INVESTOR EXIT STRATEGIES
The great and famous Harry Houdini (legendary escapologist) said it very well: ‘It’s easy to get locked in; it’s the getting out that’s the hard part’.
Investors often feel the same way!
Warning: There is a considerable amount of information here concerning the importance of investor exit strategies to equity offers. 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.
Investors’ exit strategies: a prickly & sensitive issue
Hello, Graham here with another informative webpage to hopefully shed some light for you on an important aspect of the equity raising process. I’m really pleased that you have come to this webpage because here I deal with what is probably the most sensitive and prickly issue that concerns investors. If you wish to raise equity capital to help the expansion of your company, then you will need to pay particular attention to this issue.
The question of investor exit strategies is therefore a critical issue for you, as a person seeking equity capital. It is critical because investors will not lock up substantial amounts of their investment funds into investments where they cannot reasonably access the funds in the unexpected or unfortunate situation that their personal financial circumstances may require such access.
Investors’ personal circumstances sometimes require drastic action
I am not saying here that investors would or do capriciously or unpredictably seek withdrawal of their investment funds from an investment made in good faith, but hey! We’re all human and life being what it is, investors sometimes have their surrounding financial environment suddenly take a turn for the worse, requiring the withdrawal of their investment funds from a company. Naturally, this can be a calamitous event for the company. As an aside from the subject under discussion, but in the unfortunate circumstance that this should ever happen to you, could I just say that both you and the investor must contact me without delay so that I can take urgent action to recruit a replacement investor.
What should I do if an investor wants to divest my company’s shares?
There is a technicality here that I must inform you about. To find replacement equity capital invokes the same ASIC regulations that governed the original recruitment of the investor who is departing. That is, the limitations on capital raising from the Corporations Act still apply, so you will still need my help as a person who has legal exemption from certain of the Act’s fund raising provisions. My help ensures protection for both your company’s position and the investor’s position to the highest degree possible. In this situation, I will still need to prepare a Class Order Compliant Document (COCOD) as the formal offer information statement given to potential new investors. I will then take the necessary action to publicise the share sale offer.
Why investor exit options are important
Let’s return to the subject of this webpage; that is the sensitive and prickly issue of concern to investors: exit strategies. If you wish to raise equity capital to help the expansion of your company, then the question of investor exit strategies is a critical issue for you. It is a critical issue because commonsense will tell you that investors will not lock up substantial investment funds into investments where their access to the funds is seriously restricted. In this webpage, I explain how you can provide investors in your company with some options to exercise in the unfortunate situation where they need to withdraw their capital investment. Let me start by going back to basics.
Investors look for security and confidence; they prefer to invest in public (unlisted) companies
Growth companies similar to yours that have already raised equity capital investment funds in the private equities market will generally be registered as public (unlisted) companies. This is quite an important point, and there is a substantial reason for the use of the public (unlisted) company corporate structure. The reason is that companies wishing to raise equity capital must have a corporate structure that give investors’ protection as well as confidence. It is therefore essential that the company seeking equity capital has a corporate structure that is ‘investor friendly’ by conforming to some minimum standards suggested by ASIC.
You must allay investor fears of a lock-in situation: use the public (unlisted) company structure
Compliance with these standards will help to allay investor fears of a lock-in situation from which they cannot easily extricate themselves. In that respect, the public (unlisted) company is the preferred ‘investor friendly’ structure, because it:
- has a more appropriate format for the capital growth of a company than does the Pty Ltd structure,
- permits the easy and straightforward transfer of shares,
- generally has no restriction on the transfer of shares,
- has a minimum of three directors,
- is a ‘reportable’ entity subject to ASIC regulation,
- is required to be regularly audited, and
- gives ASIC regulatory compliance experience to company officers.
Do not use Pty Ltd companies to raise equity capital
ASIC does not consider that ‘Pty Ltd’ companies are suitable vehicles for the capital growth of a company. There are a number of reasons for this (see my webpage Be Investor Friendly) but the two that seem to stand out are that there is no legal requirement for a Pty Ltd company to be regularly audited, and share transfers can be manipulated, so that share transfers are not always conducted in a transparent manner.
Protection of existing shareholders if an investor opts out
Many public (unlisted) companies have Constitutions that direct shareholders wishing to sell their shares in the company to offer all existing shareholders the right of first refusal for the purchase of the shares being offered for sale on a pro rata basis. Indeed, I recommend to business entrepreneurs starting new business ventures and to directors/shareholders of existing companies wishing to raise equity capital that they should have this pre-emptive right of purchase of shares offered for sale included in the company’s Constitution.
The benefit of this provision is that it gives the existing shareholders considerable authority over who can become a future shareholder. For example, the provision can be used to
- prevent hostile takeovers,
- prevent competitors purchasing a share in the company , and
- prevent persons with a malicious or mischievous intent from becoming shareholders.
A public (unlisted) company’s shares can be bought and sold through its own share register, subject of course, to the constitutional pre-emptive rights agreement referred above. A shareholder may transfer shares by proper transfer or by an instrument in writing in any form authorised by the Corporations Act 2001 or in any other form that the company’s directors may approve. The directors may only decline to register any transfer of shares in circumstances where the transfer is not in an acceptable form or where the Corporations Act provides or would require that the registration be refused. All share transfers and documentation relating to the transfer of shares must of course be lodged at the company’s share registry.
