Equity Funding PDF

00:06 In today\'s seminar, we\'ll be talking about equity financing. There will be three main aspects. The first is an overview of equity financing, followed by equity financing for private companies, and last, a public offer of shares by public companies. 00:26 Why then would company issue share...

00:06 In today\'s seminar, we\'ll be talking about equity financing. There will be three main aspects. The first is an overview of equity financing, followed by equity financing for private companies, and last, a public offer of shares by public companies. 00:26 Why then would company issue shares through equity fundraisings? So companies are started by individuals or corporations and funded in the first instance by these individuals or their parent company putting in their own money into the company, thereby becoming its shareholders. When a company requires funds, for example, to expand their business operations, they may raise funds through debt or equity. Now a company may raise funds through debt by borrowing from banks. On the other hand, a company may raise funds 00:56 by issuing new shares to existing shareholders or new investors who then become shareholders of that company. It is this form of financing that we are primarily concerned with in this talk. There are various legal and commercial factors that a company will take into consideration to determine if it should raise debt or equity. The fundamental difference is that for equity fundraising, there is generally no repayment obligation. By requires shareholders to give up a profit, 01:24 portion of their ownership of the company, i.e. it could be dilutive to certain shareholders. On the other hand, debt financing involves borrowing money and paying it back with interest, but the lender generally does not have ownership or control over the business. Now, what are the other factors? The first, obviously, how much existing debt does the company already have? It may be seen as less attractive to a company to be excessively leveraged. Second, 01:54 Are there any applicable restrictions on borrowing? For example, does the company\'s ability to borrow may be limited by the terms of existing loan agreements or other debt instruments or other licensing requirements imposed on the company? The third factor is the availability and cost of debt finance. Are lenders prepared to lend to the company, and if so, at what interest rate? And how would this compare to the cost of additional equity? 02:23 Last consideration is how the company shares are rated. What is the likely reaction of the company shareholders to an issue of equity, and if its shares are highly rated by the market and its valuation? 02:38 There are two main ways of equity financing. For smaller private companies, this could be through a subscription agreement entered into with one or several investors. An example would be startup companies that obtain venture capital funding. Or larger, more established companies may do a public offer of its shares. That way, it could offer shares to a much larger number of potential investors. For example, if a company lists on a stock exchange via an IPO. 03:07 or subsequently raises funds through secondary offerings, such as placement or a rights issue. 03:17 Now let me go into a bit more detail on equity financing for private companies. 03:25 There are various sources of funding, the first obvious one being Friends and Family Fund raising rounds, angel investors, government schemes, such as Startup Singapore, which provides mentorship and startup capital grants to qualifying applicants, Singapore accredited startup incubators, and other corporate VC investors. 03:50 As a general rule, all companies that offer or sell shares in themselves come under an obligation to issue a prospectus unless an exemption applies. Likewise, for small private companies, early-stage companies seeking funding from private investors will also have to rely on certain prospectus exemptions to market their shares. There are three main exemptions that are relied upon. One, a small offer. 04:16 where the total amount raised is less than \$5 million in any period of 12 months. Second, an offer made to no more than 50 persons in any period of 12 months, provided that the offer is not accompanied by an advertisement. And third, an offer made to accredited investors or institutional investors. What an accredited or institutional investor is has been discussed in the talk on debt capital markets and the same definitions apply here. 04:44 There are additional considerations. The first obvious one being that private limited companies may have at most 50 shareholders. So if the number of persons taking up shares in the company will cause the company to exceed this limit, the company will have to convert from a private limited company to a public limited company. Note that for public limited companies with net tangible assets of 5 million or more, the company would. 05:11 Prima Fasci be subject to the Singapore Code on Takeovers and Mergers. The second consideration is whether the existing shareholders would approve the additional fundraising. As mentioned, the issuance of new shares is generally seen as dilutive to shareholders, so it will be subject to the existing shareholders approval in order to do the new fundraising. 