Question 2 (30marks) Fatt Fatt Fatt Limited is a company listed on the Singapore Exchange and it wishes to borrow the

sum of S$500 million to purchase all 300 units of Infinity Towers condominium in an en bloc sale. The purpose of the purchase is to redevelop Infinity Towers into a new 450-unit luxury condominium. Fatt Fatt Fatt Limited approaches its bank, SDE Bank, about lending it the S$500 million that it requires for the purchase. Due to a number of reasons, including not wanting to lend so much money to one single borrower, SDE Bank is not willing or able to lend the S$500 million to Fatt Fatt Fatt Limited. It is only able to grant a loan of $100 million. However, Fatt Fatt Fatt Limited is a long-time customer of SDE Bank and the bank does not want to disappoint Fatt Fatt Fatt Limited by not being able to provide the loan that it needs. Discuss the following: . (a) The different methods whereby the full loan of $500 million may be made to Fatt Fatt Fatt Limiited without SDE Bank exceeding the loan amount of S$100 million that it is prepared to grant; and . (b) The method that you would recommend SDE Bank to adopt and the reasons for your recommendation. Multilender financing methods Syndication Club loans Pros and cons of syndicated loans, sub participations and club loans Heng Property Private Limited is a private company incorporated in Singapore and it wishes to raise the sum of S$20 million to purchase a high-tech factory in Paya Lebar Singapore as part of its business expansion strategy. It would like to raise the amount by way of equity rather than through debt financing. Heng Property Private Limited has 5 shareholders cum directors but between them, they can only come up with additional equity amounting to S$2 million. Tony, one of the directors of Heng Property Private Limited, is borrowing $400,000 from his good friend, Ah Long, to pay for his additional shares. Ah Long is a not a licensed moneylender and he does not intend to charge Tony any interest for the loan. Tony is also able to get 10 of his friends to take equity stakes in Heng Property Private Limited. However, because the company has not been regularly making money in the last few years, they are each only willing buy S$100,000 worth of shares in the company. None

of the other directors are able to find anyone interested to take equity stakes in Heng Property Private Limited. This means that there is an outstanding sum of S$17 million to be raised. Discuss the following: . (a) The various methods whereby the balance sum of S$17 million may be raised in the form of equity; (15 marks)

Raise capital by issuing shares Raise fund from current shareholders

Raising Equity Get more shareholders IPO Grant

Debts Issues bonds (easier if they are listed) Borrow from Banks Bilateral and multilateral Get money from spring

. (b) The problems that Heng Property Private Limited might encounter in raising the additional equity and (10 marks) . Legislation put in place

-More scrutiny -Account and auditing -May lose say because decisions made by the shareholders. _less flexibility . (c) The legal position between Tony and Ah Long. (5 marks) Glory Private Limited is a small property investment company belonging to 3 shareholders cum directors, Ee Nee, Mai Nee and Moh. Glory Private Limited recently entered into an agreement to purchase a piece of land in Upper Thomson Road for the price of $50 million and paid a 10 per cent deposit. They managed to have a clause in the agreement to allow them to complete the purchase of the land in one years time because they needed the time to seek financing for the purchase of the property. For a number of reasons, Ee Nee Mai Nee and Moh do not wish to borrow moneys from any bank or financial institution for the purchase of the property. The company does not have any substantial assets left after the payment of the 10 per cent deposit but the 3 shareholders are able to each inject another $1 million into the company. Discuss the following: . (a) The different methods that may be used by the directors and shareholders to finance the purchase of the land without resorting to any borrowings from banks and financial institutions; and (equity financing) . (b) The legal issues or problems (if any) that may be faced in the different methods. . . . . . . . Private Equity Financing Loss of autonomy Terms and conditions Expectation of annualized returns and performance benchmarks When u take equity stake unless u have market to sell to u will be stuck with shares. Initial Public Offering Prospectus

. . . . .

. .

Initial Listing Fee for Main board 50,000 Wont even be able to list there are requirements cumulative pretax profit The ways in which Layman can raise equity capital. Private company with 5 shareholders and directors. Easier step to raise equity is to get more shareholders. (up to 50 no need change anything). Then convert to public if still not enough unlimited shareholders. Together with IPO (restricted in most cases in Singapore), section 144a offering to sophisticated investors in the us, similar provision in other financial cenroes. List in other countries (downside inverse relationship to control) Existing shareholders to take up more shares.

. . . .

. .

