The increase in share capital is often a crucial step in the growth of a company, whether it is a start-up or a more structured entity.
Share capital is the set of monetary assets or goods that a company has at its disposal and that constitute the capital guarantee towards third parties (e.g. banks). Thus, share capital can be made up of both cash and assets (such as real estate or machinery), or even patents, trademarks or the work of one or more partners (so-called working partner).
A capital increase consists of a positive change in all those elements that make up the company's share capital. It is therefore a strengthening manoeuvre which aims to consolidate the company and, in some cases, also to increase its liquidity.
A capital increase can be financed by the existing shareholders themselves, thus without any change in the company's corporate structure, or through the intervention of third parties. In the latter case, it is possible to obtain a divisible capital increase, i.e. one that can be realised regardless of the number of investors who decide to subscribe, or an inseparable capital increase, i.e. one that can only be realised if all the investors identified participate in the subscription.
Capital increase through equity crowdfunding
The capital increase through equity crowdfunding is considered inseparable as all the capital would be returned to the investors if the fundraising campaign does not reach the minimum target.
The use of crowdfunding also implies that the capital increase can be defined as 'free' in the sense that there are no direct disbursements from shareholders, as is the case with 'paid' capital increases where the injection of new capital is through existing shareholders or third parties who will acquire a stake in the company.
Paid-in capital increases, especially for start-ups, often include a premium so that existing shareholders have to pay additional amounts into reserves.
Capital increase - the steps of the process
There are four basic steps in any capital increase - resolution, subscription, release of shares, certification.
1. Resolution
In order to pass a resolution to increase the share capital, two conditions must be met: the first is that all the initial shares have been paid up (i.e. paid in full) by the shareholders. The law provides that only 25% of the nominal share capital may be paid at the time of incorporation of the company.
The second requirement is that there are no losses or that they are less than one third of the share capital. Once these conditions are met, the resolution can be passed.
2. Subscription
The purpose of this step is to set a deadline for shareholders and third parties to subscribe. Very often for start-ups, the subscription takes place at the same time as the resolution.
3. Release of allowances
This expression refers to the balance of the amounts due. At the time of subscription, in fact, one is required to pay 25% of the share capital and, if applicable, the entire share premium.
4. Certificate
This is very often a formal step without which the share capital increase will not appear in the formal company documents. The certification is the responsibility of the director, who must file a certificate with the Companies' Register within thirty days of the subscription of the increase.
Capital increase through crowdfunding
Simplifying a lot, we can say that any equity crowdfunding campaign is a risk capital raising operation not very different from a capital increase. In fact, it is increasingly common for funds raised through crowdfunding to be used to increase the share capital of high-growth companies.
In most cases, the capital increase is approved excluding the option right for existing shareholders and is considered inseparable for a certain share and divisible for the remaining share.
It is important to remember that in equity crowdfunding transactions the inseparability clause is used in a flexible way. Indeed, issuing companies tend to define a minimum threshold below which the raising of capital will be ineffective (inseparable capital increase) and a maximum raising threshold, the achievement or non-achievement of which does not affect the validity of the partial subscriptions made (divisible capital increase).
The advantages of using equity crowdfunding to increase share capital
The availability of capital without related debt is an important opportunity for financing and business development, especially in periods of economic crisis such as the one we are slowly emerging from.
In addition, an effective investment of the capital raised in this way can prevent a situation of crisis and insolvency that the company could have incurred without the contribution of new economic resources.
Finally, crowdfunding allows investors of all sizes to diversify their portfolios, thereby reducing risk and democratising access to investment.