RAISING EQUITY CAPITAL: THE ESSENTIALS YOU NEED TO KNOW
This is Part 1 of 4 Parts
If you are a business owner or entrepreneur needing funds to implement a new venture, or expand into new products, new services or new markets, then here is a primer to give you some idea of the process involved. This primer does not pretend to be a complete exposition of how to go about raising equity capital; that is information that would fill a book.
In fact, that is a perfect segue into a shameless plug about my recently published 350 page eBook, which is on sale as we speak on webpage ‘The Chiron EzyPayPal Shop’.
‘The Venture Capital MasterClass: everything you always wanted to know about raising equity capital … but until now, you had no one to ask’.
Clearly, what I can outline in this four part primer will be nowhere the great volume of information that is available in the eBook itself. My firm recommendation is that if you are seriously determined to fund a major expansion of your business, you must buy my eBook. Why? I hear you ask. Because my eBook:
- explains the issues that you must think carefully about before seeking to raise equity capital,
- explains the law that covers the act of raising equity capital in Australia,
- explains the process of raising equity capital in Australia,
- explains some alternatives to the use of equity capital,
- draws attention to the dark side of equity raising, where the venture capital industry seems to be a magnet for crooks, cheats, scammers and swindlers, and most importantly,
- explains the implications for you personally when you no longer have the unfettered right to manage your company as you personally see fit, but you must now share that power and authority with one or more shareholders.
Warning: There is a considerable amount of information here and in the other sequential Parts concerning the process and issues involved in raising equity capital. 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.
About this primer: a story in four parts
Raising equity capital must follow a process that has extensive procedural requirements and legal obligations. To explain the process, I divided the subject for convenience into four Parts across four webpages:
- Part 1: Background to the equity raising process
- Part 2: The equity raising process
- Part 3: Mechanics of the equity raising process
- Part 4: Wrapping up the equity raising process
Part 1: Background to the equity raising process
Firstly, a very warm welcome. This is that part of my website where we get into the action you have been waiting to hear about: how the equity raising process works and how I help business owners and entrepreneurs like you to get into the equity capital market and raise funds for the business development or expansion of your company. This webpage therefore is particularly important to you if you are a business owner needing funds to expand into new products, new services or new markets, or an entrepreneur seeking funds to commercialise a new product or service.
The entrepreneur’s dilemma. If either of those hats fit you, then your requirement for development or expansion funds is both quite normal and eminently typical. I therefore completely understand the dilemma you are in at the moment. On the one hand, you want to start your venture as quickly as possible but on the other hand at this particular time, you do not have the means or the ability to tap into a source of funds to permit your venture to get under way. As you are here in my website and reading this particular webpage, I am guessing (and of course I may be wrong here) that for whatever reason – the reason doesn’t matter – you do not want to use loan funds, which involve a payback commitment that you don’t want to lumber yourself with at the moment. That is a very limiting framework boxing you in. It leaves you no wriggle room to manoeuvre forward.
Two points therefore arise from your situation:
- The first is that I fully understand how important it is to your future growth activities that a source of funds be tapped so that your venture can start.
- The second point is that you must be given assurance that the source of funds to be tapped will provide the funds you require in accordance with an agreed draw-down schedule.
Equity Capital: the way to go – no capital repayments, no interest payments
A particularly beneficial and helpful way for you to raise the necessary development or expansion funds you need is through the use of equity capital.
Have you yet carefully considered the pros and cons of using equity capital? Equity capital is valuable to you because it does not require repayment and it does not attract interest payments.
There are of course both advantages and disadvantages in the use of equity capital, and I have a webpage devoted to that topic; see Equity Capital Pros & Cons. This webpage contains vitally important information and you should read it. If you would like to further investigate how to go about raising equity capital (perhaps after you have carefully considered the advantages and disadvantages), please don’t hesitate to telephone me confidentially and without any obligation on telephone 61 (0) 405 702 644.
In that discussion, I will advise you of all the implications for your company in pursuing such a course of action. In that discussion, I will point out that legal technicalities in relation to raising equity capital from the public can make it a very difficult and expensive operation.
Individuals & companies cannot raise equity capital from the public
Equity raising legal technicalities. The most important of these legal technicalities is that the Australian Corporations Act makes it illegal for individuals or companies to raise equity capital funds directly from the public without first registering an expensive prospectus or product disclosure statement with the Australian Securities & Investments Commission (ASIC). Pursuant to the terms of ASIC Class Order 02/273, which is a set of official government regulations, clients may be granted an exemption from that Australian Corporations Act requirement.
