Businesses that acquire more than 50 shareholders through the new crowd funding exclusions under the FMCA may be subject to the Takeovers Code and to the “big end of town” requirements of the Financial Reporting Act, according to Tim Tubman, Bradley Kidd, Josh Blackmore, Roger Wallis, Geof Shirtcliffe and John Holland from Chapman Tripp.
Last week, the Takeovers Panel 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 says 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,” says the firm.
The FMCA, it says, 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
“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
“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.