A couple of weeks ago a raggedy looking thespian walked through the streets of Covent Garden wearing a sign offering me the chance to buy shares in the South Sea Company. What I didn’t realise at the time – and what Danvers told me all about at last night’s Bootlaw – was that the South Sea Company and infamous South Sea Bubble of 1720 is the very thing that established the fundamental principles of our share trading laws. Thanks guys.
Last night’s chat started with a nod to history and Danvers regaled us with text from ancient legal scripts. I couldn’t write fast enough to get them down, but Danvers if you’re reading this, stick a couple in the comments please. Ta.
Anyway, the result of those rather amusing laws and The South Sea bubble was The Bubble Act, which was followed by the Joint Stock Act in 1844 and then Ltd. Companies in 1856.
So there’s the rather sketchy, seriously abridged history. Moving on, we were taken through three broad subjects last night: Private vs. Public companies, Prospectus, and financial promotion rules
Private companies vs. Public companies
The difference between a private and public company is not rocket science. One is private, with private investors, the other is public with shares available to be purchased by the public at large. If you’re a private company and you try to sell shares to the general public you are most certainly a fool, but the good news is, you’re not a criminal. This wrong-stepping has just recently been decriminalised. Relief.
Prospectus
Unless you’re raising finance into the tens of millions you don’t want a prospectus. Why? Because they’re about ‘this big’ and need an even bigger pile of money to be created in the first place. Your prospectus for the offer to the public (which offers anyone in the public the opportunity to buy shares in your company) will then live with the FSA and the United Kingdom Listing Authority. Basically, the point of the prospectus is to offer securities to those who choose to invest in your business. And naturally, it’s all regulated within an inch of its life. Again, time to hit the rule book. Numerous exemptions apply and its worth making sure one applies. Do you really want to write a full blown prosectus?
The Financial Promotions Rules
The FSA are ‘the police’ of this regime, but instead of policing the actual act of investment, they have instead wisely chosen to focus on the advertisement of the offer of shares.
Broadly the rules say that unless you are a person authorized by the FSA then you cannot make a financial promotion (unless an exemption applies; read on for info). How do they police these promotions? In various ways, including a hotline that anyone can use to draw their attention to such things.
So what happens if you put an offer out into the world inviting people to buy shares in your company, no exemption applies and it isn’t sent by an FSA authorised person?
- You can go to prison for 2 years (unpleasant)
- You could be liable to pay the investors damages which would be based on a calculation as if they’d invested in the next BIG thing.
- But wait, there’s more, if you think that the liability will be limited to the company, you’re wrong, all the people involved in, or responsible for, the Financial Promotion.
If you’re wondering how the heck any business gets any investors with all this stuffy stuff, then wonder no more. The ability to make financial promotions in the venture backed emerging growth company sector is really less focused on getting an authorised person to send it for you but instead relying on the exemptions. Basically after some checks you can send your investment opportunity note to the following people (think Dragon’s Den):
- A sophisticated individual – Someone who’s invested in a private company within the past two years
- A high net-worth individual – Someone who earns more than £100k a year and have investable assets of about £250k.
There are other exemptions. For example, there is a journalists exemption. Generally, if a journalist writes about your company and an interested investor comes to you with an offer the original story won’t count as a Financial Promotion. How do you get the journalist interested in your story in the first place. Some clever PR maybe!
Takeway, remember selling shares in your company is heavy on rules the result of hundreds of years company law. If you’re offering shares you need to think about them rules and make sure your complying with them. Mostly this will mean falling within an exemption.
I’d like to end this post by saying Happy Birthday to Bootlaw. Hip hip guys, thanks for a year of legal brilliance, beer, pizza and chat. Here’s to many more.
Thanks Lea. Another great post on Bootlaw. Much appreciated.
The two quotes I read out last night. First one is the infamous promotion for a company during the frenzy around the South Sea Bubble: “a company for carrying out an undertaking of great advantage, but nobody to know what it is”.
The second was the statement made by the Vice President of the Board of Trade, Mr Robert Lowe, on the reading of the 1856 Act (whole quote copied below, more than I read out):
“My object at present is not to urge the adoption of limited liability. I am arguing in favour of human liberty – that people may be permitted to deal how and with whom they choose without the officious interference of the state; and my opinion will not be shaken even though very few limited companies be established. Every man has a right to choose for himself between the two principles, and it is ill advised legislation which steps in between him and the exercise of that right. It is right the experiment should be tried; and, in my judgment, the principle we should adopt is this, – not to throw the slightest obstacle in the way of limited companies being formed – because the effect of that would be to arrest ninety-nine good schemes in order that the bad hundredth might be prevented; but to allow them all to come into existence, and when difficulties arise, to arm the courts of justice with sufficient powers to check extravagance or roguery in the management of companies, and to save them from the wreck in which they may be involved.”
See: http://en.wikipedia.org/wiki/South_Sea_Company for more about all of this.