Corporate finance law - Crowdfunding

Companies Act 2006 restrictions. There is a general restriction under section 755 of the Companies Act 2006 (2006 Act) against private companies issuing shares to the public. This includes (section 756(2) of the 2006 Act) an offer to any section of the public, howsoever selected.

There is an exemption in section 756(3) of the 2006 Act, which provides that an offer is not regarded as an offer to the public if it can properly be regarded, in all the circumstances, as not being calculated to result, directly or indirectly, in securities of the company becoming available to persons other than those receiving the offer. Private companies considering crowdfunding or other means to raise capital should therefore exercise considerable care to ensure that they, and the platform they use, fall within this exemption.

Prospectus Directive restrictions. Under the Prospectus Directive (2003/71/EU), which is implemented in the UK under FSMA, it is unlawful for transferable securities to be offered to the public in the UK unless an approved prospectus has been made available (section 85(1), FSMA). There are various exemptions to this requirement but the one that is most commonly relied on in the context of capital raising is the exclusion for offers under ?5 million (paragraph 9, Schedule 11A, FSMA). So staying under this threshold and structuring the offer so to not be seen as being made to the public will place the issuing company in a sound position.

Marketing documents. The company raising funds will also need to prepare its marketing materials. Typically, these would include some form of company summary, explanation of the business and the opportunity and, in some cases, financial projections. These materials will include a direct offer financial promotion under section 21 of Financial Services and Markets Act 2000 (FSMA).

The materials must be approved by someone having authority to do this under section 19 of FSMA. You should check that the crowd funding platform is an authorised person (a) to stay within sections 19 and 21 of FSMA and (b) potentially to widen the marketing channel available under the FSMA regime. If you want to avoid the expense of s 19 approval (or the crowd funding platform doesn't provide it) marketing will be pretty much confined to sophisticated and high net worth investors using a process that shows all means are taken to prevent the document breaching section 755 (above).

Whatever the laws on distribution, the law on contents must not be overlooked.

A section 19 authorised person will advise, as will we, that your marketing documents are fair, clear and not misleading and provide appropriate information about the designated investments so that the investors are able to understand the nature and risks, and to take investment decisions on an informed basis. This is a requirement of rule 4.2 of the Financial Conduct Authority's Conduct of Business Sourcebook (COBS 4.2). There is also a requirement not to disguise, diminish or obscure important items, statements or warnings (COBS 4.5).

Various heads of criminal and civil liability can attach to both the company and its directors in the event it transpires that any of the materials are untrue. These can include misleading statements under section 89 of the Financial Services Act 2012, fraud under section 2 of the Fraud Act 2006, a false statement under section 19 of the Theft Act 1968, or potential liability in tort or under contract for misrepresentation or negligent misstatement, and deceit.

How do I get the money? The answer must be (a) a good business (b) an offer of an attractive share of that business for the amount of money sought and (c) good contacts from which to draw investors. You may have a little or a lot of (c) yourself of have some need for regulatory or professional support. Using a crowdfunding platform or choosing one from several will come down to, amongst other things, the liveliness of its membership. The more traditional route will be a corporate finance firm of some kind. We have also seen well connected businesses raise significant capital from amongst friends and acquaintances. If taking this route do get the right legal advice on capital raising.

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