European Prospectus Directive
The European Prospectus Directive came in to being 2005 and swept away many issues that may be worrying you about raising money. One of the old problems was that, if you were raising over £100,000 from more than 40 people, you needed to have a prospectus with all sorts of disclosures under what was called the ‘Public Offer of Securities Regulations’. It was onerous and the prospectus needed to be lodged with Companies House. The good thing about this was that it forced disclosure and gave a frame work for a prospectus, the bad news was that the cost of putting a compliant document together could be off-putting for entrepreneurs.
The Prospectus Directive got rid of all that. Basically, as the rules stand you could write a document on the back of a cigarette packet and it would be OK as long as you were not raising over EUR2.5mn.
How is the relevant to you?
Well, if you have a business plan (which I am sure you have!) then this can form the basis of a document for you to use as a prospectus. All you need to do is add how much of the company you are offering and for how much.
This does sound simplistic and it is, but it will get complicated if you want to offer shares in your company to a lot of people. Let me give you an example.
Let’s say you have an online business with an email list of 2000 people who are interested in what you do and follow your recommendations closely. You may be able to use this list to raise money for your existing or new venture. The problem that you have is that you need to have a more structured way of going about things so as not to cause problems in the future. Here is a list of things you need to do:
1. Make sure you company is a PLC (Public Limited Company) – you can get into trouble if you try and sell shares in a ‘Limited’ company. You can upgrade your existing business no problem. Call Companies House, they will tell you how to do it.
2. Get the share structure right. The general rule of thumb, when raising money for a small company is that you should have a ‘small share price, it is a psychological thing where investor believe they are getting on the ground floor if you have a ‘penny shre’.
Let’s say you believe your project is worth £1mn. Setting your structure up by having 2mn shares at 50p per share, would probably be the best way to structure and price the shares. (Remember the share price is just a number right now – you could have 1 share for £1mn, but how would that work???)
3. To manage your share holders and issue of certificates you could do it yourself, or get an accountant to do it, but I wouldn’t recommend it. Go with someone like Capita Registrars, they are huge and know what they are doing. You will probably have to go and see them and explain what you want them to do, they usually get approached by brokers on behalf of the company, so an in-person explanation will help.
4. Your prospectus should have a sign-up form (Capita would give you an example one) where investors can sign up and send a cheque.
5. When you send out an email to your potential investors make sure your language is not too hyped. Don’t say anything you can’t back up or show realistic projections for, if you do and things don’t work out this will all come to bite you.
Stay Out of Trouble
There are other things you can do like only accept investment from ‘sophisticated investors’ and also you will need to screen out US people on your list (differemt rules apply there), but that is just common sense. If you accept investment from widows and orphans you will have a very big pain for a very long time, so stick to those who know what they are doing.
That is about it! Sounds very simple yes? The bottom line is that there is nothing too complicated in sorting all this out, just a little leg work and you can save yourself a fortune (a lawyer would charge you £10k for this process).
The goods news is that if you follow the formula above you will not be in breach of any regulations, which can be a minefield.
I will say that there are brokers in London who, if you have a good project, will take on funding like this but generally only if you are looking to list on at least a junior market like ‘AIM’ or ‘PLUS’. You will find also that they will charge you about 30% of the money raised in commissions and fees.
These days, with entrepreneurs creating there own followers, there is much power for raising finance in the very people you do business with online, or those who follow your business. In fact many online entrepreneurs will have more credibility (especially in the current economic environment) than many brokers.
The power is in the list guys….. (on that thought… do sign up for our newsletter!… erhmmm.. shameless plug).
Regards
David
@OneLifeNoFear
Davids Blog
