The classic definition of a business is “an undertaking for the purpose of making a profit.” Enterprises naturally go through several phases, which depending on the context of the discussion will attract several different descriptions. An enterprise may be described as being in the start-up phase, the growth phase, the mature phase or even a phase of decline. A large majority of businesses, irrespective of the phase that they are at, have an appetite for additional capital. More capital (if utilized well) should translate into at least one of the following benefits for the business: expansion of the number of units of goods or services that the business is able to offer, lower cost of production, lower cost of financing, availability of working capital, managing risks and threats to the business.
Here are some tips (not an exhaustive list) that you may consider if you need a business investor:
- Ensure that the investor is a “fit and proper” person. The regulations for some business sectors, such as banks, financial institutions, pension funds and charities, specifically require that directors and officers meet fit and proper criteria. Most business sectors do not have this specific requirement. However, the Proceeds of Crime Act is applicable to all persons in Jamaica. By virtue of this legislation, persons who partner or enter joint ventures with another who benefits from criminal activities may be exposed to being charged for violations under the Act. Therefore, it is prudent that one ensures that new investors’ source of funding is above board. Additionally, in order for a business to access legal services, financial services, real estate services, accounting services, government contracts and licenses, the usual requirement is that the shareholders and directors of the company are to be disclosed as these service providers are required to “know their clients” and be the gate keepers for ensuring that the proceeds of crime do not enter the formal economy. Having a tainted investor may present some obstacles in accessing these services.
- Know that there are several options for arranging or structuring the investment. The investor may become a shareholder and hold ordinary shares, preference shares, redeemable shares, convertible shares, among other options, each of which provides the parties with an opportunity to bargain and strike a deal that best suits the need of the business for capital, the need of the investor for income and security of principal. The investment may also be structured as a loan with terms that best suit the parties. They may also consider the use of options to acquire or sell shares, rights of first refusal, pre-emptive rights, etc. All of these terms may seem like legal meaningless jargon. They are not presented here to confuse or intimidate the reader, but I hope that the reader understands that there is no one size that fits all for structuring investments and that different arrangements have varying and sometimes implied terms based on established practices in law, business and finance. Thus, it is important to seek advice and counsel.
- It is important to operate your business in an investor-friendly manner. This means that company records and filings are to be kept up-to-date; dealings with third parties are to be evidenced or guided by written contracts; contracts are to be of the highest standard; trade marks, brand names and intellectual property belonging to the company are to be registered, properly licensed, as appropriate, and otherwise protected; taxes and filings for statutory deductions are to be satisfied; and that specific regulations governing the particular industry in which the business operates are complied with.
Taking on a new investor is not a fly by night transaction. The success of the transaction can sometimes make or break the business. An attorney can assist in providing advice on the options available and preparing contracts and other documents that appropriately reflect the intent of the parties and that protect the business, as well as, the long –term interest of his/her client.
Andrea Scarlett-Lozer is a Partner at Myers, Fletcher & Gordon. She specializes in commercial transactions and advisory, as well as, intellectual property law. Andrea is the Head of the firm’s Intellectual Property Department and is the Director of the Landlord and Tenant Law course at the Norman Manley Law School. She may be contacted via andrea.scarlett@mfg.com.jm or www.myersfletcher.com.
1. Know that there are several options for arranging or structuring the investment. The investor may become a shareholder and hold ordinary shares, preference shares, redeemable shares, convertible shares, among other options, each of which provides the parties with an opportunity to bargain and strike a deal that best suits the need of the business for capital, the need of the investor for income and security of principal. The investment may also be structured as a loan with terms that best suit the parties. They may also consider the use of options to acquire or sell shares, rights of first refusal, pre-emptive rights, etc. All of these terms may seem like legal meaningless jargon. They are not presented here to confuse or intimidate the reader, but I hope that the reader understands that there is no one size that fits all for structuring investments and that different arrangements have varying and sometimes implied terms based on established practices in law, business and finance. Thus, it is important to seek advice and counsel.
