4.3 Pioneer offers
Purpose
The purpose of a pioneer offer is to raise share capital for a new society that will be spent on getting the enterprise investment-ready. Investing in an enterprise at this early stage is a high-risk activity, and because of this, pioneer offers should only be made if a society is unable to raise the risk capital it needs from grants, gifts or donations.
Developing pre-start initiatives can be expensive, time-consuming and highly risky. Pre-start development costs may include professional fees for legal advice, society registration, financial advice, planning permission, asset valuations, market appraisals, feasibility studies and business plans. The society will be unable to recoup these costs if its plans turn out to be unfeasible, or if the society subsequently fails to attract the investment capital it needs to implement its business plan. If the society is planning to acquire an existing business or property, there is the risk that the society will lose a competitive bid, and will be unable to proceed, even though the proposition is viable and the society is able to raise the necessary capital.
The best way of financing these development costs is through grants, gifts, donations and other voluntary fundraising methods. However, there is a limit to how much money can be raised this way. Supporters may be prepared to provide more development finance if there is a possibility, however remote, that they could get their money back.
A pioneer offer invites the public to invest share capital, which will be spent by the society to get investment-ready. If the society is unsuccessful and ceases to exist, pioneer members will almost certainly lose all of their investment. However, if the society’s plans succeed, and it becomes a profitable enterprise, then pioneer member may be able to withdraw their capital in accordance with the terms of the pioneer offer, and subject to any renegotiated terms set out in subsequent offer documents.
Before making a pioneer offer, the venture needs to prepare a development plan that identifies all the costs that will be incurred in becoming investment-ready. Development costs should be kept in scale with estimates of the start-up costs of the venture, and should not normally be more than 5% to 10% of these start-up costs.
Structure
Because pioneer investors are asked to take far higher risks than subsequent investors, consideration should be given to establishing a separate class of “pioneer shares” with different terms and conditions, such as a higher rate of financial return, or a preferential right to withdrawal ahead of other classes of share. Introducing more than one class of share can have an impact on the attractiveness of future share issues. This matter is dealt with in greater detail in Section 2.2.6.
The offer document should make it clear that withdrawal of share capital is suspended indefinitely, or until it is superseded by the terms and conditions for the withdrawal of share capital set out in a subsequent offer document.
Pioneer offers can only be made by new societies that have not started trading. There should be a minimum and maximum fundraising target for the offer, based on the development costs alone. If any of the development costs have already been committed, this should be highlighted, together with an explanation of how these costs have been met.
Contents
Pioneer offer documents need to address the following matters:
Capital-at-risk warning: The offer document should contain a prominent warning that the society has no business plan and will need to raise substantial, additional capital before it can start trading. Any commitment to pay share interest or allow the withdrawal of share capital is wholly dependent on the future profitability of the enterprise, and its ability to recover early stages losses resulting from the development costs outlined in this offer. Investors could lose some or all of the money they invest without recourse to the Financial Services Compensation Scheme or the Financial Ombudsman.
Purpose of the investment: A brief description of the proposed new enterprise, its proposed business, industry or trade, the scale of the enterprise, and the estimated amount of start-up capital required. ,
Development costs, targets and contingencies: The CSU has a template for summarising the forecast development costs and comparing these costs to the fundraising targets, other sources of development funding available to the society, and the contingency arrangements associated with these targets.
Tax relief: Pioneer share offers may be eligible for tax relief under the Seed Enterprise Investment Scheme, the Enterprise Investment Scheme or Social Investment Tax Relief (see Section 8). However, offering tax relief at this stage may severely constrain the future actions of the society, committing it to engage qualifying business activities and requiring it to commence trading within two years of receiving the eligible investment. The society should seek professional tax advice or advance assurance from HMRC before offering tax relief in a pioneer share offer.
Terms and conditions: Details of the type of share capital being offered, and the terms and conditions that apply to this class of share. The indefinite suspension of withdrawal rights should be clearly stated, as should the reliance of this offer on the success of future share offers for there to be any prospect of pioneer members getting a return on their investment.
Timetable: The target date for closing the offer, together with a commitment not to spend any of the finance raised by the offer until the minimum targets or contingencies have been met. An estimate of how long it will take to get investment-ready, raise the capital required, and establish the society as a profitable enterprise.
In most cases, pioneer offer documents will be no longer than 1,500 to 2,000 words.