You are a consultant working in the Singapore office of an international firm of real estate consultants. Maguro, Sukiya and Kikunoi are three wealthy Japanese citizens having permanent residence status in Singapore who have come to get advice from your firm. Maguro has S$6 million in his savings account, while Sukiya and Kikunoi each have S$2 million in their savings account. Sukiya also has the option of borrowing up to S$3 million from his father, a medical doctor who is living and working in Tokyo. They are keen to buy a piece of land to build a modern ryokan (i.e. Japanese style hotel) in Singapore as there is an increasing number of Japanese tourists coming to Singapore. The three of them did their calculations and agree that S$9 million would be sufficient to buy the land and complete the entire construction of the ryokan project. Discuss the following: . (a) how they ought to structure this business venture of theirs and the related issues that they may encounter; and . (b) whether they should finance their project entirely by cash and the reasons for your conclusion.

Equity Financing You may have some cash you want to put into the business yourself, so that will be your initial base. Maybe you also have family or friends who are interested in your business idea and they would like to invest in your business. That may sound good on the surface to you, but even if this is the best arrangement for you, there are factors you must consider before you jump in. If you decide to accept investments from family and friends, you will be using a form of financing called equity financing. One thing that you want to be clear about is whether your family and friends want to invest in your business or loan you some money for your business. That is a crucial distinction! If they want to invest, then they are offering you equity financing. If they want to loan you money for your business, then that is quite different and is actually considered debt financing. Advantages of Equity Financing:

You can use your cash and that of your investors when you start up your business for all the start-up costs, instead of making large loan payments to banks or other organizations or individuals. You can get underway without the burden of debt on your back. If you have prepared a prospectus for your investors and explained to them that their money is at risk in your brand new start-up business, they will understand that if your business fails, they will not get their money back. Depending on who your investors are, they may offer valuable business assistance that you may not have. This can be important, especially in the early days of a new

firm. You may want to consider angel investors or venture capital funding. Choose your investors wisely! Disadvantages of Equity Financing:

Remember that your investors will actually own a piece of your business; how large that piece is depends on how much money they invest. You probably will not want to give up control of your business, so you have to be aware of that when you agree to take on investors. Investors do expect a share of the profits where, if you obtain debt financing, banks or individuals only expect their loans repaid. If you do not make a profit during the first years of your business, then investors don't expect to be paid and you don't have the monkey on your back of paying back loans. Since your investors own a piece of your business, you are expected to act in their best interests as well as your own, or you could open yourself up to a lawsuit. In some cases, if you make your firm's securities available to just a few investors, you may not have to get into a lot of paperwork, but if you open yourself up to wide public trading, the paperwork may overwhelm you. You will need to check with the Securities and Exchange Commission to see the requirements before you make decisions on how widely you want to open up your business for investment.

Debt Financing If you decide that you do not want to take on investors and want total control of the business yourself, you may want to pursue debt financing in order to start up your business. You will probably try to tap your own sources of funds first by using personal loans, home equity loans, and even credit cards. Perhaps family or friends would be willing to loan you the necessary funds at lower interest rates and better repayment terms. Applying for a business loan is another option. Advantages of Debt Financing

Debt financing allows you to have control of your own destiny regarding your business. You do not have investors or partners to answer to and you can make all the decisions. You own all the profit you make. If you finance your business using debt, the interest you repay on your loan is taxdeductible. This means that it shields part of your business income from taxes and lowers your tax liability every year. Your interest is usually based on the prime interest rate.

The lender(s) from whom you borrow money do not share in your profits. All you have to do is make your loan payments in a timely manner. You can apply for a Small Business Administration loan that has more favorable terms for small businesses than traditional commercial bank loans.

Disadvantages of Debt Financing

The disadvantages of borrowing money for a small business may be great. You may have large loan payments at precisely the time you need funds for start-up costs. If you don't make loan payments on time to credit cards or commercial banks, you can ruin your credit rating and make borrowing in the future difficult or impossible. If you don't make your loan payments on time tofamily and friends, you can strain those relationships.

For a new business, commercial banks may require you to pledge your personal assets before they will give you a loan. If your business goes under, you will lose your personal assets. Any time you use debt financing, you are running the risk of bankruptcy. The more debt financing you use, the higher the risk of bankruptcy. Calculate the debt to equity ratio to determine how much debt your firm is in compared to its equity. Some will tell you that if you incorporate your business, your personal assets are safe. Don't be so sure of this. Even if you incorporate, most financial institutions will still require a new business to pledge business or personal assets as collateral for your business loans. You can still lose your personal assets. Which is best; debt or equity financing? It depends on the situation. Your financial capital, potential investors, credit standing, business plan, tax situation, the tax situation of your investors, and the type of business you plan to start all have an impact on that decision. The mix of debt and equity financing that you use will determine your cost of capital for your business. Two More Traditional Sources of Capital for your Business Besides debt and equity financing, there are two other traditional sources of capital for your business. Operating revenue and the sale of assets can also generate money for your firm. Make your financing decisions wisely!

