Developing a product or service and scaling a startup's business model need big amounts of cash. Thus, most startups seek capital from investors at some point. There are some legal hurdles to overcome when asking people to invest in your startup. The following questions and answers will help you stay in safe waters and alert you to areas where you should not sail without an experienced guide.
1. What is a prospectus?
A prospectus is neither a pitch deck and nor a glossy brochure about a startup, but a disclosure document issued before offering shares to the public. The prospectus must contain very detailed information as set out in articles 40 to 49 of the Swiss Federal Act on Financial Services (FinSA) and articles 50 to 57 and annex 1 of the Swiss Financial Services Ordinance (FinSO). Also, it needs to be checked by a reviewing body (currently BX Swiss AG or SIX Exchange Regulation AG). Drafting a prospectus is a demanding and time-consuming process that requires considerable resources from management as well as external legal and financial advisors.
2. My startup is very early stage. Why should I care about the prospectus requirement?
The Swiss Federal Act on Financial Services (FinSA) generally requires publishing a prospectus when publicly offering securities in Switzerland. Shares in a startup are considered securities. Failure to comply with the obligation to publish a prospectus may result in criminal sanctions and additional liability towards the subscribers or purchasers of shares. Therefore, a startup should know what constitutes a public offering and what exemptions from the prospectus requirement apply.
3. Will my pitch deck be seen as an offer?
An offer means an invitation to acquire a financial instrument that contains sufficient information on the terms of the offer and the financial instrument itself (article 3 lit. g FinSA). Terms of the offer mean the approximate amount to be raised, the valuation or price range, and the type of securities (debt, equity or convertible, common or preferred shares). Sending out a pitch deck that merely indicates that you're raising a Seed round, but without indicating the size of the round and the valuation, does not qualify as an offer. This will allow you to create awareness about the upcoming financing without triggering the prospectus requirement.
4. How can I use my personal network to raise capital for my startup?
Article 36 para. 1 lit. b FinSA provides an exemption for offers directed to less than 500 investors. Note that the threshold for this same exemption in the European Union is only 150. Securely relying on this exemption will both need a detailed list of all persons who received the offer and technical measures to restrict third parties from accessing the offer. This could include e.g. sending personalized links so that only the persons on your list can view the offer. Merely relying on a disclaimer stating the offer is only for the intended recipients will likely not be enough to profit from this exemption.
5. What about looking for capital on platforms such as LinkedIn, Instagram, etc.?
Social media and the internet do not stop at national borders but are available in many countries worldwide. If an offer is directed at persons abroad, foreign legislation will apply. For example, the European Union generally knows a threshold of EUR 1 million, below which no prospectus is required. EU Member States have the option of raising this limit up to a maximum of EUR 8 million. Germany, France and Italy, among others, have increased their threshold, but at the same time introduced further regulations such as additional information requirements. Therefore, looking for capital on open platforms such as Linkedin or Instagram is not recommended because it is almost impossible to keep track of all applicable legal requirements.
6. What if I focus my fundraising efforts on professional investors only?
The bar to qualify as professional client under article 4 para 3 FinSA is quite high. In particular, (even ultra) high net worth individuals do not qualify as professional clients unless they use investment structures with professional treasury operations. However, venture capital funds with a balance sheet total of CHF 20 million and more qualify as professional clients and may be offered securities without publishing a prospectus.
A much more convenient way to get out of the prospectus requirement is to determine a minimum investment per investor of CHF 100'000. This will get you out of the Swiss and EU prospectus requirements while leaving the door open to approach high net worth individuals.
7. Is there a legal way to call for investors in a newspaper advertisement?
Seeking investors by means of an advertisement in a Swiss newspaper undoubtedly qualifies as a public offering. Also, a newspaper advertisement might not be the right communication channel if you look for investors with a minimum ticket size of CHF 100'000. However, there is another exemption form the prospectus requirement that will help here: If you are not offering securities in excess of CHF 8 million in any 12-month period, no prospectus needs to be published. Limiting the amount of the offer is therefore an efficient and safe means of avoiding the preparation and publication of a prospectus. Remember, however, that this threshold might be considerably lower in other countries. Thus, make sure to select a Swiss newspaper.
8. What do I have to do if I do not meet the above conditions?
If none of the following exceptions apply to you, you are obliged to prepare a prospectus for your offer. This must contain extensive information on the securities offered and the issuer and must be approved by the reviewing body. This applies both in Switzerland and in the EU Member States. If a prospectus is approved in an EU Mmember State, an EU passport can be applied for. With this, the prospectus is approved for the entire EU area. Failure to comply with the prospectus requirement can be punished with a fine of up to CHF 500,000 in Switzerland Severe penalties could also be imposed in the EU.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.