IPO Incubator

FUNDRAISING INCUBATOR

Transaction Financing Tool

Problematic

A common problematic in business is:
  • from the investor’s standpoint: how to invest for a short period of time and make a significant profit ?
  • from the entrepreneur’s or the company’s point of view: how to finance a large transaction and get rid of the investors immediately afterwards ?
More often than not, when acquiring or merging, it is possible to use the cash of the target company to pay off investors. Thus, transaction financing answers both these needs allowing the investor to make a quick profit in case of successful transaction.

1. DEFINITION

A Fundraising Incubator is a company financing corporate transactions such as a merger, an acquisition, a securities private placement or an initial public offering (IPO) against an equity participation and a put option on this equityparticipation to the issuer itself. The put option, issued by the same issuer as the equity participation, ensures the investor that, in case of success ofthe transaction, it can resell this participation to the issuerimmediately after. Today, transaction financing is the exclusive privilege of all investment banks who make huge profits therefrom.

2. Objection

One could wonder why not a simple loan? The main reason is that under most jurisdictions, loans are limited to a certain interest rate percentage, called the usuryrate, generally less or far less than 25%. In Switzerland, the federal law limits this usury rate at 15% and makes any interest rate set above that limit unlawful and thus, not payable!

The investors usually want a higher return on their investment, as any transaction financing investment represents a significant degree of risk at least from a market perception standpoint.

3. Risk of a Transaction Financing Investment

The risk linked to a transaction financing investment is directly linked to the probability of the transaction being successful.

Therefore, as a rule of thumb, we can say that the transaction financing investment risk is directly linked to thequality of the agreements binding the parties to the transaction and to these parties’ willingness to execute the transaction properly.

4. Rules of Prudence

The basic rules of prudence in a transaction financing investment are the following:

  • Having a commitment from both parties to the transaction provides the safest conditions to the investment. However, this is rare and mostly impossible. Commonly, a transaction financing agreement is entered into between one party to the transaction and the representative of the investors.
  • Reduce the time of the investment to the minimum. This rather simple rule has lots of implications, from logistics to legal conditions. The representative of the investors, who should be a financier or a businessman but not an attorney-at-law, should pool the funds into an account under his control and verify the parties’ consents and willingness to proceed.
  • Have all the transaction (key) terms agreed upon before the financing takes place. The investor or his representative must ascertain that the parties are in full agreement on all (key) terms of the transaction. While the parties might not be able to bear the cost of all agreements drafting before the transaction financing takes place, they can surely produce a complete term sheet for each agreement needed for the transaction. Any party receiving the transaction financing can also take the commitment toward the investor that no other additional or new (key) term shall be required from the other party after the financing takes place, preventing thereby the classic last minute requirement that makes the transaction fail.
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