MAS and approach

The mission of the Monetary Authority of Singapore (MAS) is to promote sustained and non-inflationary economic growth and a sound and progressive financial services sector. To carry out this mission, MAS conducts exchange rate policy, manages the official foreign reserves, regulates and supervises the financial sector, and works with the industry to develop Singapore as an international financial centre.

In 1997, MAS launched a comprehensive review of Singapores financial sector. We fundamentally changed our regulatory approach, from one-size- fits-all prescriptive regulation towards a more risk- focused supervisory approach. We liberalised the industry, allowing freer competition and greater risk taking by financial institutions. We actively promoted activities in which we had competitive advantages. Singapores financial sector held up well against the full impact of the Asian financial crisis, the SARS outbreak and other external shocks. Despite the more volatile environment, it has grown and matured. Our financial system is robust, and our legal, supervisory and institutional framework is sound. Today, over 600 local and foreign financial institutions are in Singapore. They offer a comprehensive range of world-class financial services and with 5% of our workforce, contribute 11% of Singapores GDP. MAS SUPERVISORY APPROACH MAS seeks to promote a sound and progressive financial services sector through both financial supervision and developmental initiatives. We supervise the banking and insurance industries, as well as the capital markets. At the same time, we work in partnership with the private sector to identify and implement strategies for developing Singapore as an international financial centre. Working with the boards and managers of financial institutions, MAS encourages the effective management and mitigation of risks taken by financial institutions. We aim to do so in a way that does not unnecessarily hinder the competitiveness and dynamism of financial institutions, or the efficiency of financial markets. In super vising the financial sector, MAS is guided by 12 key principles which collectively characterise our approach as risk-focused, stakeholder reliant, disclosure-based and business-friendly. RISK-FOCUSED Principle 1: Emphasise risk-focused supervision rather than one size-fits-all regulation. In a prescriptive one-size-fits-all rules regime, a supervisor prescribes activities and risks that institutions can and cannot take. This approach is increasingly ineffective in a rapidly changing environment, and also unnecessarily restrictive for the stronger institutions. With risk-focused supervision, MAS evaluates the risk profile of an institution, taking into account the quality of the institutions internal risk management systems and processes. This allows us to give greater business latitude to well-managed institutions while retaining higher requirements or tighter restrictions for weaker ones. Principle 2: Assess the adequacy of an institutions risk management in the context of its risk and business profiles. MAS takes a proportionate approach in assessing an institutions risks. Rather than have a fixed view of what constitutes acceptable business risks or risk management

standards, MAS assesses whether risk management systems and internal controls are commensurate with the institutions risk and business profiles. Institutions engaging in complex financial businesses must demonstrate that their risk management capabilities match their risk appetite and operations, while institutions engaging in less complex or risky financial activities may find simpler risk management processes adequate. Principle 3: Allocate scarce supervisory resources according to impact and risks. We categorise financial institutions according to the potential impact they would have on Singapores financial system, economy and reputation in the event of a significant mishap (e.g. financial failure and prolonged disruption), and also the likelihood of these significant mishaps occurring. More resources are channeled towards supervising systemically-important institutions and institutions with higher risk profiles. Principle 4: Ensure institutions are supervised on an integrated (across industry) and consolidated (across geography) basis. As the home supervisor of local financial groups, MAS takes an integrated supervisory approach, evaluating them on a whole-of-group basis across their banking, insurance and securities activities. We also supervise these financial groups on a consolidated basis, taking into account both their Singapore and overseas operations. For foreign banks operating in Singapore, we ensure that they are subject to consolidated supervision by their home regulators. Insurers that are part of a wider insurance group or conglomerate are monitored on a solo and group-wide basis to assess the potential impact on the Singapore insurance operations. We also cooperate and share information with foreign supervisors for effective supervision of internationally-active insurers and insurance groups. Principle 5: Maintain high standards in financial supervision, including observing international standards and best practices. MAS continually strives to maintain high standards in financial supervision, benchmarking itself against international standards and best practices. As an international financial centre with a strong stake in global financial stability, MAS participates actively in regional and international initiatives to enhance regulatory standards and supervisory training. Principle 6: Seek to reduce the risk of failure rather than prevent the failure of any institution. MAS does not aim to prevent all failures. We require financial institutions to observe prudential standards, such as appropriate capitalisation, liquidity and exposure limits. We have the power to intervene if we believe that the interests of depositors,

