Small offer delivers big future

In the past, businesses looking to raise money from the public have been put off by the time and cost of complying with the Securities Act – and justifiably so. 

The Securities Act requires a lot of paperwork, including the preparation of both a prospectus and an investment statement. It also has an extensive liability regime, which in our experience has always been a concern to directors of would-be capital raisers.

On 1 April 2014, phase one of the Financial Markets Conduct Act 2013 commenced. It includes several new exemptions from securities law that provide exciting new capital raising options for small and medium sized businesses in New Zealand. We are also pleased to report that, ultimately, the Securities Act will be entirely replaced by the Financial Markets Conduct Act. This means these types of businesses (SMBs) will be able to raise small amounts of capital with minimum fuss. 

 

A lot of the recent publicity around the Financial Markets Conduct Act has focused on crowdfunding platforms, but the changes also include some more traditional options for capital raising. 

We think the most significant of these is the new ‘small offer’ exemption. This enables up to $2 million to be raised from up to 20 investors in a 12 month period, without the need for a prospectus or investment statement. The exemption provides significant time and cost savings over the previous law and enables growing businesses to raise moderate amounts of capital quickly.

 

The small offer exemption will appeal to small and medium sized businesses which are looking to grow. It suits companies wanting capital before they reach the size where something more significant, like a sharemarket listing, becomes worth considering; but where they want to raise more money than can easily be obtained from existing contacts or through crowdfunding. 

The new rules can even be used in conjunction with other ‘non-public’ offers to maximise the amount that can be raised, or together with an offer of shares to employees (there are also new rules that make employee share purchase schemes easier).

Done properly, a small offer can quickly provide growing businesses with the capital they need to springboard themselves through the next phase of growth. What’s more, carefully selected outside investors can provide valuable experience, skills, and connections to help businesses grow.

 

Although the law changes make small offers a much simpler proposition, you need to be careful because things can still go wrong. It’s critical that you put appropriate shareholder agreements in place. These need to balance the interests of the incoming investors without unnecessarily impeding your future capital raising options. For example, pre-emptive rights need to be carefully considered because, in our experience, it’s often wise to leave room to issue a modest number of additional shares without needing to offer them to existing investors first.

Appropriate corporate governance is also key. If you want to be taken seriously by potential investors, you need to be well managed and serious about what you are doing. 

 

There are some technical legal issues to think about with any capital raising, and the small offer exemption is no different. The most important of these is ensuring that the Takeovers Code doesn’t apply to your company. 

The Takeovers Code applies to an unlisted company if it has:

• More than 50 shareholders on its register. 

• 50 or more share parcels. 

 

The Takeovers Code, when applied, can be extremely problematic for small growing companies. It severely restricts the way that future capital raisings can be carried out, especially where any shareholder owns more than 20 percent of the company. In addition, the costs of complying with the Takeovers Code can be significant. 

In our experience, another point that is often missed is that liability for false and misleading statements can arise when any offers of shares are made, even if the offer doesn’t need a prospectus and investment statement. Most importantly, this can include liability for conduct that is misleading by omission. This means you need to provide potential investors with a balanced view, and make sure they have enough information to make an informed decision. Proper legal advice can help mitigate the risks of falling foul of these rules, and is usually money well spent.

 

In our experience, many companies at this stage of growth have traditionally found it hard to easily source the capital they need. We think the new exemption has the potential to make a real difference.

In the few months since the new rules became law we’ve had a lot of interest from the market and have already advised on deals that take advantage of the changes. For example, in one transaction, the small offer rules were used to offer options to employees of a related business. In another, we’ve devised a structure that involves the use of part-paid shares to maximise the amount that can be raised under the rules over several years.

We expect interest in the small offer exemption to grow as word gets out.

 

›› Nick Summerfield and Chris Parke specialise in capital markets, financial services, and mergers and acquisitions law at national law firm, Kensington Swan. They can be contacted at [email protected] and [email protected].