Acquire more than 50 shareholders through the new “small offer” or crowd funding exclusions under the Financial Markets Conduct Act (FMCA) and you may become subject to the Takeovers Code and to the “big end of town” requirements of the Financial Reporting Act.
The Takeovers Panel today issued a statement encouraging potential issuers to seek specific legal advice on this risk, and how to avoid it and other unintended consequences. Chapman Tripp has significant expertise in these issues, including advantages of using a limited partnership rather than a company structure for start-up businesses.
…creates a number of exclusions, the purpose of which is to encourage innovation by enabling small and medium sized companies to raise money from the public without having to go to the expense of meeting the normal disclosure requirements.
Small offers must seek to raise no more than $2 million in a year and must be limited to 20 investors, each of whom is connected personally or professionally to the issuer, either through previous association or through an expression of interest (angel networks).
Crowd funding imposes no limit on how much an investor may invest but limits the amount an issuer may raise through this format to $2 million a year.
These limits apply only to the particular offer. They do not restrict issuers from using other exclusions available under the FMCA, and the crowd funding cap applies only to retail investors – not to sophisticated or wholesale investors.
The Takeovers Code…
…applies to companies with 50 or more voting shareholders and 50 or more share parcels. But the Panel states explicitly in its Guidance Note on Small Code Companies and Compliance with the Takeovers Code that it is:
“…not averse to the shareholders deciding to restructure their holdings so that they do not fall under the definition of Code company, provided that the restructuring is undertaken in a manner that complies with the Code”.
The Financial Reporting Act…
…treats anyone who makes a regulated offer of securities as an “FMC Reporting Entity” and requires all FMC reporting entities to prepare full annual financial statements in accordance with GAAP.
Phase 1 Regulations made under the FMC Act deem entities that have more than 50 shareholders as a consequence of the “small offers” exclusion to be FMC Reporting Entities, although merely making a crowd funding offer will not attract that status – at least for now.
Smaller companies, with assets of less than $60 million or revenues of less than $30 million a year and which are not FMC reporting entities, may be relieved of the obligation and the expense of preparing financial statements, where shareholders agree to opt out.
Clearly the compliance cost savings which the crowd funding and small offer options are designed to deliver could be entirely eroded by the obligations imposed on Code companies under the Takeovers Code and on reporting entities under the Financial Reporting Act.
Issuers thinking of using these capital raising platforms should first seek legal advice on how best to structure their company and the offer. Licensed intermediaries offering crowd funding services should also encourage people to seek this advice.