policyholders or investors are at risk. But we cannot (due to the complexity of financial activities) and should not (due to moral hazard and the undesirable consequences of excessive regulatory burden) guarantee the soundness of financial institutions. Consumers should recognise that there are risks involved in dealing with financial institutions. Like other regulators, MAS faces the challenge of educating the public about this reality and managing their expectations. Deposit insurance and policy owners protection schemes make explicit the level of protection available to depositors and policy owners. They also help consumers realise that risks are inherent in financial transactions. While we cannot prevent failures, we are conscious of the systemic impact that failures can have and the damage they can do to consumers and Singapores reputation as a financial centre. MAS will seek to reduce the risk of failure of institutions through increased supervision where it is appropriate and effective. In the case where increased supervision is ineffective, we will take measures to limit the impact of a failure. STAKEHOLDER-RELIANT Principle 7: Place principal responsibility for risk oversight on the institutions board and management. The primary responsibility for the prudential soundness and professional market conduct of a financial institution lies with its board of directors and senior management. By encouraging best practices by boards and management, we minimise the need to interfere with institutions business decisions. Principle 8: Leverage on relevant stakeholders, professionals, industry associations and other agencies. Apart from MAS, other stakeholders such as shareholders, creditors, counterparties, depositors, policyholders and home supervisors also have an interest in the continued financial health and stability of financial institutions. Likewise, professionals such as external auditors, internal auditors and actuaries, as well as credit rating agencies, are specialists in assessing the risks inherent in the institutions and the adequacy of risk management and internal control systems. In addition, many financial institutions here are members of their respective industry associations. MAS leverages on the relationships and work of many of these stakeholders, including the home supervisors, SGX, auditors and industry associations, to complement our own supervision of the institutions. MAS also works with other agencies, such as the Council on Corporate Disclosure and Governance, the Ministry of Finance, and the Accounting and Corporate Regulatory Authority, to strengthen corporate governance and disclosure standards.

DISCLOSURE-BASED Principle 9: Rely on timely, accurate and adequate disclosure by institutions rather than merit-based regulation of products to protect consumers. Under a merit-based regime, the regulator assesses the suitability of a product before it is allowed to be introduced in the marketplace. Under a disclosure-based regime, the consumer makes well-informed decisions when purchasing financial products and services based on material information being made available to the consumer. A disclosure-based regime encourages innovation and facilitates the development of a more sophisticated body of consumers. The role of MAS is to put in a place a regulatory framework that facilitates timely, accurate and meaningful disclosure of material information that consumers could reasonably rely on in making financial decisions. Principle 10: Empower consumers to assess and assume for themselves the financial risks of their financial decisions. A disclosure-based regime is meaningless if consumers do not know how to make use of disclosed information in making financial decisions. Consumers should understand the nature of different financial products and the issues they should consider in making their financial decisions. MAS works in partnership with other public sector agencies and industry bodies on consumer education to facilitate this. BUSINESS-FRIENDLY Principle 11: Give due regard to competitiveness, business efficiency and innovation. MAS seeks to undertake supervision in a way that does not unnecessarily impair the competitiveness and dynamism of individual institutions and Singapores financial services sector. We take into account the business and operational concerns of the institutions and industry, so as not to hinder growth and innovation as long as the risks are adequately managed. Principle 12: Adopt a consultative approach to regulating the industry. MAS actively seeks feedback from market practitioners and the public, so as to help us develop regulations that take into account market realities and industry practices. Consultation also helps to pre-empt implementation problems, minimise unintended consequences, and foster better industry understanding and support. In the end, it is the combined efforts of MAS and the industry that contribute to financial stability and resilience while promoting enterprise and innovation. CONCLUSION

A sound and progressive financial services sector is a vital part of any modern economy. Apar t from its direct and significant contribution to gross domestic product, the financial services sector intermediates between savers and borrowers, allocates financial resources efficiently, and thereby enhances economic growth and job creation. Promoting a sound and progressive financial services sector is an integral part of ensuring the success and resilience of the Singapore economy. MAS is committed to the vision of Singapore as a leading global financial sector, one which is competitive, fosters enterprise and innovation, and maintains high regulatory standards. We have made steady progress toward this goal and continue to work with our stakeholders to achieve our vision.

