The Definitive Guide to Small-scale Capital Raising
Austpac Ventures provides a highly effective pathway, system & tool set to assist SMEs source alternative business funding to grow their enterprise…even if they are small or very early stage.
Our consultants advise on Initial Private Offers for SMEs wanting to self-raise their own funds through an issue of debt or equity securities. Private Trading Exchanges for the trading of issued securities. Strategic Business Exits and Employee Shared Ownership Participation Schemes (ESOPS).
There are specific regulations relating to fund raising through the Issue or Sale of securities.
In most regions around the world, including Australia, it is illegal for any person (or company) to ask two or more persons to invest in a shared business venture, property or other investment, without complying with legal rules set down by the relevant Corporate Regulator.
However, in order to provide SMEs with access to capital, there are certain exemptions available in most jurisdictions that allow SMEs to make ‘private’ or ‘personal’ offers to raise funds.
These exemptions are usually enshrined in the Corporate Law of any given jurisdiction.
Another term often used for a small-scale offer is ‘initial private offer’ (IPO), which is the most common form of capital raising worldwide that generally does not require a regulated disclosure statement.
Offers made under an initial private offering exemption are generally done through an informal Information Memorandum or ‘IM’.
IPOs are a legal and cost-affective way for high-growth small to medium sized enterprises (SMEs) to raise start-up, early-stage or expansion capital.
Unlike an initial public offer, an initial private offer to issue securities does not require the preparation and registration of a costly disclosure document (prospectus).
An IPO capital raising through your own private trading exchange may be just the thing to stimulate growth and realise your Company’s true potential faster.
Banks no longer the right tool for financing SMEs
Small to medium sized enterprises (SMEs) are an essential part of the economy, it’s where innovation, growth and job creation come from. However, SMEs are facing huge challenges in terms of funding, banks have come under the increasing pressure of *Basel III. lending has tightened, and businesses have seen their traditional source of funding dry up.
Since 2008 Global Financial Crisis, the implementation of *Basel III, the (Australian) Hayne Royal Commission into the banks and more recently the Global Corona Virus pandemic, the SME financing framework has changed dramatically! Bank lending to SMEs has been shrinking and will reduce further.
*Basel III is a comprehensive set of banking reform measures, developed by the (global) Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector and was developed in response to deficiencies in financial regulation revealed by the global financial crisis of 2008.
Raise capital for your SME through an Initial ‘Private‘ Offer (IPO)
An IPO or Initial Private Offer is an affordable way for a startup or early-stage company to raise equity capital. An IPO provides a simple and legal way to make private (or personal) offers to issue shares to investors.
However, an equity-based capital raising exercise is not without cost. There are advisor fees, legal fees, document preparation fees, lodgement fees, etc. Issuing an SME Bond, or a series of them, can be a way to cover off those initial expenses.
Issuing a convertible SME Bond can be a way fund your initial capital raising costs and get your equity capital raise off the ground.
Offering Convertible SME Bonds is a way to get your early supporters onboard and give them the discretion to choose to convert the debt to equity as the business grows, perhaps at a discounted price to your Company’s proposed initial private offer share price.
An asset or a liability?
Equity capital is contributed in return for a share of ownership of the Company. It’s not repayable, demands no provision of security (other than the issued shares) and bears no interest. See IPOs for SMEs. Equity capital is recorded on the books as an asset.
Debt funding: Whereas an SME Bond is a type of debt security that is issued by a business and sold to investors. The backing for the bond is generally the ability of the business to repay. Debt funding is recorded on the books as a liability.
Raising Debt Funding through an Issue of SME Bonds
Issue a ‘series’ of SME Bonds
A company or small business can issue a ‘series’ of SME Bonds, to raise debt funding for business development or expansion, or for any other worthwhile purpose! The business issuing these might call them, ‘Development Bonds’; ‘SME Bonds’; ‘Special Project Bonds’; ‘Vendor Bonds’ or any other name that best describes the purpose for which the funds raised will be used.
Funding for Established Businesses
An issue of SME Bonds is a way for established businesses with strong cash flow to obtain debt finance. Issuing a series of SME Bonds provides a way to fund the Company without watering down its existing shareholders. Bond investors receive regular interest payments until the end of the bond term and receive their initial investment back at the maturity date.
Convertible SME Bonds
These Bonds can be converted into equity securities at the discretion of the investor. Since the Bonds act as a debt instrument prior to conversion, they can include an interest rate. Instead of paying out cash, the Issuer pays the investor(s) with shares in the Company when the debt is converted.
The advantage of issuing convertible bonds is that, if the bonds are converted into shares, the company’s debt vanishes.
However, in exchange for the benefit of reduced interest and principal repayment, the value of shareholder’s equity is reduced due to the watering down or stock dilution expected when bondholders convert their bonds into equity (ownership) shares in the Company.
Alternative Business Finance for Entrepreneurs & Innovators
Remember, wealth is created by solving problems. If you solve a million-dollar problem, it will make you millions!