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Dilution solutions

FUNDRAISING is something that all finance directors, especially those in small businesses, will likely have to undertake at some point. Listed businesses that raise funds through the equity markets will always try to do so at the best possible price, to minimise the dilutive effect of issuing new shares. But this is not easy for many young, growing companies.

This is a difficult line for FDs to tread. The FD must secure the funds that are the lifeblood of any growing company by issuing new shares while allaying concerns that such efforts will dilute existing investors’ shares. And many of these investors may have been essential in getting the business off the ground.

As finance director at Provexis, a functional food and sports nutrition business, I have been involved with two open offers and three placings of new shares for the company. Provexis, like many growing businesses, has had a fairly volatile share price over recent years, which has often made raising funds – with minimal dilution – a challenging objective.

In 2008, the financial crisis created difficult markets, a situation reflected in the company’s low share price and investors’ reluctance to commit capital. The company was fortunate to complete a £2.5m placing of new shares.

In May 2009, new European legislation for the food industry was introduced. As a result, we were able to secure an approval from the European Food Safety Authority (EFSA) for a health claim for the company’s anti-thrombotic technology, which resulted in a dramatic increase in the share price.

Following the success with EFSA, we raised £5m from a share subscription in September 2009, and announced an open offer to shareholders shortly afterwards. The offer enabled all existing shareholders to buy more shares in the company at the same price as the subscription, raising a further £2.1m.

Conducting open offers can be an expensive business for small companies where cash is tight. But finance directors can keep costs down by not publishing a full prospectus approved by the Financial Services Authority. This can be avoided by ensuring that the open offer falls under an exemption of the European Prospectus Directive, which allows open offers raising less than €2.5m (£2.2m) to avoid a prospectus. This exemption means the costs incurred in raising funds are significantly reduced. The original €2.5m limit has recently been increased to €5m, as the government has fast-tracked some amendments to the directive into UK law. This will allow more companies to raise funds at reduced cost.

Following our fundraising success, we started to look for acquisitions, seeking to raise more funds with minimal dilution. Provexis secured an equity financing facility in March 2010, and was one of the first businesses in the UK to do so. The facility means we can draw down funds from the AIM market at a discount of 7.5% to the prevailing share price.

Provexis is in control of the process and is under no obligation to use the facility. It sets a floor price below which the company providing the facility cannot offer new shares to the market, giving some protection against any downward share price movement.

We have used the facility on two occasions. In June 2010, we raised the relatively small sum of £89,000 and in October 2010, we raised a more meaningful £2.4m. The facility has enabled us to build up sufficient funds for an acquisition. This was supported by a £2.5m placing and an open offer to all shareholders, while protecting the company’s valuation.

Provexis reversed onto AIM in 2005. It has fulfilled its primary purpose and function as a growth market for the company, and has been a very effective source of funds. ?

Ian Ford is the finance director of Provexis.

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