Limitations and recommendation In Singapore there are two main methods through which listed firms can raise additional equity finance: a rights issue (usually underwritten) and private placement. However, we note that the seasoned public equity market in Singapore is underdeveloped relative to the rights issue and private placement markets. For example, the Listing Manual of the Stock (SES) does not provide specific rules on primary seasoned equity offering. In a rights issue, each existing shareholder has the right to subscribe for new shares on a pro-rata basis. In a private placement, firms issue new shares to a group of investors through a placing agent, which is usually a stockbroking firm or an investment banker. The regulatory agencies require a detailed prospectus in a rights issue, but exempt firms from preparing a prospectus when they issue shares by way of a placement. The placement shares carry the same voting rights and right to cash flows as do the existing shares. The exceptions to this rule are the issues for which the new shares do not rank for dividends payable in relation to the fiscal year ended before the announcement.

Raising Equity Finance in the UK Article, Securities and Mergers & Acquisitions Newsletter September 2010

This is the second of a two part article addressing the United Kingdom's securities, mergers and acquisitions regimes and it focuses on an overview of the methods, both public and private, of raising equity finance in the United Kingdom. Part One, which described the principal UK capital markets and their regulation, was published in our Q2 2010 Securities and M&A Newsletter. Public Equity Finance When raising equity finance through the issue of shares to the equity markets, relevant considerations in determining which method of finance will be most suitable for the company include:

The purpose of the fund raising; The time available to raise funds; and The anticipated reaction of the market to the fund raising. There are four main methods that a public company customarily uses to raise capital in the UK equity markets:

Rights issue; Open offer; Placing/Cash box placing; and Vendor placing. A private company may seek to raise finance on the equity markets during its initial public offer (IPO) process, i.e. at the same time as it obtains a first listing for its securities on an equity market and offers securities to the public for the first time, by means of an offer for sale or subscription of shares, or by a placing. The IPO process in the UK is a complicated process and is beyond the scope of this article. We will provide a review of the IPO process in the UK in a future article. Rights Issue Historically the most common method of raising finance (but now for regulatory reasons, far less common), a rights issue is an offer of new shares or other securities made on a pre-emptive basis to existing shareholders in proportion to their shareholdings.

A rights issue is subscribed for in cash (in most cases at a discount to the market value of the company's shares). This enables shareholders in a listed company to realise the value of their right to subscribe for new shares by selling them in the market nil paid[1] .without the need for the shareholders to first pay up the sum required on allotment. Historically, a discount of 15 to 20 per cent was usual and it was mainly companies with financial difficulties who offered 'deep discounts' of 30 to 50 per cent. Because of the uncertain markets in the UK in recent years, deep discounting has become more common, most likely to allow greater liquidity in the nil paid rights and more flexibility. On an underwritten rights issue, arrangements are made for the sale of shares not taken up by shareholders. Therefore, a shareholder retains the right to receive any value in excess of the subscription price, if the shares which were provisionally allotted to him in a provisional allotment letter (PAL) are sold at a premium in the market, even if no action is taken. A rights issue by a public company will almost always constitute an "offer to the public", requiring the preparation of a prospectus, described below. Open Offer An open offer is similar to a rights issue to the extent that it is also an offer of new shares to shareholders on a pre-emptive basis. As a result, the existing shareholders of a company are faced with the choice of either taking up the offer or allowing the shares to be taken up by others. Although an open offer is similar to a rights issue, there are a number of key differences:

Application forms are used which cannot be traded in the market nil paid in the way that PALs can; Shareholders are generally offered a guaranteed minimum allocation of shares (equivalent to their entitlement under a rights issue) but can apply for additional shares; Shares are offered at a lesser discount than on a rights issue (not more than 10 per cent if the Listing Rules apply), which makes them attractive from a company's perspective as the discounts are generally finer; and For a fully listed company, if a general meeting is required (for example, to grant the directors authority to allot shares), application forms can be posted with the notice of the general meeting. On a rights issue, PALs can only be posted after the general meeting has taken place as the UK Listing Authority does not allow shares which can be traded to be allotted provisionally on a conditional basis. As the notice of the general meeting and offer period run at the same time on an open offer, the company will receive the proceeds of the offer sooner.

