Complex Corporate Structures and Investor Offers
The first questions I ask anyone enquiring about investment document services is, ‘what is the corporate structure?’ This is closely followed by, ‘what is the offer to investors?’
That is, the corporate structure may range from a simple company entity to one that involves a multitude of entities bounded by a host of agreements and negotiated rights. The offer to investors may range from a simple equity offering to a range of financial instruments and hybrids with a multitude of rights attached.
This sets the scene for the whole prospectus or information memorandum project. By this, I mean the more complex a matter, the extra $000’s that get added to the project cost by professional heavyweights such as lawyers, accountants and advisors who are required to understand the intended matter, vet it against legal requirements, create it, capture it and present it in a legally sound manner.
What’s the motivation to complicate a structure or offer? It’s usually one of two motives; tax management or investor rights management.
What’s the risk of a complex structure and offer? The main risk is that investors won’t understand the offer. Generally investors understand paying $X and receiving Y shares – as happens in the case of publicly listed companies on the stock market,
When proponents start moving away from this simple model, the risk is investor just won’t ‘get it.’ The investors are put in a position to have to decide if they are interested enough, given what they are able to ascertain, to engage a lawyer to work out their rights in relation to the offer. Or should they simply move on to the next offer?
By ‘investor rights management,’ I am not assuming any malice. However, even offers to investors that are purposely and deliberately designed to offer real above market benefits and returns, by their deviation from the simple to understand swapping cash for equity model, risk being treated with the same suspicion by investors as those that may have been constructed with a view to minimising or controlling investors rights.
Like most things in life, In my opinion, the default position should be ‘simplicity.’
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