SME Bonds offer an innovative funding solution that is simple and cost-effective.
Suitable for start-ups, early stage and established businesses.
The multi-purpose Bond
A company or small business can issue a ‘series’ of SME Bonds, to raise debt funding for business development or expansion, or for any other worthwhile purpose! The business issuing these might call them, ‘Development Bonds’; ‘SME Bonds’; ‘Special Project Bonds’; ‘Vendor Bonds’ or any other name that best describes the purpose for which the funds raised will be used.
Funding for Established Businesses
An issue of SME Bonds is a way for established businesses with strong cash flow to obtain debt finance. Issuing a series of SME Bonds provides a way to fund the company without watering down its existing investors. Investors receive regular interest payments until the end of the bond term and receive their initial investment back at the maturity date.
These Bonds can be converted into equity securities at the discretion of the investor. Since the Bonds act as a debt instrument prior to conversion, they can include an interest rate. However instead of paying out cash, the Issuer can pay the investor(s) with shares in the Company when the debt is converted.
The advantage of issuing convertible bonds is that, if the bonds are converted into shares, the company’s debt vanishes. However, in exchange for the benefit of reduced interest and principal repayment, the value of shareholder’s equity is reduced due to the watering down or stock dilution expected when bondholders convert their bonds into equity (ownership) shares in the Company.
Realty Bonds can be issued to to raise debt funding for small-scale property development, or renovate & flick projects.
These Bonds can be converted into cash or equity at the discretion of the investor. Since the Bonds act as a debt instrument prior to conversion, they can include an interest rate. However instead of paying out cash, the investors may elect to be paid out with equity in land as an owner or a tenant in common (TIC) co-owner, when the debt is converted.
Cash redemptions can only be done once the proceeds of sale at project completion have been received, or replacement financing has been received.
Thinking of going Public?
Equity capital is contributed in return for a share of ownership of the Company. It’s not repayable, demands no provision of security (other than the issued shares) and bears no interest.
However, an equity-based crowdfunding exercise can be costly. There are advisor fees, legal fees, document preparation fees, lodgement fees, etc. Issuing an SME Bond, or a series of them, can be a way to offset those initial expenses.
To get the equity capital raise off the ground, you could offer Convertible SME Bonds to your early supporters with the discretion to choose to convert to equity, perhaps at a discounted price to your Company’s proposed initial public offer share (stock) price.
The Bonds act as a debt instrument while you are preparing your Company for the public launch of an equity-based crowdfunding campaign.
Once launched, those early-stage investors/supporters (the Bond holders) can convert the debt your Company owes them into equity shares (stock).
To explore the potential of your Company to raise EQUITY capital, CLICK HERE.
When seeking investors for your business, it’s helpful if you have …
- A convincing, compelling, credible story;
- A balanced, passionate, capable and likeable team;
- Lots of suitable people to share the story with and engage;
- Lots of compliant ways and means to tell the story.
If you need help drafting a legally compliant investment offer document embodying your story you can email us for a quote.
Warning to Issuers!
In most jurisdictions around the world it is illegal for any person or company to ask two or more people to invest in a business venture, or other investment, without complying with legal rules set down by the Corporate Regulator in that country.
These rules will apply when an offer to invest in a series of Bonds is made by an issuer to members of the public. However, sophisticated, professional and accredited investors can have investment offers made and accepted by them.
In Australia, the limit on retail investors is set by the Corporations Act 2001 Sec. 708, which allows up to 20 retail (Mum & Dad) investors in any 12-month period not exceeding $2million. Any sophisticated, professional or accredited investors (as defined), and anyone who invests $500,000 or more (this is called the Gold Card exemption). These investors are outside of the count (of 20) and are unlimited as to numbers of investors and total amount raised
The Corporate Regulator in the United States is the Securities and Exchange Commission (SEC). Wherever the jurisdiction you are in, the Bond issuer should always check with their local Corporate Regulator and/or seek legal or other professional advice before making any offer to invest. There are fines and jail terms for those who breach the law in this regard and ignorance of the Law in no excuse.
Warning to Investors!
Investing in SME Bonds is not without risk to your capital. Interest payments and forward-looking financial projections are not guaranteed. If you are thinking about lending money to a business, it is essential to put the terms in writing to minimise the chances you could have a future disagreement that ends up in court. A Bond avoids such disagreements or misunderstandings over terms of a loan agreement by clearly defining important details, like interest rate, late payment penalties, and payment timeframes. A Bond provides concrete evidence of the loan terms if a question ever arises.
Above all, do your due diligence and risk assessment on the issuing company and its directors before handing over your money!!
Get started raising funds for your business today!
Don’t let your great idea procrastinate any longer!