Once again, a prospectus is generally required (see below). Placing A placing involves the issue of new shares for cash to selected subscribers rather than to shareholders as a whole and is therefore a form of non-pre-emptive offer. The recipients of shares are usually institutional shareholders who are likely to hold the shares as a long-term investment. Placings are generally used for relatively small issues as it is unlikely that shareholders would approve a large non-pre-emptive issue. Shareholder approval is required to disapply statutory pre-emption rights. Typically, a placing would be of shares representing less than 5 per cent of the company's issued share capital in any one year (or 7.5 per cent in any three year period) and placed at a discount (including commission) of not more than 5 per cent, in accordance with Investor Protection Committee guidelines. Cash Box Placing As described below (see below under Companies Act 2006), UK companies are restricted to the number of equity securities they can issue for cash otherwise than on a preemptive basis to existing shareholders. These restrictions do not apply to the issue of shares for a non-cash consideration. A cash box placing provides a legal mechanism to enable a company to issue new ordinary shares (or rights to acquire new ordinary shares) in return for the transfer to it of shares in a newly incorporated company, the assets of which comprise entirely of cash in circumstances where seeking shareholders' approval to the disapplication of the statutory pre-emption rights is impractical or undesirable. A cash box placing involves the incorporation of a new company (usually outside the UK for tax purposes) (Newco) in which the issuer's bank subscribes for redeemable preference shares and undertakes to pay the subscription price (a sum equal to the proceeds of the placing) for those shares. The bank identifies persons wishing to take up ordinary shares in the issuer (Placees) and shares are allotted to the Placees in consideration of the transfer of the redeemable preference shares in Newco from the bank to the Issuer. The Placees pay the subscription monies for the placing shares to the bank and the issuer allots the placing shares to the Placees. The bank uses the proceeds of the placing to discharge its undertaking to pay the subscription price for the preference shares. There are a number of potential legal issues associated with cash box placings and concerns regarding this structure have been raised by some commentators, including the Association of British Insurers (an independent body representing the interests of large institutional investors). Views have been expressed that this structure could be

challenged as a means of avoiding statutory pre-emption rights. However, the prevailing view is that the cash box structure is designed to fall within the exemption from the pre-emption rule afforded to the allotment of shares otherwise than for cash, and therefore it remains a mechanism for raising equity finance which is used successfully by some issuers. Vendor Placing In practice, a vendor placing is only used where the purchaser wants to issue shares to fund an acquisition, but the vendor wants to receive cash rather than shares in the purchaser as consideration. In a vendor placing, shares in the purchaser (Consideration Shares) are allotted to the vendor in exchange for the transfer of the shares in the target to the purchaser. The Consideration Shares are then placed by the purchaser's broker on behalf of the vendors who receive the proceeds of the sale of such shares in cash. Regulation of the public equity markets There are a number of regulations and guidelines, as detailed below, which govern the issue of shares by a company on the public equity markets. Companies Act 2006 The two key provisions of the 2006 Act relate to the directors' authority to allot shares and the disapplication of pre-emption rights. An ordinary resolution must be passed by the shareholders of the company in order to grant the directors authority to allot shares if such an authority sufficient for current requirements is not already in place. Companies can disapply pre-emption rights by the shareholders passing a special resolution. The life of the disapplication will be limited to the length of the directors' authority to allot to which it relates. In accordance with the Investor Protection Committee guidelines, the directors' authority to allot shares should not relate to more than one third of the existing issued ordinary share capital of the company or the amount of unissued but authorised ordinary share capital. However, on a pre-emptive rights issue, the guidelines issued by the Association of British Insurers permit companies to seek authorisation for the allotment of a further one third of share capital. Financial Services and Markets Act 2000 The issue of shares by listed companies is regulated by the Financial Services and Markets Act 2000 (FSMA) and by the EU Prospectus Directive.

A prospectus, disclosing such information as to enable investors to make an informed assessment about the financial position and prospects of the issuer, approved by the relevant competent authority is required where a company offers shares to the public or applies for the admission of shares to a regulated market. There are, however, a number of exemptions to this requirement. Financial Promotions Regulations FSMA contains the basic financial promotion restriction which provides that a person must not:

In the course of business; Communicate; An invitation or inducement; To engage in investment activity; unless he is an authorised person, or the content of the communication is approved by an authorised person, or the communication is covered by an exemption. Each limb of the above restriction must be looked at carefully in determining whether a proposed communication will be caught by it. Similar careful consideration should be given to the exemptions from the restriction (which are stated in the secondary legislation). There are many exemptions to the restriction on financial promotion, some of which relate to all controlled activities and some relate only to deposits and insurance. Some of the more commonly used exemptions can be divided into the following categories:

