SME Owners

10 Things You
Must Know to
Raise Capital

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Glossary of Terms

Annual General Meeting (AGM): A meeting of shareholders that must be held every calendar year to enable them to view the records of the company, elect directors, and vote on matters integral to the running of the company.

Assets: Everything that a person or company owns or has due to it. Cash, investments, money due, stocks and materials are "current assets"; buildings and machinery are "fixed assets"; patents and goodwill are "intangible assets". Assets surplus to liabilities are "net assets".

Asset backing: Useful check for investors; net assets of a company (in $) are divided by the number of issued shares. Relate this to the firms earning capacity.

Associated Company: A company that is owned between 20% and 50% by another company.

Authorised capital: This used to be the total amount of capital that could be offered to the public for subscription and was the amount named in the Memorandum of Association. It was usually fixed at some round figure sufficient for the company's foreseeable needs. (see Subscribed or Issued Capital) Note: As of July 1, 1998 no longer allowed. Merely common stock or issued shares.

Board of Directors: Persons elected by shareholders to control the planning and implementation of corporate objectives.

Bonus Issues: Distribution of funds to shareholders in the form of shares issued free.

Business Angels: Informal private investors making direct equity investments in high growth potential SME's (and frequently contributing management and other expertise) in return for a share of the company, its income or capital growth.

Call: Often Limited Liability companies have shares that are not fully paid. A call can be made for the payment of part or all of this outstanding capital. Holders of shares in Limited Liability companies cannot avoid a call and are Liable for monies so called. (see Limited Liability)

Capital: Money invested in a business by its owners in order to earn income.

Capitalised Value: Is the total amount of money invested in a company in return for shares (the equity held in the company), or its revised value calculated by the most recent share sale price times the number of issued shares.

Company: A company is a corporation. A corporation has been defined as a succession or collection of persons having in the estimation of the law an existence, as well as rights and duties, distinct from those of the individual persons who from time to time comprise it. The company continues in existence irrespective of the death or bankruptcy of a member.

Company limited by shares: Is a company in which the liability of the members is limited to the amount of capital they have subscribed or agreed to subscribe. (See Public Company)

Debentures: A debenture is a fixed interest loan secured by specific fixed assets or through a "floating charge" on the business as a whole. Such loan stock is often issued with a convertible option attached to it; at the end of a stated period, the lender may convert it into ordinary shares.

De-listed: Removed shares or securities that were once quoted on a stock market.

Development Capital: Larger volumes of equity finance provided by a professionally managed fund to established firms with a track record of successful enterprise.

Discount: The amount by which a security is quoted below its issue value. The opposite to "premiums".

Dividend: Distribution of profits among shareholders usually expressed as a percentage of paid up capital or as an amount per share.

Dividend yield per share (DPS): The dividend yield is the theoretical return on investment from dividends per share, based upon the price paid per share. It is shown as a percentage of the last sale price.

EBIT: Earnings before Interest and Tax.

EBITDA: Earnings before Interest, Tax, Depreciation and Amortisation.

Equity: The capital invested in a company by its owners, together with retained profits from previous years that have not been distributed as dividends.

Equity Funding: Through the issuing of new shares. The opposite to debt funding. Equity finance is contributed in return for a share of ownership. It is not repayable, demands no provision of security (other than issued shares) and bears no interest.

Exempt Proprietary (Pty Ltd) Company: In filing an annual return, it is not necessary to include a copy of the balance sheet of the company, if it is an 'exempt' proprietary company, that is to say one in which no share is owned or deemed to be owned by a public company. This privilege enables an exempt proprietary company to keep its affairs confidential.

Float: The initial raising of capital by public subscription and subsequent listing of the issued shares on a stock exchange.

Gross Revenue: All receipts from the sale of a products and/or services.

Growth SME: A small or medium sized enterprise either aspiring to, or achieving high or significant growth.

Initial public offering (IPO): A new share issue (allotment) from a company (the Issuer). The floating of a company by offering a proportion of its shares to public investors. Sometimes called the 'Primary issue'. Before reforms in the Corporations Law (CLERP) in 1997, the primary method for a small to medium sized enterprise to obtain capital from the public was through an Initial Public Offering (IPO). The basic concept of an underwritten IPO is that part of a corporation is sold to an underwriter, who then resells it in much smaller pieces. An underwritten IPO is traditionally handled by securities firms (stockbrokers) that have formed an "underwriting syndicate," with one of the firms acting as "lead" or "managing" underwriter. The company's primary responsibility is to contact and negotiate with the managing underwriter, who will then direct the sales of the securities. The most important ingredient of an IPO is that the underwriter has responsibility for selling the securities.

Investment ready: The state of a firm being considered to meet the requirements of external equity investors. These requirements include a high quality management team, and appropriate governance and delegation arrangements.

