SELLING SHARES AND BONDS TO THE PUBLIC
Bonds and share certificates
which pay interest! The UK Companies Act 2006 is quite specific about preventing private companies from being able to sell securities to the public. This legislation and the historical approach taken towards private limited companies in many countries makes it nigh impossible for private companies to raise capital from members of the public or even from their own customers - and puts undue emphasis on the role of banks which have traditionally acted as "lender of last resort" to many companies. The Stock Market at the same time provides a very limited choice of companies to potential investors and over the years it has effectively become no more than a lottery or gambling den for speculators, who have no real interest in the quoted companies which have paid fortunes to get listed! There is therefore a whole army of savers which can do nothing but watch the meagre interest rate they are receiving on their savings - sometimes as little as 1% per annum - while at the same time there are many businesses which could pay much higher returns on bonds if only they could be allowed to reach out to these savers / investors. By acquiring capital if only in the form of loans from the sale of bonds, companies could take on new employees, refine their products and expand their field of operations. In a nutshell, companies could grow by having access to capital. The prohibition on offering securities for sale to the public is designed to "protect" the public, but because it is such a draconian restriction, there is no room for private companies to gain access to capital except by going along to their local bank "cap in hand". It is quite evident that companies cannot thrive in such an environment, as they are starved of cash while savers are also starved of interest on their savings and the unemployed remain at home twiddling their thumbs. The workaround solution to this stagnant situation may be found in three ways: (i) by "issuing" (ie., selling) bonds or shares of companies which are no longer incorporated (ie which are no longer a legal entity). These can be sold on a "sale or return basis" ie., with a guarantee to redeem the "securities" at some future point in time for the original purchase price. The selling of these types of securities already takes place in an established market called Scripophily. The additional feature of selling them with a 'buy back' guarantee will not turn them into securities in the sense of their being regarded as 'specified investments' subject to regulatory control. Buyers are often given inducements for example to buy products on a free home approval basis and if for any reason the buyer wishes to return the item then thay can do so. This is a condition of sale which does not thereby make the item or promise to redeem a "security" of the selling company. It may suit some investors to buy items on this basis in order to act as a hedge against inflation, but an additional offer to provide a rate of return while the item is retained by the buyer may also be possible without the selling company being accused of selling securities to the public. This however is a grey area and has not yet been tested in the courts. Conditions relating to early redemption rights etc can be incorporated in the terms of sale. (ii) A company name closely associated with the seller company's identity could be registered as a company limited by guarantee but without a share capital.This type of company can offer securities to the public! See: Section 755 The Companies Act 2006: http://www.legislation.gov.uk/ukpga/2006/46/notes/division/10/20/1 A recognisable company name would be more marketable and desirable (eg., "Sherlock Holmes Ltd"; "Ann Summers Lingerie Ltd"; "Emma Bridgwater Designs Ltd") than using an old security issued by a previously registered but unrelated company name. The company limited by guarantee without a share capital - Company A - would sell bonds and pay interest to the buyer, while the associated company imited by share capital - Company B - would receive the sale proceeds as a loan from Company A and pay interest on that loan to Company A. (iii) An even simpler approach rather than incorporating a company for the purpose of obtaining a specific name could be to just print bond certificates in any desired name which can easily be associated with the name of the company seeking funds - eg., "The Old Curiosity Shop" (sold by the Charles Dickens Museum). These items could be specifically marked as "non-security souvenir item only" which would make their status even clearer to a buyer to avoid any confusion or misrepresentation that they may in themselves constitute securities of a company. The fact that a company has agreed to sell them on an interest-bearing or buy-back basis ought not to turn them into a security for the purposes of the Financial Services Act because to qualify as a security in the legal sense they would have to be issued by a body corporate which would then constitute a specified investment. These three options also raise the question of what actually contitutes a security? The paper or digital bonds we are referring to are merely prima facie evidence of a security or promise issued by a company - the items themselves are not securities. It is the terms of the guarantee or promise to pay interest or to redeem which surely constitutes the security in question, rather than the actual "IOU" which the buyer is given. Any guarantee or promise offered by a backer in return for funds (ie., a loan) in relation to the sale of the items could however be enforceable in a court of law even though the "securities" themselves have no intrinsic or enforceable value. It would be better if the government came up with a scheme which would allow private companies to attract capital from the public without having to resort to workaround solutions, but until that happens, the options outlined above may at least provide a feasible solution. The Companies Act 2006 states: 755 Prohibition of public offers by private company (a)offer to the
public any securities of the company, or (2)Unless the contrary is proved, an allotment or agreement to allot securities is presumed to be made with a view to their being offered to the public if an offer of the securities (or any of them) to the public is made— (a)within six
months after the allotment or agreement to allot, or (3)A company does
not contravene this section if— (4)The specified period for the purposes of subsection (3)(b) must be a period ending not later than six months after the day on which the offer is made (or, in the case of an offer made on different days, first made). (5) In this Chapter “securities” means shares or debentures. 756.