Communications to certain recipients; Types of communication; Communications from certain persons; Communications relating to certain securities and listings; Company communications; and Communications relating to corporate transactions. As referred to above, each of these categories is subject to detailed information and guidance within the legislation and therefore each proposed communication must be looked at on a case by case basis to ascertain whether an exemption applies. A commonly used exemption is that relating to communications to certain recipients (specifically, to (amongst others) investment professionals, self-certified high net worth individuals, high net worth companies and self-certified sophisticated investors), the

main reason being because it is usually relatively straightforward to determine whether a company/individual falls into such a category. The Financial Promotion Regime and its Territorial Scope Whether the financial promotion rules apply to incoming and outgoing promotions to/from the UK will depend on various factors, such as the location of both the sender of the communication and the recipient of it. The general starting point is that any promotion with a UK link (whether an incoming or outgoing communication) will be caught. In general, the UK's financial promotions regime will apply to promotions to recipients located in the UK, subject to exemptions. FSMA states that promotions originating outside the UK will be caught if they are "capable of having an effect in the UK". In terms of communications into the UK, a person who carries on relevant investment activities outside the UK but who does not carry on any such activity from a permanent place of business maintained by him in the UK may be able to take advantage of certain exemptions to the financial promotion restriction. In summary, such exemptions depend on whether the communications are 'real time' or 'non-real time', solicited or unsolicited and whether a particular customer is an existing customer of the party making the promotion. Consideration must also be given to applicable EU legislation. It is possible that more than one EU directive could apply to a particular financial promotion, in which case careful consideration must be given to the territorial scope. In particular, it should be noted that the exemptions referred to previously are not available to MiFID business carried on by an investment firm. MiFID is the Markets in Financial Instruments Directive and, very broadly, applies to investment banks, corporate finance firms, stockbrokers, portfolio managers, parts of the business of retail banks and building societies as well as other firms/institutions. It is possible for a firm to be a MiFID investment firm even if it does not provide investment services to others. Careful consideration should be given to, and legal advice sought before, any promotion, or offer, which could be deemed to be a promotion, is communicated to ensure that there is no breach of the financial promotion restriction. Prospectus Rules and Listing Rules The Prospectus Rules govern the content of prospectuses and apply to all offers to the public by a company, whether the company is trading on the Official List, AIM or PLUS. In establishing if a prospectus is required, it is important to consider the following questions.

Is there an offer to the public? and Is there going to be an application for admission to trading on a regulated market? In the event that a prospectus is not required, any documentation produced will need to comply with the general circular requirements detailed in the rules of the relevant market. Listed companies are also subject to the pre-emption rules of the Financial Services Authority detailed in the Listing Rules. Under these rules, even overseas companies must generally get shareholder approval for a non-pre-emptive share issue, although overseas shareholders and fractional entitlements can often be ignored for these purposes. A prospectus can only be issued with the approval of the Financial Services Authority following a thorough pre-vetting process. This can involve considerable time and expense, and many issuers will seek to structure their fundraising to avoid the need for a prospectus if at all possible, often by effecting an institutional private placing. Private Equity Finance In many situations, public methods of raising equity such as IPOs and rights issues will be inappropriate. This may be due to market conditions, unsuitable internal policies including improper corporate governance practices, or the often off-putting, onerous and ongoing obligations attached to public listings. In particular, the lacklustre IPO market in recent times has increased companies' drive to find alternate means of raising capital, with private equity often being a plausible solution. However, an IPO does, of course, remain a viable option for an unlisted company to raise equity finance in the UK, subject to it satisfying various requirements which are referred to in Part One of this article, as well as many of the regulations and legal requirements referred to herein. Methods of raising finance most frequently adopted in public equity, such as rights issues and placings, can also be transposed into the realm of private equity, the difference being that in the latter case they are not tradable securities. March 2009 saw Aquarius Platinum Limited, the world's fourth largest primary platinum producer, combine a private placement of convertible bonds with a public rights issue and placing, raising 125 million in gross proceeds. Private equity transactions cover a variety of arrangements including buyouts, which are a process by which management teams acquire a target with the help of external private equity funding and debt. Across Europe, the number of private equity buyouts has increased by 23 per cent in 2010[2] and recent announcements include the luxury shoe retailer Jimmy Choo which is considering a 500 million buyout of the business,