Joint Venture: An agreement for two or more parties to jointly explore, finance or direct a particular development. May be in various forms such as, 50/50, 75/25, with a right to increase to 60/40 etc.

Limited Liability: The liability of shareholders is limited to the fully paid value of the shares held. If partly paid shares are held in a limited company and a call is made, the holder is liable to pay the call. A person taking up shares in a company knows from the beginning the extent of his individual liability.

Net Tangible Assets Per Share (NTA): Is the asset backing per share. Calculated as follows:

Offer Information Statement (OIS): Is a short form of prospectus that is only slightly less onerous than a full prospectus.

Option: The right to take up certain shares on specified terms within or at a specified time. One may negotiate to convert part or all of an account owing, into an Option to take up shares in a company by conversion of any, or all, of the account total. Options are frequently transferable and are themselves bought and sold.

Paid up capital: This is the amount of money that has been paid or deemed to have been paid on shares actually allotted

Par: The nominal value once given to shares by the Articles of a company. It often had no relation to the asset value or worth of shares. Note: the concept of par value is now obsolete.

Parent company: Company that owns a majority of shares in another company.

Placement: An allotment of shares made directly from the company to investors, rather than through the medium of a cash issue.

Pre-emptive Rights: The existing shareholders reserve the right of first refusal should any shareholder wish to sell (usually embodied in the company's Constitution).

Prescribed Interests: Shares, stocks, bonds, debentures etc.

Premium: Was an extra amount above par value, payable upon issues of shares. No longer allowed.

Price Earnings Ratio (PER): The relationship that a company's profits bear to the current sale price/value of its shares.

Primary Share Sale: This is the term used to describe the initial issuing or allotment of shares from a company to its shareholders.

Professional Investor: A Professional Investor is a person who controls at least $10 million for the purpose of investment in securities; or a regulated superannuation fund, an approved deposit fund, a pooled superannuation trust, or a public sector superannuation scheme; or a person who is a licensed or exempt dealer, acting as principal.

Prospectus: Document issued by a company setting out the terms of its public issue of shares subject to the Corporations Law.

Prospectus costs: The tough prospectus provisions of the Corporations Law mean that anyone involved in the promotion of the sale of shares to the public - be they the owners, the underwriters, the accountants or the lawyers - can be held legally liable if the prospectus contains misleading information or there is an omission of material information.

Proxy: Written authorisation given by a shareholder to another person to vote on his behalf at a company meeting.

Public Company (Limited): A public company has no limitation on membership, must have a minimum of three directors, has broadly no restriction on the transfer of shares, and can, subject to the Corporations Law, raise money by appealing directly to the public.

Research and development (R & D): The search for improvements and innovations in a company's products/ services and the solving of allied technical problems, with a view to creating new products/services.

Scrip: Short for subscription. These are the Share certificates representing the ownership (equity) in a company. Keep your scrip in a safe place.

Secondary sale: The sale (transfer) of shares from a shareholder (the Seller) to another buyer.

Securities: Usually refers to the form of investment, i.e. shares, debentures, bonds, etc.

Shares: Shares are the parts into which the capital of the company is divided. The ownership of a share entitles the holder to receive a proportionate part of the profits distributed by the company, and to take part in the management, usually on the basis of one share one vote.

Share Capital: The amount of money invested in a company by its risk-taking shareholders.

Share Premium: Money received by a company for a share issue which is in excess of its nominal (or par) value. No longer allowed as of July 1, 1998.

SME: SME stands for Small and Medium Enterprise. There are many definitions of an SME. Typically, these are businesses which have between 1 and 250 employees. Many ASX-listed companies fall within this definition of SME, so they are not necessarily just small businesses.

Sophisticated Investor: A Sophisticated Investor must have at least $2.5 million in net assets; or have gross income of $250,000 for each of the past two financial years.

Subscribed or issued capital: This is the total nominal or face value of the shares of the company which have actually been issued or allocated to shareholders. These shares are generally issued in consideration for cash but can also be issued in consideration for the company acquiring non-cash items such as: intellectual property, real property, machinery, investments, etc.

Subscription: The application by the public for shares being offered for issue/allotment.

Subsidiary: A company that is owned or controlled by another company. Ownership or control need not be complete but must be through a majority, e.g. 51%. (see Parent Company)

Turnover: The gross revenue earned from providing goods or services to customers.

Underwriter: One who arranges an issue of new securities by guaranteeing full subscription.

Venture Capital: Accepted OECD (Organisation for Economic Co-operation and Development) usage defines venture capital as primarily equity investments in enterprises, including property and mining, not covered by collateral or other security (that is, they are justified solely on the earning potential of the project).

Venture/development capital: Risk finance (equity) provided by a professionally managed fund to an enterprise (investee) in return for a share of the firm's ownership and voting control for the ultimate purpose of capital gain.

Working Capital: The amount of short term funds available to a business to perform its normal trading operations. Usually defined as the difference between current assets and liabilities

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