Author: Sara Howard
Whether you have a co-operative or corporation, to secure equity funding in the form of shares you'll need to produce an offer document. Here we explain how to draft a share offer document, and ways you can market it to prospective shareholders.
What is an offer document?
A share offer document is an essential marketing tool for raising capital through equity. It provides a clear, transparent proposal for prospective shareholders, as it explains why they should buy shares or become a member in your community energy project. Your opening statement should outline your business plan, financial viability, market potential and inherent risks. It's important all investors fully understand the financial potential of the project, as well as their responsibilities as members or shareholders.
Once you've agreed your financial plan, and have secured some pre-feasibility funding for initial planning costs, you'll need to start putting your offer document together. The most effective offer documents have accurate, detailed information on energy resource quality measurements, contracts with developers and Power Purchase Agreements (PPAs). A key part of the offer document is a risk analysis — and the sooner you take your project to market, the riskier it will be for investors.
Offer document requirements
Depending on your business structure, there may be regulations that govern the way you offer shares to members or the general public. You'll need legal advice to ensure your offer document meets all requirements.
Co-operatives
A co-operative is not governed by ASIC, so has very few requirements when it comes to selling shares. In fact, it doesn’t even need a capital raising document, but any member will want to see something in writing before signing up — so consider it your key marketing tool.
As well as registering your co-operative with your state department (such as the Office of Fair Trading in NSW), you may also need to register a copy of your offer document.
If your co-operative is a not-for-profit organisation, you can only issue bonds, not shares. Members receive a return on their bond as an interest payment rather than a dividend.
Proprietary limited companies
A proprietary company falls under the Corporations Act and you need to register it with ASIC. Also, it can't have more than 50 non-employee shareholders. You need to include a Product Disclosure Statement (PDS) with your share offer document, which a legal professional must check on your behalf.
Publicly listed company
A public company may offer shares to the general public, and trade shares on the Australian Stock Exchange or some other public exchange. Again, a PDS is mandatory when you raise shares this way. Specialist advisers will need to be appointed and paid for the listing process. The cost of listing and professional services associated with the process mean that this approach is unlikely for most community projects.
Hepburn Community Wind Park took a middle ground approach. Although they're a co-operative, they put almost as much work into the offer documents as a company would — they wanted to look professional and establish credibility to generate the investment interest they needed.
Unlisted public company
Shares in an unlisted public company may be purchased by the general public, subject to ASIC having approved the offer document. These share issues are not listed on any stock exchange. As buyers and sellers do not meet at or through a stock exchange to trade shares, other arrangements must be made. Potentially this is through personal contacts or to other existing shareholders. The size of an unlisted public company would normally be smaller than that of a listed company, in terms of the value of the company, the number of shareholders and the frequency of share transactions. The benefit for approved offers is that they can reach members of the general public without the expense of listing on the stock exchange.
Unlisted public companies may be limited by shares or by guarantee. Potentially, it is difficult and expensive to arrange a guarantee for a company. Embark is therefore trying to develop a template for an unlisted public company limited by shares for community solar projects
What should you include?
Depending on your business structure and the scale of investment involved, your offer document will be around 25 to 40 pages long. As well as some very important legal disclaimers, there are other things you'll need to include.
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An introduction: Summarise the key benefits of buying shares and/or becoming a member.
- A summary of offer: Outline any conditions of investment and exactly what the investment will go towards – as well as the cost of each share and any deadlines for the share offer.
- Project background: Give the investment some context and highlight achievements to date.
- Project description: Include any approved planning permits, site considerations and design, technology and equipment (and contracted suppliers), and the quality of the energy resource.
- Business overview: Show how you'll generate revenue and the timeframe of the project.
- Financial information: Include projected capital costs, funding, revenue, expenses and profits – and any assumptions that underline these.
- Organisational structure: Show how the project is structured, who's on the Board of Directors and what expertise or networks they bring to the project.
- Contracts: Include any conditions of grant funding, loan agreements, supplier contracts and grid connection agreements.
- Risk analysis: Outline any potential risks to the success of the project. This may include fluctuations in costs and energy pricing, not meeting set deadlines, or current technology being superseded.
- Conditions of membership or investment: This should include the rules of the co-operative, residency requirements, voting rights and liability.
- Call to action: Once you’ve sold them on your project, you need to give your reader a quick and simple way to apply for shares. Include contact details, a number to call with any questions, and an application form.
Top tips for writing a share offer
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Plan for a series of share offers: You can offer different classes of shares at different stages of the project. For example, not-for-profit co-operative Positive Power developed an initial offering statement for the sale of bonds, and then another for the turbine deposits. This spreads the risk as bonds will come to term at different times.
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Think about when to start: You can seek investors before putting down equipment deposits, but be clear about how you plan to use those investment funds. You may want to put some of this capital aside in escrow.
- Be clear and concise: Focus on the details relevant to the investor’s decision-making.
- Be honest and transparent: You'll need to declare all funding and contracts already negotiated, as well as the current financial position.
- Seek legal advice: Make sure your document meets all regulatory requirements and does not ‘over-promise’ the return on investment or benefits of membership. You may be lucky enough to have a lawyer on your Board of Directors, and this is a good time to use their expertise.
- Remember your triple bottom line: Address all the reasons for investment, not just financial. There will be social and environmental rewards as well, and the type of investor you attract will be interested in these outcomes.
Rewarding early investors
Your first investors take on a higher level of risk, so think about different classes of shares or bonds, with different rates of return, different caps on investment, or different terms for bonds.
One option is to offer a discount to early investors, such as 30 cents in a dollar share to start with, rising to 60 cents and then full price. This encourages people to get involved when you need them most. And the more equity you build up, the more attractive your offer will look to other investors.
You may also want to encourage local investors, to keep as much equity as possible in the community. Hepburn Wind lowered their minimum membership investment to $100 (from $1,000) for local residents in the local area.
Holding investment funds aside
You can set aside a small amount of fundraised money for ‘working capital’ before operations begin. The rest is held in escrow. This ensures you keep money allocated for equipment deposits, for example, in a separate trust account.
Locking in future funding
You can seek a commitment to buy shares in the future — possibly in the form of a legally binding contract, to give additional assurance for financial lenders. WindShare in Toronto signed member agreements with this type of guarantee.
Checklist
Are you ready to present your offer document and start fundraising capital through equity?
- Do you have a complete business plan?
- Do you have available test data?
- Have you completed the pre-feasibility phase?
- Have you agreed on the classes of shares and any membership conditions?
- Do you have a clear idea of the investment rate of return?