05:39 principal documents involved in equity fundraising of private companies entail a subscription agreement, which sets out the terms and conditions of the subscription, and a shareholders agreement, which regulates the management of the company and specifies the respective rights and obligations of shareholders between each other. 06:08 warranties as to the business and financial status of the company. In addition, the investors will carry out legal financial tax and or commercial due diligence to assure themselves as to these matters. The shareholder\'s agreement will usually contain protective provisions for the investors who are likely to be minority shareholders in the company. These commonly include certain corporate governance rights, for example, 06:36 the right to appoint directors or board observers, and the specification of certain matters that will be reserved for the approval of shareholders generally or the investors in particular. Second, anti-dilution mechanisms, such as preemption rights over the issuance of new shares, transfer restrictions, such as the right of first refusal, role first, over the shares to be sold to a third party, and last, exit mechanisms, such as the wholesale right 07:02 enabling the minority investor to sell a pro rata portion of their shares to third-party buyers, along with the selling shareholders. 07:16 I will now move on to a public offer of shares. As discussed in the first talk of this course, one of the main ways in which shareholders get their investment back is by selling their shares. This is generally more difficult when the company is a private company as there is no ready market for its shares. One popular exit route for investors is a successful company, of a successful company is an IPO. So under this route, a private company is converted to a public company. 07:43 and the company applies what shares to be listed on the stock exchange, such as SGX. A successful IPO exit is contingent on external factors, including market conditions and regulatory and listing approvals. 08:00 In respect of SGX, there are two main boards which, well, two boards which issuers can list on, the main board and the catalyst board. The main board caters to the needs of more established companies with higher entry and listing requirements, such as minimum quantitative entry criteria. The catalyst board is to smaller fast growing issuers. And while there is no minimum quantitative entry criteria for listing on the catalyst, they have to be approved 08:29 by certain sponsors or issue managers. 08:35 Companies which seek a main board listing must have a minimum one-year track record to satisfy one of the requirements as to the profitability or market capitalization. Please see your reading materials for more information as to the details of the profitability and market capitalization tests. The purpose of these tests is to ensure that a company or issuer listing on the main board is suitable for investment by the general public. 09:03 What is most critical in the IPO is the prospectus, the book with which information on the shares in the company is used to market to the public at large. So the prospectus has to contain all information reasonably required by investors to make an informed assessment of the shares. 09:23 The prospectus will likely disclose the assets liabilities, profits and loss, financial position, performance and prospects of the issuer. The prospectus is prepared by the issuer and its advisors, including its legal advisors, auditors and various experts, with inputs from the banks and their legal advisors. Before the issuer of a prospectus, verification exercises are conducted with the issuer to confirm the accuracy of key statements in the prospectus. 09:51 If there is any false or misleading statements in the prospectus, or there is an omission to state any information that must be included in the prospectus, then these persons may be subject to criminal and or civil liability. 10:05 With the backdrop of this, the obligations to ensure that everything in the prospectus is accurate. It is important that we conduct due diligence and verification purposes as part of the prospectus drafting. So if you can see it in terms of the key steps of the IPO, there is a considerable part of an initial step of an IPO. Obviously, if the group needs to be restructured, there is also a pre-IPO restructuring process. 10:34 After completing a substantial amount of diligence and prospectus drafting, the issuer then submits an application to the SGX and pre-clares any issues with the exchange in terms of its suitability to list. It will also concurrently submit its prospectus to the MAS, the Monetary Authority of Singapore. The issuer and the banks will then respond to queries received from SGX and MAS and obviously incorporate those comments. 11:03 when necessary, and parties will then negotiate legal documentation, such as the underwriting agreement, legal opinions. 11:13 Towards the end of the deal, the banks would then price the IPO and register the final prospectus with MES. Once the prospectus is registered, then it is open for the public to subscribe for shares. At the close of the offer, the issuer is then admitted on the official list of the SGX and the shares listed. 11:35 The entire process takes about six months to a year, depending on whether SGX or MAS raises issues and how long it takes for these issues to be resolved. Your reading materials contain a slightly more detailed list of steps, as well as an indicative timeline for a main board listing. 