Be Investor Friendly

WILL YOUR PRESENT COMPANY STRUCTURE HELP OR HINDER YOUR EQUITY RAISING EFFORTS?

Here’s a hint: your answer here is so important that it will determine whether or not you can become investor friendly and raise equity capital

Q. Why is your company’s structure so vital to your efforts to raise equity capital?

A. Because it is your company’s structure that gives confidence & protection to investors. If investors can’t be assured that the funds they will invest in your company will be properly and securely safeguarded and only used for the agreed purposes as set out in a Shareholders’ Agreement, there is no way that they will contribute to your company. It’s commonsense really.

Warning: There is a considerable amount of information here concerning the importance of your company structure. If your structure is not right in the eyes of investors, you can never be investor friendly. I understand how important this information is to you when making up your mind as to who can best help you with the expansion of your business. Consequently, as the guide covers a lot of ground, expect a long read.

Background to Australian venture capital investing

A bit of history. Hello, welcome to another webpage of advice about the use of equity capital for business development and expansion purposes. First, a little bit of history. I won’t get academic but this is important. In Australia, the vehicle traditionally or historically used for business development and expansion purposes in the small and mid-size business sector was the private proprietary company, identified by the use of ‘Pty Ltd’ (Proprietary Limited) in the business name. However, the use of the proprietary company for business development and expansion purposes has become more difficult over the years for two reasons.

  • The first is that these companies were often used by crooks to run scams where members of the public were cheated.
  • The second is that in the business environment of today, proprietary companies not considered as a suitable vehicle on which to base corporate capital growth activities. I will explain why shortly.

Pty Ltd companies are restricted. Because of these regulatory control problems and other legal and administrative difficulties encountered over the years, the Australian Government has enforced strict rules on the conduct and management of proprietary companies. Consequently, there are now very stringent restrictions placed on the shareholders of proprietary companies by the Australian Corporations Act 2001.

Pty Ltd companies are inhibited. These restrictions seriously inhibit the rights of proprietary companies’ shareholders’ to seek equity capital funds from the public through a sale of securities. I will outline these restrictions in a moment. Please note however that these restrictions do not apply to a proprietary company’s ability to obtain debt or loan funds from commercial lending institutions such as banks or finance companies.

Proprietary Companies: give them a miss

The restrictions imposed by the Corporations Act on the shareholders of proprietary companies include, but are not limited to, the following:

  • Shareholders in a proprietary company do not have the right to freely transfer their shares to whomever they like at any price. The right of a shareholder in a proprietary company is therefore restricted.
  • A proprietary company does not have the right to have an unrestricted number of shareholders.
  • A proprietary company does not have the right to invite the public to subscribe for securities in the company, or to accept subscriptions from the public for securities in the company, unless a formal and expensive prospectus or product disclosure statement has first been registered with the Australian Securities and Investments Commission (ASIC).
  • A proprietary company does not have the right to invite the public, or make any offer to the public to deposit money with the company, whether interest bearing or not, and whether for fixed periods or payable at call, unless an expensive prospectus or product disclosure statement has first been registered with ASIC.
  • A proprietary company does not have the right to undertake any action (including the raising of equity capital) that requires, pursuant to the terms of the Australian Corporations Act 2001, disclosure to investors. The one exception is an offer of shares in the company to existing shareholders, or employees or a direct subsidiary. In practical terms, this essentially means that capital raising is limited to rights issues restricted to existing shareholders.

Two more reasons to give proprietary companies a miss

While the above limitations demonstrate the legal restrictions on proprietary companies to raise capital to develop or expand their companies, there are two further important reasons why regulatory authorities do not consider that proprietary companies are suitable vehicles on which to base corporate capital growth activities. These reasons are:

  • there is no legal requirement for a proprietary company to be regularly audited, and
  • share transfers can be easily manipulated or controlled so that share transfers are not always conducted in an open or transparent manner that protects the interests of all shareholders.

Investor concerns are paramount. These two issues are of vital concern to investors in small and mid-size growth companies. Investors naturally require companies in which they place investment funds to operate in a transparent and ethical manner with a regular and full financial and operational disclosure of the companies’ activities to shareholders. It is therefore almost impossible to raise equity capital funds through a proprietary company (Pty Ltd) structure. Don’t even try!

The investor friendly corporate structure

Fiduciary responsibility and prudential accountability. As you read this webpage, you will learn how I will personally help you to structure the company that will have control rights over the venture to ensure that from an investors’ point of view, the company will be operating to a high level of fiduciary responsibility and prudential accountability and therefore will be investor friendly. I have already explained that proprietary companies are not suitable vehicles on which to base corporate capital growth activities because they do not satisfy that test.

