Whenever a company is looking to raise additional equity capital there are always two questions to consider: Firstly, is a Prospectus required? Secondly, if the answer to question 1 is ‘no’, does the fund-raising document the company is proposing to issue to potential investors require approval by an authorised person as a Financial Promotion, or can an exemption or exemptions be found that will allow it to be sent to its intended recipients without such approval?
Requirement for Prospectus
Following a review by the European Commission in 2010, certain changes were made to the Prospectus Directive and the Government has taken rapid steps to introduce two of the changes into UK law. These changes, which came into effect on 31 July 2011 – nearly a year ahead of the timetable required by the amending Directive – alter two of the triggers which require a Prospectus to be prepared:
- the number of investors to whom an offer of securities may be made before a Prospectus is required has been increased from 100 to 150; and
- the amount of money that a company can seek to raise in an offer of securities in any period of 12 months without a Prospectus being required has been increased from €2.5 million to €5 million.
These two exemptions are separate and can potentially both be used.
The first exemption (up to 150 people) can be used to raise any amount (the €5 million limit does not apply) and will allow the net to be spread wider where a company is seeking to raise money from a restricted number of investors.
The second exemption (up to €5 million) allows a company to seek to raise that amount from any number of people (the 150 person limit does not apply).
As the Government has introduced these changes ahead of the date required by the Directive, certain other EU countries have not yet adopted the higher limits. So companies seeking to raise funds in other countries in the EU will need to bear in mind the possibility that the previous limits (€2.5 million and 100 people) may still apply.
The Quoted Companies Alliance lobbied hard for the early introduction of these changes, which increase the potential for companies to raise additional equity funding without preparing a Prospectus. The changes should also result in significant cost savings. According to the Explanatory Memorandum issued by the Treasury, UK businesses have been spending some £12 million a year by way of costs in preparing Prospectuses required under the previous rules. Some companies that decided not to seek equity funding because of the costs involved in preparing a Prospectus may now find that they can revisit this possibility.
Market conditions for raising additional capital are still not easy, with incoming investors and incumbent shareholders or directors often finding it hard to reach agreement on valuation, but if that hurdle can be jumped evidence shows that money is available for companies which have a good story to tell. These changes should therefore be welcome, particularly to smaller companies.
As mentioned above, assuming that a method of raising capital without a Prospectus can be found, a company will still need to consider whether its fund-raising document must be approved as a Financial Promotion or whether it can find available exemptions under the Financial Promotion regime and avoid that requirement. The most commonly used exemptions – for communications with existing shareholders, exempt persons, sophisticated investors and high net worth individuals – offer considerable assistance here, but there are traps for the unwary and advice should always be sought.