4.7 Amending the terms of a share offer, post-launch

Amending the terms of a share offer, post-launch

During live share offers, some societies may struggle to reach the minimum investment target, so in order to raise enough money for the project to go ahead, it may need to fill the gap using loan/debt finance - this can especially be the case when an asset is at risk from being purchased before the community can raise enough money to secure it. 

In other situations, the society may wish to alter the terms of the share offer to allow for a subscription/payment plan option for investors, to attract a broader range of investors who can't afford to invest the minimum amount all at once. 

Occasionally, a society may find a way to undertake the project with a lower amount of share capital compared to that which it had detailed in the share offer document. For example, it may have secured a significant amount of grant funding post-share offer launch. Alternatively, the asset may be at risk of being lost, so the priority is that the share offer closes having raised a lower target, so that it can purchase the asset before it is sold and then raise further funds subsequently to execute the renovation work. 

With any material change to the share offer, the details need to be shared, via an addendum to the share offer document (SOD), with investors who have applied to the current share offer. The SOD acts as a contract between the society and the investor. The addendum should detail the revised financial projections and the assumptions used to re-calculate them.  To retain investors’ commitment to invest, the society should clearly outline the benefits of the updated circumstance to the society/project/investors. 

The society should be clear that if an investor does not consent to this change, they have the right to withdraw their application to become an investor, and the society should return their payment. The share offer document should be clear about when the application to become an investor is processed and the funds are converted into society share capital. In some projects, such as energy projects with several installations within the same share offer, the applications are processed in phases, so that the installations executed in succession. If the application has already been processed and the funds have been recorded as society share capital, the investor is subject to the society’s withdrawal policy. 

In the case of the Standard Mark assessment framework, the most important consideration is that the society is clear, transparent, and not misleading for current and potential investors - the three key components of the Standard Mark. An addendum to the share offer document (SOD) should outline details of the changes, and this needs to be assessed so that the Standard Mark can be (re)issued to the share offer (if appropriate). 

Adding loan/debt capital into the deal mix

If a share offer is launched that outlines a certain approach to a society, project and its financial structuring, then this is what the investor is considering in terms of making their investment decision regarding levels of risk and potential return. If the society subsequently decides to add more debt into the mix, there will be a cost to this money, in the form of interest, that is (usually) greater than the cost of community shares equity. Therefore, adding loan/debt into the society will alter the level of risk and return for the investor; it is a material change to the investment proposition that the investor signed up to at the start of the share offer. 

There may be good reasons for the society to take on the debt - it may ensure that they do not lose the asset to another buyer or they complete the installation more quickly, so speeding up returns etc. If the society can make the case, then it can present this to the current members and potential investors. The addendum to the share offer document should explain why the society is now proposing to use this debt function alongside the share offer. The addendum should outline the process for investors to invest and the terms of the loan, addressing these questions:  

• Can the society afford the loan with its business model?  
• What impact will the loan have on the society’s likely ability to pay interest as described in the share offer document?
• What impact will the loan have on the society’s scheduling of withdrawal payments to investors as described in the share offer document?
• Could the loan affect the stability of the society? Is the loan secured against the society assets, or future revenues? 
• Are there any other specific terms of the loan that impact on the society’s business model, business plan, governance or operations? 

Societies must explain to investors the likely impact of a loan on the society’s ability to pay share interest and fund withdrawals, emphasising that loans will have priority over share capital for interest payments and loan repayments. In the case of a society having to be wound up, creditors (debt) will receive priority over investors (equity) receiving any payment. 

Adding new grant capital into the deal mix

In the case of a society securing non-repayable grant funding post-launch, this could reduce both the need for as much share capital, and also the risk profile of the community shares investment. This new stream of funding to the society can be used to justify a reduction in the share offer minimum target. In the case of an already Standard Mark awarded share offer, this change should be checked and approved by the Community Shares Practitioner who originally awarded the Standard Mark (or the Community Shares Unit), to ensure that the Standard Mark can be retained for the amended share offer terms. In particular, the society should be transparent about any potential liabilities or clauses attached to the funding, e.g. clawback. This change should be communicated to existing investors via an addendum (see above) and also can be used to market the share offer to potential investors. 

Reducing the Share Offer Minimum 

If a society decides that it can reduce its capital requirement and still execute a version of its business plan, it should be clear with investors what will be the impact of the lower capital raise. 

The most common example is where a society is seeking capital to buy and renovate an asset, and its share offer projections and raise target assume that the renovation will be undertaken. However, post-share offer launch, the society may find that they are at risk of losing the asset to another buyer if they do not purchase quickly. The priority changes so that the share offer needs to close sooner, having raised a lower amount that is sufficient to purchase the asset. The society will then still need to raise further funds to execute the renovation work, therefore prompting a second share offer issue. 

If the society is only going to buy the asset but not refurbish or renovate it as in the original share offer document, this will likely hit revenue projections. This in turn will affect the society's forecast of interest payments and how much and how frequent it can permit a withdrawal of capital.  

The society should describe if/how/when the society will undertake the work that has was originally envisaged and any other follow-on consequences of the reduced investment plan. 

Adding a subscription (payment plan) option for investors

In the case of adding the subscription option, the addendum to the share offer document should explain why the society is using this function; i.e. this will allow the society to attract more investors and enable the society to reach the share offer target. Here the society should outline the process for investors to invest. If a short-term loan is going to be used to allow the society to do this, it should include the loan terms. It should be clear what would the impact would be if the investors did not fulfil their subscription payments, i.e. would the loan then become a financial liability that the society could service without it being detrimental to the other investors' investments? Or could it be repaid without a financial implication, e.g. an Early Repayment Charge?