Wednesday, August 15, 2007

Pre-IPO Funding With a Guarantee?

For most entrepreneurs, the conventional way to attract serious sums of money to develop their fledgling businesses has been to float on the London Stock Exchange, NASDAQ, AIM. OTCBB or Plus Markets via an initial public offering (IPO) or placing.

However, a strategy that throws up exciting possibilities for many entrepreneurs, investors and those institutions allowed to dabble in unlisted securities, is one of taking a chance with pre-float fundraisings when the company is still private.

The concept of pre-float finance is very simple. Basically, non-risk-averse investors agree to invest a set amount in a business, at a pre-arranged price, prior to its flotation on the market within (usually) six to 12 months. One group that successfully exploited the pre-float funding route is Adwalker, a hi-tech sandwich board venture brought to the market by former Ogilvy & Mather adman Simon Crisp. When it joined OFEX, its shares were priced at 8p (valuing the company at £8.5 million), but pre-float investors were able to buy their shares at a variety of prices ranging from 1.25p to 7p. The company's fortunes, as far as share price is concerned have not fared well recently, but those early investors would have been able to sell their stakes for a tidy profit.

As the example shows, the attractions of a pre-float funding for the actual investors are obvious. This select group are offered the possibility of doubling, tripling or even quadrupling their investment within less than a year should the company they back go public as planned.The attraction for all the players is that they know they can get exposure in a soon-to-be-listed venture at attractive prices. However, they get in at lower prices because they are essentially backing a private company, which, by its very nature, represents a greater risk than a publicly listed one.

The problems that have occurred in this area for clients, companies and corporate finance boutiques alike has been that many brokerage company's have entered this arena but have not been selective about the companies with which they operate, thus a listing of these entities has not occurred as promised. So the phrase 'pre-ipo' has become a by word for 'low quality issues'.

An interesting compromise has, however, come into fashion in recent years. This is essentially raising the funds for a private company into escrow but only releasing them when the company is actually admitted to a market such as AIM etc. This gives the investor that confidence in knowing hat his investment will actually be used for what will become a listed company.

There are a number of benefits to the company of such a structure including; increased commitment from investors (because of the known listing element); reduced costs (because there would be no offer to the public at the floatation date) negotiation on contingency fees with advisers (because funds are escrowed and they know they will be paid on when the company floats and the funds released).

The investor benefits from a low share price, the comfort of knowing there will be a listing and, in some cases, participation in an IPO where perhaps only institutions would have been invited had the company gone the normal route.

Of course company's will always want to get their hands on funds as soon as possible but if they are not in a position to be able to function up to the floatation without and injection of funds, then perhaps the quality of the issue is not what it should be anyway. In the circumstances where there is a need for an immediate injection of cash because of expansion, for example, then some cash could be released on a convertible basis, but secured on the company's assets or intellectual property. Because of the extra risk the convertible could be at a percentage discount to the float price.

If you have a company that would be interested in such a funding or are an investors interested in this sector then please contact HF Capital in London

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