Legal Definitions - price memorandum

A price memorandum is a specialized document used in the financial industry, specifically when a company is preparing to sell its shares or other investment products to the public for the first time, or in a subsequent offering. This document is typically created by an underwriter—a financial firm that helps companies issue and sell securities to investors. Its primary purpose is to thoroughly explain the methodology and various factors that were considered to determine the initial price at which these securities will be offered to the public.

Crucially, a price memorandum often includes detailed financial projections, internal valuations, or expert appraisals that, while essential for the underwriter's internal assessment and discussions with the issuing company, are generally not permitted to be included in the official public offering documents (such as a prospectus). This is often due to regulatory restrictions on forward-looking statements or subjective valuations that could be misleading to potential investors.

• Example 1: Tech Startup's Initial Public Offering (IPO)

  Imagine "Quantum Leap Innovations," a rapidly growing software company, is preparing for its IPO. Their underwriter, "Global Capital Partners," creates a price memorandum. This document meticulously details how they arrived at the proposed share price of $30. It includes a comprehensive discounted cash flow (DCF) analysis projecting Quantum Leap's revenue growth over the next five years, along with comparisons to recent acquisitions of similar private tech companies. While the official prospectus will state the offering price, the detailed assumptions and specific growth rate projections from the DCF model, and the internal valuation multiples derived from private transactions, are contained only within the price memorandum. This is because securities regulations often restrict the inclusion of such forward-looking, speculative estimates in public-facing legal documents to prevent undue reliance by investors.

• Example 2: Pharmaceutical Company's Secondary Offering

  "BioGen Pharmaceuticals," an established publicly traded company, decides to issue new shares to raise capital for a groundbreaking new drug trial. "Apex Financial Group" is the underwriter for this secondary offering. Apex prepares a price memorandum explaining how the new shares are priced at a slight discount to the current market price to attract new investors, factoring in the potential dilution of existing shares and the projected future value if the new drug trial proves successful. This memorandum might include internal expert opinions on the drug's market potential and the probability of its regulatory approval, which are vital for the underwriter's valuation but are considered too speculative and subjective to be included in the official offering circular provided to the public.