Meaning of “offer to the public” The Act makes it clear that as a director you cannot speak to another person in your local pub (never mind to any of your customers) if you hope that they can assist you to 'spread the word' about the great opportunity your business represents. The law only wants you to talk about beer and sandwiches, but not about your business prospects. The preceding section in the Act makes it plain that an offer to the public also includes any agreement to allot shares with a view to their being offered to the public, so you cannot make an offer via a third party. The proposed solution of offering bonds or shares as described above could provide private companies with the means to raise capital from members of the public quite lawfully. These "securities" can be made as fancy and colourful as one likes (with or without ornate frames!) and could provide a guaranteed income to the buyer and redemption rights in the same way as genuine securities. There is nothing to prevent a company from selling such "securities": the only novelty is in offering a rate of interest and redemption rights against them, in effect honouring them as though they were genuine securities. There may be an advantage in registering and then liquidating a sister company name associated with the company seeking funds in order to print bond certificates for investment use, but in practice one can simply print fancy bond or share certificates in any name or entity, such as a recognisable trademark. The maturity date and rate of interest can be left blank to be completed when they are sold, or indeed any rate of interest and maturity date can be announced by the capital-raising company despite what the bond certificate states. A public offering of colourful pieces of paper is made as if they were securities, although in law they are simply being sold under the Sale of Goods Act. Such a method provides a legal basis on which to attract investors from the general public, since no securities of a body corporate are being promoted or sold. An online exchange could be set up by third party brokers to facilitate the buying and selling of these "paper bonds" which would allow sellers to be matched with buyers. Care would need to be taken by the buyer to ascertain whether particular bonds are actually backed by reputable companies in terms of interest and redemption rights, or are merely unsecured bonds or shares. Further controls would need to be in place to ensure that a company does not issue an excessive number of bonds which could lead to a Ponzi situation where early bond holders are simply paid interest from subsequent purchasers. A well-regulated online exchange operated by a reputable company would ensure that only reputable companies are allowed to join. Many people do buy bonds and old share certificates purely as collectible items (See Scripophily), but in a bond exchange as described here, such certificates would also pay regular income to investors.
January 2011 Paper Bonds NOTES: An Indenture is a contract between an issuer of bonds and the bondholder stating the time period before repayment, amount of interest paid, if the bond is convertible (and if so, at what price or what ratio), if the bond is callable and the amount of money that is to be repaid. A Debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. A debenture holder is an unsecured creditor. However, there seems nothing to stop a company from giving debenture holders certain rights so that for example, in the case of a default, any particular class of bondholder or third party intermediary could be given the power to appoint a receiver over the company's assets in order to run the company or dismiss curent directors etc - in other words power would be granted to agrieved bondholders or their representative body/agent to step into the shoes of the shareholders whose powers would be suspended while the bondholders are able to liquidate their positions. Much will depend on the constitution of the company and the pecking order granted to previous creditors. Shareholders may have to agree to give up some of their rights to debenture holders in the event of a default. . |
