Equity finance for hi-tech expansion

Gannons helped a hi-tech firm expand their business using equity finance.

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

Our client briefed us on their issue, and we prepared a convertible loan note for them. This permitted the lender to convert their debt to equity if our client defaulted. We also drafted the financing prospectus for our client to send to the equity subscribers. As well as that, we attended to all compliance aspects, which included filings, and consideration of the Financial Services and Markets Act (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. Additionally, 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 yearly projected cash flow position did not support a significant loan, or the 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, they could not obtain a bank loan for the full £7.5m. Instead the bank had offered our client a £1.5m loan. However, as well as it being too small to meet our client’s needs, the terms of this loan were very unfavourable. They included: 12% interest per annum; a 5% arrangement fee, payable at the end of the term of the loan; and it was only a 9-month term.

Using a convertible loan note to stimulate growth

We structured the loan as follows:

Extend the term

This would minimise the possibility of defaulting on the loan and the significant charges incurred after such a short period.

Make the loan automatically convertible

This would transform the loan into any equity security offered during the loans. Alternatively, it was convertible into equity at the election of the lender if our client defaulted.

We prepared our client’s loan documentation and acted on their behalf until the completion of the loans.

Raising equity finance

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

Financial services issues

The regime implemented in the FSMA 2000 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 fundraising.

We first determined whether the fundraising involved an “offer of securities to the public”. If so, a prospectus would be required.

Prospectus

The definition of a prospectus is broad. It covers any communication to any person which presents sufficient information on the offer of transferable securities. It also covers the terms on which they are to be offered to enable an investor to decide to buy or subscribe for the securities.

Exemptions from requiring a prospectus

There are certain circumstances in which a companies can offer securities to the public without providing a prospectus. Only meeting one of the following criteria would exempt our client from requiring a prospectus:

Criteria

Any one person has to invest at least  €100,000.

The total amount offered for investment could be no more than €100,000. However, this figure includes any offers made during the previous 12 months.

The shares needed to be offered in connection with a merger or demerger or takeover.

The total amount offered in the European Economic Area (EEA) states is less than EUR €5 million.

The offer is made to, or directed at, fewer than 150 persons per EEA state.

Unfortunately, our client’s fund raising did not meet any exemption criteria. Therefore, our client had to produce a prospectus.

Producing the prospectus

In producing it, we worked closely with our client’s accountants and brokers. This ensured that the finished prospectus addressed the accounts, financial reporting, payment of taxes, compliance with legislation, the company’s business, and its key customers.

Outcome

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