An investor friendly structure is paramount. The company that will have control rights over the venture therefore has to have a structure that is ‘investor friendly’. That is, the company must conform to some minimum standards suggested by ASIC. I say ‘suggested’ because these standards are not mandatory. With my guidance to help you comply with these standards, you will be able to substantially dispel investor fears and build investor confidence in your investment proposal. Many investors of course, for practical reasons of self-protection, will not even consider investment proposals in companies that do not satisfy these corporate structure standards.

The public (unlisted) company. The preferred ‘investor friendly’ corporate structure is the public (unlisted) company. It is the preferred ‘investor friendly’ corporate structure because:

  • the public (unlisted) company has a more appropriate format for the capital growth of a company than does the proprietary company (Pty Ltd) structure,
  • the public (unlisted) company allows for an easy and transparent transfer of shares,
  • the public (unlisted) company generally has no restriction on the transfer of shares,
  • the public (unlisted) company has to have at least three directors,
  • the public (unlisted) company is required to be regularly audited,
  • the public (unlisted) company is required to report annually to ASIC, and
  • the public (unlisted) company gives experience to company officers as a ‘reportable’ entity.

Investor protection and investor confidence. The importance of the criteria set out above is paramount to investors. That is because they are critical to investor protection and investor confidence. There are two important issues here:

  • The first is that without investor protection, there would be no investor confidence to invest in small and mid-size companies through the venture capital market.
  • The second is that without investor confidence, there would be no opportunities for small and mid-size companies to raise equity capital without having to meet the high cost of preparing an expensive prospectus or product disclosure statement and registering it with ASIC.

Let’s make your company investor friendly

Are you beginning to see how your Company can benefit from my help in setting up the structure of your company to conform to the standards suggested by ASIC?  Are you beginning to see how your Company can benefit from my help by satisfying investor concerns about confidence, security and protection?

As you read my comments about the necessity to be investor friendly, and how I go about making companies investor friendly, did you realise the full range of benefits that you will enjoy as a client of Chiron! the business doctor.™. As a client of Chiron! the business doctor.™, you will gain the ability and freedom to:

  • authorise Chiron! the business doctor.™ to help you raise equity capital for your company without breaching the Corporations Act 2001;
  • sell or trade ownership equity in your company;
  • have any number of shareholders (including investors) that is appropriate to the circumstances;
  • swap shares for cash;
  • use shares as a type of ‘bid currency’ to purchase new products or technologies;
  • enjoy the benefits of existing shareholder value, something that is simply not possible under a proprietary company structure;
  • resolve ownership succession problems within your company to ensure continued commercial viability over the longer term; and
  • use the company’s shares as a bid currency for mergers, acquisitions and takeovers, if you become as successful as your ambition dictates (and everything IS possible in business!).

Three Key Questions Often Asked by Business Owners & Entrepreneurs

Worries & concerns. Many business owners, who have never had shareholders in their companies before, let alone other Directors, are concerned or worried about how they will work with new shareholders and directors. They are worried because the reality is that they are looking at a completely new way of running their businesses for the first time. To some, this is a frightening and scary scenario.

However, despite their fears they are attracted to the concept of equity capital and want to take advantage of the opportunity to raise equity capital. These business owners however generally ask three troubling questions:

  1. Do I need to put up additional security or collateral for the equity capital provided by investors?
  2. Do I have to mortgage my house to the investors and sign a personal guarantee for the equity capital raised?
  3. Will I have to pay interest on the equity funds raised?

The answers to these questions are quite straightforward: No! No! & No!

Equity capital. Equity capital is not repayable, and it does not attract interest payments. Equity capital is a contribution to the assets of your company by investors (usually in cash) in return for a share of ownership in your company. The share of ownership in your company is identified through the issue to the investor of share certificates that reflect the investor’s financial contribution.

Share certificates are valuable and accountable documents. Share Certificates must be safeguarded and protected. Substantial investors in a company have the right to ask for appointment as a Director, and sit as a Member of the Board of Directors.

Please Note This Important Personal Limitation. As a sole-practitioner, I simply cannot accept every assignment I am offered. There are unfortunately not enough hours in each day to accept them all. So the earlier you call, the better. To be fair, I operate on the ‘first up, best dressed’ principle.

Yours sincerely,

Graham  Segal

Chiron! the business doctor.™ ... relieves business pain!™ 

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© Graham Segal, Author. March 2013. All Rights Reserved

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Creative Commons License

This website and the associated webpages content are produced by Graham Segal trading as Chiron! the business doctor.™. They are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License based on Graham's work at http://chironthebusinessdoctor.com.

 

Date this webpage last reviewed/updated: 5 May 2013

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