and the fast food chain Burger King which recently agreed a buyout valued at just over two billion pounds. The two main providers of private equity finance are venture capitalists and business angels. Business Angels A business angel investor is simply defined as an individual acting alone or in a formal or informal syndicate who invests their own money directly in an unquoted business in return for equity. It is in fact a significant source of equity for early stage businesses in the UK often providing the first significant injection of capital without which many ventures cannot grow. In the current economic climate, there has been a significant increase in demand from entrepreneurs seeking access to alternative sources of investment. Many business angels make extensive use of the Enterprise Investment Scheme outlined below. According to a report published in May 2009 by the British Business Angels Association, an average of 82 per cent of business angels used EIS for at least one of their ventures with 53 per cent of investors saying that they would have made fewer investments were it not for the tax incentives. Together with the benefits of tax relief, business angel investments have the subjective benefit of limited regulation, which is restricted specifically to the control of Regulated Activities in accordance with the Financial Promotions Order. With regards to the investee companies, the advantage brought by 'angels' is that together with the financial benefit, they bring expertise in their particular field, as strategic investors will usually turn their attention to businesses related to their personal knowledge. A well balanced investor/investee relationship will inevitably increase the potential for success. Enterprise Investment Scheme EIS The Enterprise Investment Scheme (EIS) is aimed at promoting investment in smaller, higher risk companies that have growth potential but often encounter difficulties in raising finance. The decision by individuals to invest in qualifying EIS companies is often incentivised by the potential tax advantages affiliated with such a transaction, but as is customary, the reaping of benefits comes hand in hand with the meeting of certain conditions. In order for a company to be a qualifying company and subsequently, for an investor to be eligible for tax relief, the company must be 'limited' at the time the shares are issued, i.e. not listed on the London Stock Exchange or any other recognised stock

exchange. There are no restrictions on it later applying for listing so long as no arrangements to list were in place at the time the shares were issued, otherwise the investor would lose the benefit of tax relief. For the EIS rules, AIM and the PLUS-quoted and PLUS-traded Markets are not considered to be recognised exchanges, so a company listed on those markets can raise money under the EIS if it satisfies all other conditions. However, the PLUS-listed market is a recognised exchange and so a company listed on it cannot take advantage of EIS. The company must exist wholly for the purpose of carrying out a qualifying trade. Most trades are qualifying trades provided that they are conducted on a commercial basis with a view to making profits. The investee company must also be independent in so far as it is not a 51 per cent subsidiary of another company or under the control of another company. Guidance to these and further requirements is provided by Her Majesty's Revenue and Customs (HMRC). If these circumstances are met, investors may claim relief against income tax up to an annual investment limit, for funds used to subscribe for new ordinary shares issued by qualifying companies. An EIS investor who qualifies for income tax relief may also be entitled to exemption from capital gains tax (CGT) on a disposal of those shares. Additionally, CGT on the disposal of any asset can be deferred by reinvesting in EIS eligible shares. However, the subscription must be made for genuine commercial reasons and not purely for the purpose of tax avoidance. Venture Capital Unlike business angels, venture capitalists focus their attention on high value investments, generally inputting a minimum capital injection of around 2 million. They provide a service and source of capital that neither bank lending nor mass shareholder equity (such as public shareholders) could provide. Venture capitalists generally seek to invest in businesses with a large earning potential and a high return on investment within a specific timeframe. Although they do not tend to get involved in the day to day running of the business, they often help with a business' strategy. Closing the Gap - Enterprise Capital Funds Since 2005, the government has provided a multi-million pound equity finance scheme in the form of Enterprise Capital Funds (ECFs) to bridge the equity gap where businesses require greater funding than that which can be provided by a business angel but do not require the level of input which would attract a venture capitalist. These are a hybrid solution, investing a combination of private and public money in small, high growth businesses seeking up to 2 million in equity.

Regulation of the Private Equity Market Private equity and venture capital funds have direct impacts on the real economy through their role as providers of capital to small businesses. The recent global crisis in the financial markets has led to concerns that the functioning of the real economy is being distorted. This is due to a buildup of leverage in the financial system, including private equity funds. The result has been a pressure build up at the European level for legislative measures to be taken to tighten regulation of the private equity industry. In April 2009, the European Commission tabled its proposal for a Directive on Alternative Investment Fund Managers (AIFM), to regulate all alternative investment managers in the EU currently not covered by EU law, including private equity fund managers with a portfolio of over 500 million. Private equity industry bodies have been highly critical of the proposed AIFM Directive. In a statement published by the BVCA, the Directive was described as being "irrational", "contradictory", "draconian" ,"manifestly unfair" and "especially counterproductive for Britain", on the basis that a percentage majority of the European private equity industry is located in the UK. The Directive is not yet in force but consultations are taking place subject to which the Directive may come in force by late 2012 to mid 2013. FSMA and the exemptions to the financial promotion restriction apply in similar ways to private companies wishing to seek investment, as well as to public companies, and therefore careful consideration to any form of promotion, or offer which could be deemed to be a promotion, should be given and legal advice sought, before it is communicated. Conclusion A company looking to raise finance has various options available to it. The difficulty lies in finding the right option which is both available and suited to its particular requirements. Be it public or private, with the current difficulties in obtaining debt finance, the importance of equity finance in the current market cannot be overstated.