Raising Finance from the Public – The BasicsEquity FinanceRaising money from the public is known as equity finance. This method of raising cash is often used by unlisted companies and established businesses that need a cash injection in order to expand or to finance a new project.
Becoming a Quoted CompanyThe most widely recognised way of obtaining external investment is to list on the stock exchange or on the Alternative Investment Market (AIM). By listing on the stock exchange, a company offers shares in the company to the public in return for cash. In its simplest form, for instance, it is possible to offer 1 million shares at a pound each in order to raise £1 million.
Although this may seem like a very quick and easy way to raise a large amount of finance, the decision to list on the stock exchange should not be taken lightly, because this move will mean a huge shift in the level of responsibility that you will have towards your investors and the market as a whole.
Before you become listed, it will be necessary for the market to be satisfied that you are being honest about your business and the prospects that the business has for the future. The prospectus or ‘offering memorandum’ will detail the exact nature of your business and precisely how it is run. This document will have to be approved by the UK Listing Authority, which can be a difficult and time-consuming task.
After you have listed, it will be necessary to inform the market, through regular announcements as well as annual and interim returns, of any changes within your company. Furthermore, there are restrictions which need to be complied with regarding when and how directors can buy and sell shares.
As a director of a quoted company, you will have to deal with numerous external shareholders. You are also obliged to hold regular meetings to ensure that the shareholders are satisfied with the way in which you are running the company. You are answerable to the shareholders and can, potentially, be removed from your position as director by the shareholders, should they feel that you are not performing adequately.
In addition, it is important to note that the market determines the value of your business and this information will be readily available to the general public.
Alternative Investment Market (AIM) The AIM is a relatively new option for smaller businesses that do not have the trading history required to be able to list on the full London Stock Exchange. Regulatory requirements on the AIM are less stringent than for the LSE, making the former an appealing alternative for smaller companies that want to keep legal fees to a minimum.
Summary Raising finance from the public is a very complex option and one generally best reserved for more established companies that require a cash injection for the next big project;
when a company becomes listed, the directors come under considerable pressure to comply with the stock market regulations including making regular announcements;
shareholders are extremely influential and directors will have to ensure that they keep them abreast of developments and satisfied with the running of the company.
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