Equity finance for hi-tech client to expand their business

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Equity finance for hi-tech client to expand their business

Our hi-tech client required £7.5m equity finance to expand its business. The founders had already invested significant amounts. Other senior executives had committed their time in return for reduced or zero compensation. We had to consider alternatives.

How we assisted with the funding

We were instructed by the business, and:

  • Prepared a convertible loan note. This permitted the lender to convert their debt to equity if our client defaulted.
  • Drafted the financing prospectus, which was sent to the equity subscribers.
  • Attended to all compliance aspects, which included filings, and consideration of FSMA 2000.

Why equity finance

Our client had been offered loans from a network of contacts. However the interest rate and arrangement fees were high. In addition, the amount offered was insufficient to expand the business to its full potential.

The founders preferred not to dilute their equity. However, the current and medium term year projected cash flow position did not support a significant loan or issue of debt securities. The interest payments on the £7.5 million would be prohibitive.

Structure of a small loan

Our client had a bank overdraft facility. However, it could not obtain a bank loan for the full £7.5m. Although our client had been offered a £1.5m loan, the terms included:

  • 12% interest per annum;
  • 5% arrangement fee, payable at the end of the term of the loan;
  • 9 month term.

Using a convertible loan note to stimulate growth

We structured the loan as follows:

  • Extend the term: to avoid possibly defaulting on the loan and the significant charges after such a short period;
  • Make the loan automatically convertible: into any equity security offered during the course of the loans. Alternatively convertible into into equity at the election of the lender if our client defaulted.

We prepared the loan documentation for our client and acted on their behalf until the loans were completed.

Raising equity finance

Our client had no alternative but to raise £6m through equity finance.

Financial services issues

The regime implemented in the Financial Services and Markets Act 2000 (FMSA) initially looked promising. This act regulates the raising of finance. If there is an offer of securities to the public, then it requires compulsory due diligence by third parties of documents related to the fund raising.

We first determined whether the fund raising involved an “offer of securities to the public”. If so, a prospectus would be required. A prospectus is broadly defined and covers any communication to any person which:

  • Presents sufficient information on the transferable securities to be offered;
  • The terms on which they are to be offered to enable an investor to decide to buy or subscribe for the securities.

Financial prospectus drafted

However, in certain circumstances a prospectus is not required to offer securities to the public. For example, where any of the following apply:

  • Any one person has to invest at least EUR 100,000.
  • The total amount offered for investment is no more than EUR 100,000. However, this figure includes any offers made during the previous 12 months.
  • The shares are offered in connection with a merger or demerger or takeover.
  • The total amount offered in the EEA states is less than EUR 5 million.
  • The offer is made to, or directed at, less than 150 persons per EEA state.

Unfortunately, our client’s fund raising did not meet any exemption. Therefore our client had to produce a prospectus. We worked closely with our client’s accountants and brokers, so the prospectus addressed the:

  • Accounts;
  • Financial reporting;
  • Payment of taxes;
  • Compliance with legislation;
  • Company’s business;
  • Key customers.

Outcome

Our client offered its equity to the public, and raised the funds.

Helen Curtis is a partner in the corporate team at Gannons. Helen advises SME’s on financing rounds, and understands the financing issues that can be faced. The team provides you with a workable solution.