11:55 There are various methods for IPO marketing. First, there is a pre-IPO placement. Now, pre-IPO placements are to early investors, and this can serve the purpose of increasing the issuers\' credentials and incentivizing the pre-IPO investors to persuade other investors to subscribe for the issuers\' securities. During the pre-IPO stage, funding here is also used to fund the entire IPO process. 12:23 The second form of marketing would be to cornerstone investors. This process is concurrent and separate, but separate from the IPO, but issued at the IPO price, and serves a similar purpose to a pre-IPO placement. Having a strong book of cornerstone investors would also increase deal certainty. 12:46 The third would be road shows. These road shows are held by banks and the issuer to market to the institutional and accredited investors. 12:56 Lastly, there will be advertising and other publicity made to the public at large, for instance to retail investors, and can be an effective means of generating additional demand. 13:14 After a company is listed, it would have to comply with certain continuing obligations. And these are some of the main areas with which they need to comply with. The first being the disclosure of material information. Issuers must disclose any information necessary to avoid the establishment of a false market in its securities, or in circumstances where such information would likely materially affect the price of its securities. 13:43 promptly clarify or confirm rumours which have not been substantiated by the issuer and which are likely to have or have had an effect on the price of its securities. The second would be periodic financial reporting, be it the half-year, quarterly or full-year result at a certain period of time after the end of such financial periods. Third, a listed issuer has to disclose its interested person transaction 14:12 An Interested Person Transaction is a transaction between the issuer and its related parties, such as a director, CEO or controlling shareholder. 14:22 Such interested person transactions are subject to higher governance requirements, as there is a concern that the related party may be in a position to influence the issuer for its own personal benefit. And this includes a requirement for shareholders approval where the value of a transaction exceeds certain specified limits. And last, listed issuers are also expected to comply or explain in relation to the governance 14:50 corporate governance practices with specific reference to the principles of the governance code in their annual report, and to disclose any deviation from any provisions of the code together with an appropriate explanation for such deviation. 15:06 Okay, with that, we\'ve come to the end of this segment. B24 BKF - 3\. Funding by Equity - Initial public offers under Singapore law - Why then would company issue shares through equity fundraisings? - Debt financing versus equity fundraising - subscription agreement - Amount of existing debt Restrictions on borrowing? Availability and cost of debt finance How the buyer\'s shares are rated Public offering of shares - Main board - **[Requirements]** for Primary listing - Profitability Test - Market Capitalisation test \> 300Mil - **[Repayment of debts]** - Accounts - annual aidoted financial statements must be included. - Accounting standards and Auditors - Working capital \> 12 months - Directors and Management \> 2 independent directors - \ - Minimum offer price \ SGD 0.50 - Procedure - A Public Offer is mandatory - Placement results in narrower shareholder base - **[Listing by introduction]** only where [capital is not raised] - Underwritten by investment banks - **[Timetable]** for mainboard listing: 21, 28, 33 - Catalist - Requirements - Minimum shares \> 15% post-IPO - Minimum offer price \> SGD 0.20 - Documentation - Main documentation - **[Prospectus must be lodged with MAS]** for 7 to 21 days for public viewing - Exemptions - Main content requirements - Penalties for misleading information - Statutory Defence: Made reasonable inquiries - Methods of IPO Marketing - **[Disclosure is a continuing obligation]** - What are the main areas of continuing obligations applicable to listed companies and the legislation that applies? - Equity financing for private companies - Exemptions - Additional considerations - Regulations - Venture capital investment: - o Documents and fundamental terms - Contractual protections for VC Investors - What rights does a fund have in its capacity as a holder of **[preferred or preference shares]**? - What rights are commonly used to give a fund a level of **[management control]** over the activities of an investee company? - What **[restrictions on the transfer of shares by shareholders]** are commonly contained in the investment documentation or the company\'s organisational documents? - What protections do the investors, as **[minority shareholders]**, have in relation to an exit by way of sale of the company? - Do investors typically **[require pre-emption rights]** in relation to any further issues of shares by an investee company? - What consents are required to approve the investment documentation? **[75% voting to amend constitution]** - What forms of exit are typically used to realise a venture capital fund\'s investment in an unsuccessful company? What are the relative advantages and disadvantages of each? - What forms of exit are typically used to realise a venture capital fund\'s investment in a successful company? What are the relative advantages and disadvantages of each?