Importance of this exemption. This exemption permits an issue (that means publish) of a formal Offer Information Statement (called a Class Order Compliant Document, COCOD for short) on your behalf to help you in raise the equity capital funds you need without breaking the law. Importantly therefore, the Class Order provides you with three crucial imperatives:
- the ability to raise the equity capital funds you need by selling securities (ie. shares) in your company,
- the appropriate framework for raising equity capital funds without fear of prosecution for breaching the Australian Corporations Act, and
- the opportunity of raising equity capital funds at modest cost; that is, without you necessarily incurring the high costs associated with both the preparation of an expensive prospectus or product disclosure statement and the accompanying stock exchange float, the total cost of which can easily exceed $AUD 200,000.
Raising Equity Capital: the Class Order exemption is your benefit
The exemption. The importance of the exemption is that it permits you and your company to use my services to raise equity capital from the public. You simply cannot raise equity capital on your own without first preparing an expensive prospectus or product disclosure statement that you must register with ASIC. To try and do so means that you will be breaking the law. There is a reality here that must be acknowledged. Courts have imposed hefty fines on persons who have breached the Corporations Act fund raising laws.
To raise equity capital without breaking the law, you must appoint me as your equity raising consultant
The catch! Of course, to get the full benefits of the Class Order exemption, you naturally have to formally appoint me as your consultant to help you raise the equity capital needed. The principal benefits to you of my appointment as your consultant are that I help you to raise the equity capital required through a sale of securities (shares) in your company without breaking any laws and without you having to face the high cost of preparing a prospectus or product disclosure statement; a cost that can easily exceed $AUD 100,000.
The cost of preparing a prospectus or product disclosure statement is generally prohibitive to small and mid-size companies.
Timeframes. Prospectuses and product disclosure statements also have an in-built time-delay factor that militates against quick action, a consequence of the preparation requirements and the ASIC registration process. My flexibility as a sole-proprietor permits me to act much more quickly in implementing an equity raising program on your behalf.
The equity raising process must conform to the law
Let’s look now at how the equity raising process works, and how you and I will be working together in the implementation of the process. This is, and for success, must be a collaborative effort.
The equity raising process. The process initially hinges on your company becoming ‘investment ready’ and ‘investor friendly’. This will be the initial priority task. Being investment ready broadly means that your company will be acceptable to investors in terms of your business plan and your offer information statement. Being investor friendly broadly means that your corporate structure will give investors confidence that, to the highest degree possible, you will protect the funds invested in your company and ensure that the expenditure of the funds will only be for purposes set out in the Shareholders Agreement.1
There are other important issues involved of course, and I will come to them shortly.
Equity raising & the law. The first thing that I will stress is that the process of raising equity capital must be conducted in a prescribed way to conform to the law. That is why I earlier mentioned that you must formally appoint me as your consultant to ensure that your equity raising program is conducted within the terms of the Corporations Act. As you go through the information set out below in detail, you will gain further insights as to why it is necessary for me to be formally appointed as your consultant.
Dealing with investors
Investor considerations. To get at the heart of the process, it is probably most useful if I first advise you of the key points that investors will take into account in evaluating whether or not your company or venture is a viable investment opportunity. By mentioning what investors’ want and how they will look at your venture or business however, I do not wish to convey the impression that I will critically analyse your venture or business to your detriment. I simply wish to emphasise the point that the venture capital marketplace reality is very tough and often unforgiving.
Importance of your investment proposal. The golden rule here is that investors will simply ignore your investment proposal and business plan if they are not right the first time you submit them to prospective investors. In those circumstances, there is very little likelihood that you will get a second opportunity to submit your investment proposal to the same investors. That is the importance of being investment ready and investor friendly. As I said earlier, it will be a priority task to work closely with you to bring your company or venture to investment ready/investor friendly status.
No guarantees can be given that investors will participate in your venture
No guarantees. I must again stress a most important constraint. There are no guarantees that investors will participate in your venture. Investors, by the nature of their profession, are canny, wary, cautious and prudent. Your success therefore will depend almost entirely upon your ability to
- justify your management team’s expertise to be able to successfully manage your venture, and
- provide investors with full details about your venture’s financial, marketing and sales forecasts.
… this is the end of Part 1: where would you like to go next? Please select from the following options:
- Go to Raising Equity Capital: Part 2 of 4
- Go to Raising Equity Capital: Part 3 of 4
- Go to Raising Equity Capital: Part 4 of 4
- Return to my Home Page
Yours sincerely, Chiron! the business doctor.™ ... relieves business pain!™ Contact Information:
© Graham Segal, Author. March 2013. All Rights Reserved Creative Commons Licence:
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.
Graham Segal
Date this webpage last reviewed/updated: 5 May 2013