Prepare for Fundraising

Fundraising is a major milestone for any company. Preparation is the key to have a successful fundraising process. While companies ensure they have the right advisors for marketing the deal to investors, conducting the due diligence and documenting the definitive documents, they often leave secretarial compliances to the last moment.

Once your due diligence process is complete and the definitive documents are being finalised, it would be advisable to keep knocking off items from the following list:

Decide on the process for Fundraise

Based on the investor preference and the context of the fundraise, it needs to be decided whether the process for fundraise should be a rights issue or a preferential allotment or a private placement.

Each of these approaches have different completion timelines and compliance obligations which have to be borne in mind as well while making a choice.

Check support for allotment of additional securities

We have seen this happen too often – many times the company's authorised share capital is insufficient to support allotment of additional securities to the incoming investor(s). In such cases, the timelines for infusing capital can get extended upto 3 weeks. Certainly avoidable, especially if the company has a short cash runway.

Ensure Board & Shareholder meetings are conducted

In our previous posts, we spoke about the need to conduct board and shareholder meetings to authorise fundraising transactions. It needs to be borne in mind that notices need to be issued to directors / shareholders before conducting such meetings. The notices could be upto 21 days (or as directed by the Articles of Association). Shorter notice are possible but they require 90% of the shareholders' approval for such short notice (even shorter notice shareholder meetings need a minimum of 3 days' notice).

Ensure Valuation Report

Valuation report is a key requirement (if private placement or preferential allotment is the mode of fundraising). A registered valuer may require several details about the company raising funds like revenue projections, growth strategy, projected capex, free cash flows, working capital requirement etc. It would be prudent to budget 2-3 weeks for the completion of the valuation process.

Use a capital account for receiving funds

If a company chooses to raise funds through private placement or preferential allotment, the funds infused by investor(s) need to be received in a separate bank account (informally called a "capital account") which is not used for the company's day to day operations. Though this is a small aspect in the overall fundraising process, it may delay the process by 8-10 working days if not addressed in time.

Check for Conditions precedent

In addition to the above aspects, there could be certain shareholder agreement related matters that are collectively called "conditions precedent". For example, an incoming investor may mandate a company's reorganization of its shareholding before investing (eg an investor may want the ESOP pool to be increased on a "pre-money" basis.

Ensure the Stamp Duties are paid

On the count down to the "Closing" date (the date when the investor will remit the investment amount), everyday counts. Companies should bear in mind that necessary stamp duties must be paid for the definitive documents (like shareholders agreement, share subscription agreement, share purchase agreement etc). The process of procuring the stamp papers may take a day or two depending on the state where the documents are being executed. Stamp duties vary from state to state and hence it is best to be prepared to procure the stamp papers in advance.

Summary

It always helps to have a good company secretary to advise you on various aspects of compliance pertaining to fundraising.