Investor Exit Strategies: options
I am very aware (and so should you be) of the sensitivity of both private equity investors’ and venture capital firms to ensure that simple and effective exit strategies are available in the background to their investment decisions. I understand (and so should you) that a fundamental fact of investment life is that no investors wish to lock themselves into investment decisions from which they cannot conveniently be extricated if their personal or business circumstances change. Within that context therefore, should a shareholder in a public (unlisted) company need to divest some or all of the shares they hold for any reason, the following exit strategies may be utilised:
Pre-emptive rights. An investor needing to divest shares through a secondary sale offer may offer them for sale to other existing shareholders in the company. Many companies now have a reserved constitutional right for existing shareholders to have the right of first refusal for the purchase of shares from shareholders wishing to sell their shares in the company on a pro rata basis or such other basis as may be agreed and is lawful.
Secondary Sale Offer. Should any shareholder wish to make a secondary sale offer, and the shares offered for sale are not purchased by any of the remaining shareholders pursuant to their pre-emptive rights of first refusal, an offer to sell can be made through a business introduction service such as that operated by me, Graham Segal trading as Chiron! the business doctor™. Investors should be aware at the outset that introduction services operating pursuant to ASIC Class Order 02/273 are not established markets for the sale or purchase of securities but merely provide a mechanism to identify potential investments or investors.
A Note for Investors. There is no established ‘market’ existing for the trading of securities issued by public (unlisted) companies (i.e. a market for unrestricted seller offers and buyer bids). Investors should note that neither Graham Segal trading as Chiron! the business doctor™, nor his officers, employees, advisers, agents, affiliates and representatives are securities dealers, financial advisers, finance brokers, share brokers, remisiers or an intermediary to any established stock market and cannot buy or sell securities as a broker.
Acquisition or Merger. Companies that demonstrate a high rate of growth with a forecast of strong future earnings may become attractive as an acquisition or merger target. If a take-over is proposed or a merger offer is received, the company’s Board of Directors is required by law to recommend a course of action to shareholders having regard to the best interests of shareholders generally.
Share Redemption on Windup. To facilitate the smooth winding up of a public (unlisted) company in the event that the business activities of the company come to an end, the shares in the company may be redeemed at the option of the company. Subject to 75% shareholder approval, redemption funds would come from the sale of the company’s real property and other assets.
Listing on a stock exchange. A public (unlisted) company has the right to seek a listing of its shares on a stock exchange subject to compliance with stock exchange listing requirements. However, no company can provide an assurance that a decision to list on a stock exchange at some point in the future will be made, or even if made, will be achieved.
Disposal/sale of shares in a proprietary (Pty Ltd) company. The situation relating to the disposal/sale of shares in a Pty Ltd company is slightly different to that outlined above. If you are a shareholder in a Pty Ltd company who wishes to dispose of shares, call me on telephone cell phone (+61) 0404 631 230 for a confidential, no obligation discussion.
Investor Exit Strategies: Buying & Selling Shares
Even though there is no established market for unrestricted seller offers and buyer bids that lead to the settlement of a sale and purchase agreement for securities in a public (unlisted) company, investors who may wish to purchase or sell such securities for any reason may do so through me, Graham Segal trading as Chiron! the business doctor™. I can facilitate the transfer of shares or scheme interests through a convenient, continuously available, and easily accessible secondary share trading platform operating pursuant to ASIC Class Order 02/273, thus ensuring that purchases and sales of shares conform to Corporations Act requirements.
If you are an investor, you can access this convenient, continuously available, and easily accessible secondary share trading platform to view equity offers at either of the equity raising Boards within my website:
- for securities on offer in shari’ah-based companies, go to the First Australian Islamic Finance Equity Capital Board Equity Offers.
- for securities on offer from companies that follow conventional accounting and financial guidelines, go to the Australian Small & Midsize Companies’ Equity Capital Board Equity Offers.
Please note however, that access to the equity offers requires you to acknowledge some investment warnings that I am required by law to bring to your attention.
If you are a shareholder in a public (unlisted) company who wishes divest some or all of the shares held, please telephone me at 61 (0) 405 702 644 for a confidential, no-obligation discussion about a suitable course of action to help you in the circumstances in which you find yourself.
Selling Securities?: please read this important notice
Under the ASIC regulations that govern my activities, I cannot make judgements on or provide recommendations about the commercial viability of any specific project or company, or the financial potential of specific securities. That is because ASIC classifies me as a Business Introduction Service bringing companies with growth potential into contact with investors who wish to participate in investment opportunities with growth companies. In effect, I am a business matchmaker. Neither I, nor my officers, employees, advisers, agents, affiliates or representatives are securities dealers, financial advisers, finance brokers, share brokers, remisiers or an intermediary to any established stock market and cannot buy or sell securities as a broker or buy or sell securities on behalf of third parties.
Thanks for staying with me through this important and sensitive issue for investors. Although it’s a dry subject, if you want to raise equity capital, then you will have to make sure that you keep all potential investors happy by providing them with practical exit strategies.
Chiron! the business doctor.™ ... relieves business pain!™.
- Telephone (International): 61 405 702 644
- Telephone (Australia): 0405 702 644
- Telephone (Skype): graham.segal1
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© Graham Segal, Author. March 2013. All Rights Reserved
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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 https://chironthebusinessdoctor.com.
Date this webpage last reviewed/updated: 5 May 2013