BIA member Taylor Wessing is a law firm with a division, Synapse, specialising in law for life sciences. In this showcase of content from the Synapse web resource, Daniel Rooke writes about different funding opportunities for early stage life science companies.
Fundraisings of early stage life science companies can be complicated affairs, not just from the point of view of negotiating and settling the legal and other documentation, but also from the point of view of actually securing the funds from investors in the first place. Fundraisings of early stage life science companies are often of a higher value than fundraisings for other types of technology companies due to, in a large part, the resources that are needed to research, develop and trial their products, ensure that they comply with government regulations and the projected cash burn associated with these. Fortunately, there are a number of ways for early stage life science companies to raise funds and in this section we discuss the types of funding that are typically available for an early stage life sciences company.
The types of funding that are typically available
As with most types of early stage investments, a life sciences company raises funds either by issuing shares or by borrowing money from individuals, venture capital bodies or lending institutions.
The ability and appropriateness of either type of funding will often depend on issues such as:
- the personal financial position of the initial shareholders and related persons;
- the type of business and products that the life science company is trying to develop;
- the stage of development of the technology (i.e. is it just an idea at the time of the fundraising or has IP already been developed which can serve as a platform for the future development of a company e.g. a spin-out);
- the financial position of the business; and
- the asset position of the business.
Early stage investments in life sciences companies often take the form of equity, loan notes or a combination of both. These, together with other types of funding, are discussed in more detail below.
Equity is a term which covers all types of shareholding investments in a company. Equity has the following characteristics.
- it gives the equity holder ownership of a stake in the business;
- it is unprotected, so on a liquidation or winding-up the shareholders will not recover their funds until all creditors and other costs of winding up the company have been paid in full;
- when a company is limited by shares the liability of those shareholders can never be more than the amount which they invested; and
- a shareholder has rights in the company; these are set out under statute and common law and can be varied by agreement between shareholders through the articles of association and/or a shareholders’ agreement. We have produced a separate article setting out the key documents and terms of investments into life science companies.
Debt is a term which covers all types of borrowings by companies and has the following characteristics:
- debt ranks ahead of equity on an insolvency of a company. Secured debt ranks ahead of unsecured debt;
- if it is secured, this means that the company has charged or pledged certain of its assets to the lender in order to obtain funds;
- from the company’s point of view a secured loan will restrict its ability to deal with the assets which have been charged;
- many lenders (particularly banks) will not risk funds in companies with little trading history and/or tangible assets without taking some form of personal security from the shareholders and/or director; and
- the advantage to the shareholders and the company of borrowing money is that it allows shareholders to retain their shareholdings without dilution.
Loan notes can be a halfway-house between equity and debt and be a flexible alternative.
A third party will lend money to a company and the loan will be convertible into shares at a future date or on certain events happening. There would usually be interest payable on the capital amount of the loan notes. That capital sum may be secured against assets of the company. Loan notes are often convertible into shares at prescribed prices in certain circumstances or, instead, will be repayable within a certain period or on certain events happening.
Statutory restrictions to raising funds
Companies seeking finance from investors are, in effect, promoting investments and must therefore ensure that in doing so, they comply with the relevant legal and regulatory requirements which have been put in place to protect the investor.
Section 21 of the Financial Services and Markets Act 2000 (`FSMA 2000′) prohibits financial promotion communications in the UK unless they are made or approved by an ‘authorised person’ (that is, a person authorised under FSMA 2000 to engage in regulated activity) or unless there is an available exemption. There are exemptions available where the target audience is restricted to institutional investors such as venture capital funds, existing shareholders or creditors and certain high net worth and sophisticated individuals such as business angels (or groups of them).
Company law prohibits private companies from offering shares or other types of securities to the public (including any section of the public). However, private limited companies can offer their shares by private placement in certain circumstances.
In additional, companies must ensure compliance with or be exempt from Section 85 of FSMA 2000, under which it is provided that where securities are offered to the public (or a section of the public) in the UK for the first time, the offeror must publish a prospectus unless the issuer falls within one of a long list of exemptions from this requirement.