For early-stage startups, share issues can be a crucial part of capital raising and growth strategy. A share issue means that a company issues new shares to increase its capital and thereby finance expansion, product development, or other business objectives. In other words, a company sells more shares to raise more money. For many entrepreneurs, the process can seem overwhelming and complex, but with the right preparation and understanding, it can be an opportunity to take the company to the next level.
Here is a guide for startups considering their first share issue.
What is a Share Issue?
A share issue is a process where a company issues new shares to investors in exchange for capital. This increases the total number of outstanding shares in the company and can result in a change in ownership structure. Share issues may be necessary to finance growth, launch new products or services, or cover the company’s operating costs.
How is a Share Issue Conducted, step by step?
- Proposal and Decision: Before a share issue is conducted, the company’s board of directors drafts a proposal to issue new shares to increase capital. This proposal is considered by the board or the general meeting, where a decision is made to approve or reject the share issue.
- Issue Form and Terms: Upon approval, the company decides on the type of issue to be conducted. It can be with or without pre-emptive rights for existing shareholders. The decision can also include whether the issue should be directed to specific investors, such as employees or institutional investors.
- Information and Marketing: The company then communicates the plans for the share issue to shareholders and the public. This includes information about the subscription period, share price, number of shares to be issued, and how to subscribe. Marketing efforts can be made to reach potential investors.
- Subscription Period and Subscription Rights: During the subscription period, existing shareholders receive subscription rights, giving them preference to buy new shares in proportion to their existing ownership. Investments from external investors can also be accepted during this period.
- Allocation of Shares: After the subscription period ends, shares are allocated to investors based on their subscription applications. This can include allocating shares according to pre-emptive rights to existing shareholders and then to external investors based on available shares.
- Registration and Use of Capital: After the share issue is completed, the new shares are registered with the Companies Registration Office, and the capital from the issue is added to the company. The company can then use these funds to carry out planned investments, expansions, or to strengthen its financial position.
Differences for Unlisted Private Companies and Unlisted Public Companies
For unlisted private companies and unlisted public companies, there are some differences regarding the marketing of a share issue to the public and the applicable laws:
- Unlisted Private Companies: For these companies, the marketing opportunities for a share issue to the public are usually limited. They cannot market the issue publicly in the same way as public companies due to restrictions aimed at protecting investors from unauthorized or misleading offers.
- Unlisted Public Companies: On the other hand, unlisted public companies have greater flexibility in marketing a share issue to the public. They can use various channels to inform potential investors about the issue, including advertising, public statements, and other marketing activities. This is because these companies already follow certain public reporting requirements and are considered to have a higher degree of transparency and oversight.
When it comes to complying with laws and regulations, it is important for both unlisted private companies and unlisted public companies to carefully consider and follow applicable regulations from the Financial Supervisory Authority and other relevant authorities to ensure that the issue is conducted legally and correctly.
By following this process, startups can secure the necessary capital to continue their growth and development. It is important to have a clear strategy and communicate well with investors throughout the process to maximize the chances of success.