How do I close a funding round?
October 29, 2015 at 4:56 pm #2177LaurenceParticipant
I am currently in the process of trying to close a funding round. I have investors who are willing to commit today and others awaiting advanced assurance for the Seed Enterprise Investor Scheme (SEIS). What is the best way of closing this round? Do I need to wait for everyone to be committted before i accept money from investors?November 12, 2015 at 3:29 pm #2201Jonathan LeaKeymaster
In respect of the SEIS advance assurance aspect of your query, this post provides the answer and sets out the process.
The normal way to complete an equity investment round would be to first agree with the investors the terms and legal documents for the investment, then secondly, when they are in a final form ready for execution all parties, sign and exchange the investment documentation and the investors transfer the relevant monies to the company to complete the deal. Following completion, the company updates its register of members, sends a new statement of capital to Companies House and provides each of the investors with a share certificate to evidence their title to the shares that they’ve subscribed for.
However, where several investors are making an investment in the company and it will be difficult to get them to exchange at the same time, you could have a non-negotiable articles of association and a shareholders agreement that each new investor becomes a party to (pursuant to a deed of adherence) as well as a separate subscription agreement (including warranties) that each investor signs (their own version of) and exchanges when they commit their portion of the subscription monies. The subscription agreement may need to be accompanied with a disclosure letter in order to qualify the warranties given by the company (and sometimes the founders too). All shares to be issued that relate to the same investment round will need to be issued to the different investors at the same time on the same completion date. You could have the company hold on trust in an escrow account the investors’ monies (or usually in a law firm’s client account) until the decided completion date when you have all the subscription monies, know who is making up the round and can issue the correct number of new shares (representing the percentage of the company’s total issued share capital they have agreed to subscribe for) to each investor. You may need to subdivide the existing share capital, or restructure it in other ways, in order to be able to issue the correct number of new shares to investors. Remember that you can’t have fractions of shares so you may still need to round up or round down the figures and possibly make a slight adjustment and reconciliation in respect of the subscription monies paid.
Similarly, on the crowdfunding websites the completion mechanism is that when you decide to make an investment the monies are deducted from your account with the crowdfunding website and placed in another segregated client money account, whereby once the fundraising completes all monies committed are then transferred to the investee company.
If the subscription monies were paid straight to the company’s bank account before completion and the issue of shares (and the company started spending this) then it could be argued that they have established debt and the shares are then eventually issued in satisfaction of the debt rather than being fully paid up for cash – which would invalidate the tax relief. You could backdate the documentation to when the money actually came in, although it is very unlikely that HMRC will ever check bank account records for when monies were actually transferred.
Also, do not issue shares to investors before receiving payment for them. This is another reason for investments failing to qualify under the SEIS or EIS tax reliefs.
I’ve written more about the process and paperwork involved in actually issuing the shares here.
For any fundraising round it is advisable that you instruct a corporate finance solicitor focused on such startup work to assist you. The solicitor should ensure that everything is structured and done correctly, risks are limited, investors are kept happy and the round completes cleanly, smoothly and in good time without a company’s founders trying to complete a process they might have little or no experience of.
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