Why private placement and why Jersey?
As a result of the shortage of liquidity in the bank lending markets, many businesses have a need for additional funding. One source of funds might be a private placement of shares. This has often been the source of funds for expansion of a small or medium-sized business enterprise ("SME") and may be an attractive alternative for both the owners of and investors in a SME, given the relative expense associated with the listing of shares and a public offer, as well as the delay that is involved in taking a company to market.
There are many advantages for either the owners of a SME or a group of investors in establishing a holding company in Jersey at an early stage in its growth:
- as the standard rate of tax in Jersey for a company is 0% - except in strictly limited circumstances (see below) - the establishment of a Jersey holding company should be tax neutral;
- no stamp duty is payable in Jersey on the issue or transfer of shares in a Jersey company;
- Jersey companies law is based on similar UK legislation which is familiar to investors around the world - although Jersey law is frequently a simplified version of that which applies in the UK;
- Jersey is well regarded by international regulators as an offshore jurisdiction which has cooperated fully with multi-lateral initiatives against moneylaundering, terrorist financing and tax evasion; and
- many Jersey companies have had their shares listed on AIM (the Alternative Investment Market of the London Stock Exchange), an increasing number have had their shares admitted to the official list of the LSE and others have had their ADS's listed on the New York Stock Exchange - so that, when the next stage in the company's growth arrives and/or the investors wish to realise their investment, there is already a well-worn path on which to follow.
This briefing note has been prepared to provide general information regarding some of the Jersey law issues that may arise in the context of a private placement of shares by a Jersey company.
Is the placement memorandum a prospectus?
A private placement of shares will commonly involve circulation of a private placement memorandum (a "Placement Memorandum") which describes the company that will issue the shares and the underlying business. The Placement Memorandum will generally not contain the same level of detail as the offer document for a public offering of listed shares and will not be required to comply with the same content requirements, whether these are imposed by the laws of those jurisdictions where the shares are marketed or the rules or regulations of any stock exchange.
However, the Companies (Jersey) Law 1991 (the "Companies Law") defines "prospectus" as an invitation to the public to become a member of a company or to acquire or apply for any securities. For this purpose, an invitation is made to the public where it is not addressed exclusively to "a restricted circle of persons" and an invitation is considered to be addressed to a restricted circle of persons only if, amongst other things, it is "addressed to an identifiable category of persons to whom it is directly communicated" by the company or its agent and "the number of persons in Jersey or elsewhere to whom the invitation is so communicated does not exceed 50".
Consequently, if the marketing plan for shares in a Jersey company involves the circulation of the Placement Memorandum to more than 50 persons or, for some other reason, its circulation constitutes an invitation to the public, the Placement Memorandum will be treated as a "prospectus". As such, Jersey law requires that it satisfies the same content requirements as any public issue, that it contains the same specified investment warnings, that a copy of the Placement Memorandum has been delivered to the Registrar of Companies in Jersey and that the Registrar has consented to its circulation.
When does a private company become a public company and what are the consequences?
Even if the Placement Memorandum were not deemed by Jersey law to be a "prospectus", if more than 30 persons are entered in its register of members, the company will generally be treated for purposes of the Companies Law as though it were a public company (rather than a private company). If more than 30 persons are entered in a company's register of members, the company must give written notice of that fact to the Registrar of Companies within 14 days.
There are a number of consequences (primarily administrative) of a company being treated as a public (rather than a private) company. The most important are that the company must appoint auditors qualified in accordance with the Companies Law and have its accounts audited (which is not required in the case of a private company) and the company's accounts must be filed together with the auditor's report with the Registrar of Companies within seven months of the company's financial year end (whereas a private company is not required to file accounts with the Registrar). For a summary of the distinctions made by the Companies Law between public and private companies, please see our client briefing on the subject.
Registration under the Financial Services (Jersey) Law 1998
If the Placement Memorandum were to be circulated within Jersey, then the promoter (if applicable) may be required to apply for registration or seek exemption under the Financial Services (Jersey) Law 1998 in order to carry on financial services business, as its activities in connection with the placement could constitute investment business. An exemption from the requirement to register exists for a company in connection with the issue of its own shares.
Effect of certain anti-avoidance provisions introduced by the new income tax legislation in Jersey
The exempt company regime (in accordance with which a company incorporated in Jersey was deemed not to be resident in Jersey, subject to compliance with specified conditions) has been abolished. The new corporate tax regime provides that the standard rate of tax is 0%, except in the case of a utility company or a financial services company or as regards income derived from the ownership or disposal of land in Jersey.
If the marketing plan for shares in a Jersey company involves an offering to individuals resident in Jersey, detailed tax advice should be sought, as the new tax regime also includes certain anti-avoidance provisions that apply where a Jersey resident individual owns more than 2% of the ordinary share capital of such a company. The ownership percentage is determined by reference to the ultimate beneficial ownership of the company looking through any and all intermediate holding structures.
Where an individual resident in Jersey owns more than 2% of the shares in a Jersey company (determined by reference to the ultimate beneficial ownership of the company) or if the company is taken to have provided a shareholder loan to an individual shareholder resident here, this gives rise to an administrative burden for the company in terms of compliance with reporting requirements, which were introduced in conjunction with the new anti-avoidance provisions.
Consequently, it may be desirable to ensure that shares are not offered to, sold to or purchased or held by or for the account of any individual resident for income tax purposes in Jersey. It might also be appropriate to protect against the possibility of an individual resident in Jersey acquiring more than 2% of the shares in a company to amend its articles of association to provide a power for the directors of the company to dispose of such a shareholding to a third party.
Legislation to combat money-laundering and terrorist financing
Before any third-party can be admitted as a shareholder of a company, the company secretary will need to verify the identity of such person in order to comply with legislation in Jersey designed to combat money-laundering and terrorist financing, i.e. the Proceeds of Crime (Jersey) Law 1999, the Drug Trafficking Offences (Jersey) Law 1998 and the Terrorism (Jersey) Law 2002.
If the company is already in existence, it is important to review its constitutional documents at an early stage in order to ensure that there are no rights of pre-emption for the benefit of existing shareholders or other restrictions that might prevent or delay the transaction. If such rights do exist, then the constitution should be amended either to remove them or to modify them in such a manner as to ensure that the proposed transaction will not be prevented or delayed. If a new company is to be incorporated, then the constitution should be prepared with the proposed transaction in mind. The Companies Law does not provide any statutory pre-emption rights in respect of the allotment of shares in a Jersey company.
As an alternative to the above, Jersey "cash box" structures can be used to provide flexibility for a placing or other equity raising exercise in respect of an allotment of shares for cash where the constitutional documents of a Jersey company contain pre-emption rights in order to comply with the listing requirements of the London Stock Exchange. For a summary of the use of Jersey companies in "cash box" structures, please see our client briefing on the subject.
Time-frame, costs and other practicalities
It is possible to establish a Jersey company on a same-day basis, for which the costs payable to the Jersey Financial Services Commission are only £400 (reduced to £200 if same-day incorporation is not required). A Jersey company is required to have its registered office in Jersey and must maintain its share register there or at another location in Jersey, and there are well-known companies which provide electronic registrar services in Jersey if such services are required following a later listing of the shares. However, unless the company performs a regulated activity, there is no need for a Jersey company to appoint Jersey resident directors.