Private placements of mezzanine capital can be an interesting alternative to classic financial products both for companies that are raising financing and for private investors who are looking for a return on their capital. Such financing instruments are attractive for start-ups but also for “traditional” companies such as real estate companies.
Such a business investment can be realized without much bureaucratic effort, in particular without the creation of an investment prospectus. The company can also sell the system on its own, i.e. without the use of brokers (which are subject to a fee). What is also attractive for companies is that such financing instruments are generally unsecured (risk capital), so the company does not restrict itself too much. The equity capital is strengthened and the company’s creditworthiness also increases. The chances of raising further debt capital or obtaining public funding are increased.
Investors have the opportunity to realize above-average returns.
In general, mezzanine financing has in common that the investor is granted little or no information, co-determination and control rights. The company remains largely unrestricted in its freedom of decision. Investors are also regularly granted a fixed remuneration in conjunction with a variable performance-related remuneration. It is important that an understandable and marketable financial product is created. Common instruments include profit-participation loans (loans with a profit-sharing element), silent partnerships or profit participation rights.
Prospectus/exposé for investors
Even if a lawyer’s examination shows that there is no obligation to produce a prospectus, a written compilation of information for investors is quite common. Such a document (exposé) contains information about the company and the use of capital, arguments for participation, information about the opportunities and risks, the exact structure and conditions of the financial product and other legally relevant information.
It makes sense to follow the legal requirements when creating the exposé. It is essential to write the exposé in clear and simple language and, above all, to point out possible risks while legitimately highlighting the strengths and “uniqueness” of the investment.
It is advisable to involve a tax advisor, lawyer or a specialized business consultant when designing the financial product and when creating the contract and exposé.
Legal framework for small cap financing
The company can choose from a variety of financing instruments. In addition to drafting contracts cleanly and in line with interests, it is extremely important for small cap financing to have a lawyer clarify whether and to what extent the financing instrument is subject to regulatory restrictions. You should have at least heard of the following laws and, if in doubt, seek legal advice in order to avoid risks (fines, shutdown orders, etc.):
- Securities Prospectus Act (WpPG)
- Law on Investments (VermAnlG)
- Banking Act (KWG)
- Money Laundering Act (GWG)
Examples from our practice:
Some practical examples from our consulting practice are presented below.
- Foreign investors as exclusive target group: Section 1 paragraph 1 VermAnlG excludes investments such as subordinated loans or profit-participating loans from the scope of application of the VermAnlG if these are only offered abroad. Using profit-participation loans, for example, any amount of money could be raised from any number of foreign investors. Section 3 WpPG contains a similar regulation for the placement of securities (e.g. bonds).
- „20er“ Investments: According to Section 2 Paragraph 1 No. 3 VermAnlG, there is no obligation to publish a prospectus if the issuing company does not issue more than 20 shares per investment; in other words: accepts no more than 20 investors. It should be noted that the law restrictively states: “from the same investment within the meaning of Section 1 Paragraph 2”. This is to be understood as meaning that a company could, for example, involve a maximum of 20 investors via a profit-participation loan and a further maximum of 20 investors via a profit participation right and a further maximum of 20 investors via a subordinated loan, etc. The company could therefore use the entire range of investments described in Section 1 paragraph 2 VermAnlG use the financial instruments listed when raising funds. The VermAnlG does not specify a limit for the amount of money that can be raised through a “20” investment. Financing in the millions is therefore possible.
- Investments from EUR 200,000.00 each: Individual investments from EUR 200,000.00 are still privileged. It is assumed here that the investor of such an amount is usually well informed and therefore does not need to be protected by a prospectus. Any number of investors can be accepted here. It would therefore be possible to attract 30 investors with EUR 200,000.00 each as part of a profit-participating loan without a prospectus.
- Investments bis EUR 100.000,00: For the sake of completeness, it should be mentioned that it is also possible to attract more than 20 investors without a prospectus, but their total investment may not exceed EUR 100,000.00 in a 12-month period.
Conclusion
Financing via private placements with private investors is an interesting means of closing financing gaps. In this way, companies can acquire millions of dollars with a manageable amount of consulting effort.
Early advice from tax advisors, lawyers and management consultants helps to develop the optimal economic offer and minimize liability risks.
Do you need legal advice in connection with a Small cap financingthe lawyers from are at your disposal ROSE & PARTNER, generally available. Further information can be found on our website:
2023-10-24 18:05:31
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