Need Investors? Know the Rules When Asking For Capital

CW Widgets Ltd had a great product and a good small business but in the current economic environment it was unable to get bank funding to grow and reach its full potential.  The shareholders and directors were not willing to let a recessive economy hold back what they knew to be a great business so they set out looking for other options.  They heard through a friend about a guy who had recently sold a business and some properties and was cashed up looking for a new opportunity.  They arranged to meet him.  One thing led to another and they had the cash injection the business needed, a new shareholder and CW Widgets Ltd was set to be the new market leader … or was it?

Obtaining Non-Bank Funding

Bank funding for business is hard in the current economy than it has been for a number of years.  But there are still businesses doing extremely well, and there are still individuals with money who are looking for good opportunities.  What is important to remember is that there are strict rules and CW Widgets Ltd did not follow them. 

Raising capital in New Zealand through the offer of equity securities to the public is governed by the Securities Act 1978 and its regulations.  There are procedures and processes that must be strictly adhered to when a company offers shares to the public.  These rules are there to protect both the investor and the business seeking investment.  In short, generally speaking businesses offering shares to individuals other than their family and close friends need to develop a full prospectus and register this with the Companies Office.

If this does not happen and the shareholder later becomes disgruntled, they can complain to the Securities Commission that adequate disclosure was never made prior to their investment.  For companies who have issued securities in breach of the Act, like CW Widgets Ltd, they run the risk of the company having to repay all the invested funds and significant financial penalties under the Act for the company and its directors.

What sort of things might lead to an investor-shareholder complaining?  The personal relationship between the company and the new investor shareholder might become strained and unworkable.  The company may not turn into the new market leader as expected or, even worse, the company may not handle its growth and may start making less money than when it was small.

The Cost of Compliance – Other Options

For most small businesses the cost and time of preparing a prospectus and associated documents can be prohibitive.  However, without injections of cash businesses also struggle to grow and make the best use of their products, ideas or resources.  Just because bank funding is difficult and compliance under the Securities Act is significant doesn’t mean there aren’t options for the small business owner. 

If you have a business and possible investor funds, let us consider the options available to you.  For instance there are some categories of investor who do not require full disclosure under the Securities Act and there are means to obtain Securities Act exemptions.  There are also other ways of putting together that deal including joint ventures, creating new companies or limited partnerships.

The consequences of non-compliance are obviously not worth the penalties and consequences of having to return investors funds.  The key is to obtain advice early to ensure the growth of your business is not stifled and to allow it to realise its full potential.