4.5.4 Capital requirements and fundraising targets
The total amount of capital required from all sources should be clearly stated in the offer document along with an explanation of how this capital will be used, specifying how much will be spent on fixed assets and how much will be used as working capital.
The offer document should explain how the total capital required by the investment project will be raised, distinguishing between difference sources and types of capital. Details should be provided of any proposed institutional investment, be it in the form of grants, equity, loans or other forms of debt that the society has already secured or negotiated, focusing on any terms that may have a material effect on community shareholders.
The total share capital required should be expressed as three fundraising targets:
- the minimum amount of share capital to be raised, below which the offer will be deemed to have failed, and the investment project will not proceed;
- the optimum amount of share capital sought, which will normally be the total amount of capital required by the society for it to proceed with the investment project in full;
- the maximum amount of share capital to be accepted, above which some applications will be refused or scaled back, following the terms set out in the offer document.
The offer document should state how any funding gap between the minimum amount and the optimum amount will be filled. For instance, the gap might be filled by scaling back the investment project, or by drawing on institutional investment, normally in the form of debt, or possibly shares. The cost of these other sources of capital should be clearly stated, together with an explanation of how this will affect shareholders. If the society has entered into an agreement with an institutional investor, which will subordinate the share capital of members, this should be fully explained in the offer document.
If the minimum amount is not raised within the time period of the offer, including any extensions, the offer will be deemed to have failed, and applicants who have transferred funds should be refunded. The offer document should state the terms of the refund, detailing any administrative charge that may be made.
In certain circumstances the minimum fundraising target can be zero. This is restricted to societies that are already trading and have investment plans that can accommodate very little capital being raised. Such circumstances may exist where the capital being raised is to replace debt finance, and there is an agreement in place to allow the society to repay a flexible amount of this debt. Alternatively, the society may have decided to use share capital to increase its working capital, and is in a position to adjust its trading activities to suit the amount raised, however small.
In most cases the optimum amount and the maximum amount will be the same. However, a society may include contingencies in its business plan explaining how additional capital in excess of the optimum amount will be used. Such contingencies may include provisions to replace debt with equity, to bring forward future investment projects, or to improve provisions for capital liquidity. The CSU guidance is that the maximum target should not normally be more than 25% above than the optimum target, otherwise it undermines the credibility of the business plan and the optimum target.
The offer document should explain what will happen if applications exceed the maximum fundraising target. There are several different ways of addressing this matter:
- Share capital can be allocated on a first-come-first-served basis, and the offer closed when the maximum amount has been raised.
- The offer remains open until the closing date and applications can then be accepted or rejected on the basis of geographic proximity to the society.
- The offer remains open until the closing date and then the amount of share capital allocated to individual applicants can be capped or reduced.
Given the uncertainties of any administrative process, it is normal to ignore small differences in the actual amount raised, compared with the minimum and maximum targets. In this context, contingencies should only be invoked if the actual amount raised varies by 1% or more from the target.
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