A company wanting to raise funds may look to the public at large to raise such funds, however, a company is then presented with a decision as to the type of financing the company should opt for, in particular, whether debt or equity financing is better suited for the company’s needs.
The issue of debt securities and the issue of equity securities to the public give rise to similarities and differences. The similarities primarily relate to the obligations of a company which arise by virtue of the issue of securities to the public and due to the onerous nature of such obligations, the company’s ability to meet such obligations forms a determining factor on the company’s decision whether to go to the public at large to raise such funds. The differences, on the other hand, are a determining factor as to whether debt or equity financing is better suited for the needs of a company that has opted to turn to the public to raise such funds.
The Similarities
A company intending to raise funds from the public at large should be aware of the following obligations which arise by virtue of the issue of debt or equity securities to the public:
- Disclosure Obligations
Whether a company opts for a debt or equity financing, that company is subject to the obligation to disclose certain information, which includes useful and relevant facts which are to be brought to the attention of the market, such as price-sensitive facts arising due to the company’s activities which are not public knowledge and a material change in company’s capital structure, amongst others.
- Financial Reporting Obligations
A company that has issued debt securities or equity securities is required to publish a half-yearly unaudited financial report covering the first 6 months of a financial year, approved and made available to the public not later than 2 months after the end of the relevant period, and an annual financial report approved and made available to the public by not later than 4 months after the end of each financial year, prepared in European Single Electronic Format and which must remain publicly available for at least 10 years.
- Audit Committee
A company that has issued debt securities or equity securities must establish and maintain an audit committee composed entirely of non-executive directors and having at least 3 members, the majority of which must be independent, including an independent chairperson, and with at least 1 member being competent in accounting and/or auditing.
- Related Party Transactions
Related party transactions must be vetted and approved by the audit committee.
- Restrictions on Dealings
The directors, certain officers and employees of a company and its group, that has issued debt or equity securities to the public, are subject to certain restrictions on dealings in such debt or equity securities.
- Corporate Governance
A company which has issued debt or equity securities to the public, must publish a report explaining how the company has complied with the Code of Principles of Good Corporate Governance (the ‘Code’) and the extent to which the company departs from the Code; an explanation by the company as to which parts of the Code it has departed from and the reasons for doing so shall be included in the corporate governance statement contained in its annual financial report.
The Differences
Notable differences exist between debt and equity financing and such differences provide flexibility for a company to opt for a type of financing that is best suited for its needs:
- Nature
The biggest difference that sets equity and debt financing apart is the nature of the financing itself. Whereas debt financing is a short-term financing with a maturity date on which the company is to repay the principal amount to investors (together with interest thereon accrued up to the date of redemption), equity financing is a long-term form of financing without a maturity date such as in the case of an initial public offering of equity securities wherein the public who acquire shares become the shareholders of the company.
- Repayment
Another difference lies in repayment to the investor. In the case of debt financing, such as in the case of a bond issue, the company has an obligation to pay a fixed rate of interest to bondholders on the set interest payment dates. On the other hand, with regards to equity financing, such as in the case of an IPO, the company would have the option but not the obligation to pay dividends to shareholders.
- Share Capital
A company which opts for an issue of equity securities, is subject to a higher share capital requirement with the company required to have a fully paid-up issued share capital of at least €1,000,000. On the other hand, a company opting for an issue of debt securities is required to have a fully paid-up capital of at least €250,000.
- Minimum in Public Hands
For an equity issue, at least 25% of the securities for which listing is sought must be in the hands of the public, however, there is not a similar requirement with regards to a debt issue.
In conclusion, a company wanting to raise funds is faced with the decision of whether to look to the public to raise the required funds and, if so, the type of financing best suited for the company’s needs. However, on opting to raise funds from the public, a company must be aware of the onerous obligations which arise by virtue of the public nature of the debt or equity securities issued by the company and, in turn, the public nature of the company itself.
VB Advocates provides guidance to companies that are looking to have securities admitted to listing to navigate this intricate regulatory landscape and ensure ongoing compliance with their respective obligations. Get in touch to discuss how we can assist.
