businesses acquired or planned to be acquired. Depending on the specific situation, information about the mergers and acquisitions that have taken place should be provided for the period from two to three years preceding the date of placement;
• interim financial reports - quarterly or semi-annual, depending on the period of time, which is separated from the date of placement. As a rule, interim reports are not verified by an independent auditor, however, an underwriter may require such an audit;

In this section, it is required to give a detailed description of the management of the company, directors, major shareholders and provide information on the amount of remuneration and compensation received by them. In addition, it is necessary to describe the production and managerial experience of the executive directors and key employees of the company, the amount of their salary (including information about their options for shares, bonuses, agreements on participation in profits and incomes), the quantities and volumes of their blocks of shares, participation in operations related to borrowed funds, commission fees, etc.

In this part of the document, the management of the issuing company provides potential investors and other readers of this document with their views and an assessment of the results of the company's current activities, analyzes its liquidity, capital adequacy, draws attention to the prospects for the development of this business. Compilers should be especially responsible for preparing this section. Information should be submitted as objectively as possible and contain carefully weighed estimates of both probabilistically favorable and problematic developments in the company in such areas as:

• Results of current activities. Here, a comparison is usually made of the main indicators of profit and loss statements for the past reporting periods, accompanied by comments on certain circumstances, market trends and events that somehow influenced the results achieved;
• Liquidity. All known circumstances, requirements, obligations, events, uncertainties that occurred or, in the opinion of the company managers, may adversely affect the current state of liquidity of the balance of payments, should be characterized and disclosed in detail. If there is a threat of unfavorable dynamics of liquidity indicators, directors should explain how the company intends to counter the detected threat and neutralize the impact of negative factors. It is necessary to list all internal and external sources of liquidity, unused internal reserves and adequately unused liquid assets;
• Capital adequacy. A description of all existing obligations arising in connection with the incurred and planned capital expenditures should be given, and the sources of financing for this cost item should be indicated. All positive and negative trends that have been discovered or known, that can somehow affect the investment programs of the company should be described in detail;
• Other facts to be covered. These include: participation of the company in legal proceedings of any kind, names of experts and consultants receiving remuneration for their services from the company, relationships with dependent and affiliated persons and organizations, etc.