Exmount Opinion Thomas More Chambers (PDF)

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Title: Opinion Exmount-2
Author: TM

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Chambers of Geoffrey Cox QC MP I Thomas More Chambers
7 Lincoln's Inn Fields | LONDON WC2A 3BP I DX 90 LDE Chancery Lane
T 020 7404 7000 I F 020 7831 4606 I W www.thomasmore.co.uk




I am asked by Exmount Construction Ltd (“Exmount”) to provide an opinion on
whether the terms of its proposed £20m capital-raising scheme and associated
documentation comply with the relevant financial service regulations and laws.


Exmount has for the last four years, until now, been a dormant company but it is led
by a team which is said to comprise experienced property developers. It is seeking to
raise up to £20m through the issue to retail investors and others of bonds with a
minimum subscription size of £5,000 and a maximum of £500,000. The bonds will be
issued over an anticipated period of five years, but possibly longer, and in tranches
(see below) of between £500,000 and £1.5m.


Each of the bonds will be redeemed three or five years after its issue, depending on
which term the subscriber chooses, and will have a coupon of, respectively, 9.12% or
10.35% per annum, payable quarterly. Early redemption, at the option of the investor
only, will be available half-way through the terms of the respective bonds.


The proceeds of the issue of The Exmount 3/5 Year £20m Bonds 2017-27, as it is
called, (“the Bonds”) will be subject to a deduction of up to 20% for marketing,
administration, professional and other fees. The net proceeds will then be applied to
the acquisition of commercial properties for development and management, primarily
in the office, industrial, retail/restaurant, apartment complex sectors, or of
undeveloped land with potential.



The Bonds are not to be freely transferable and will not be listed on any stock
exchange or recognised investment exchange.


The Bondholders will have the benefit of a first fixed and floating charge debenture
over the assets of Exmount, which will be monitored and enforceable by an
independent security trustee. That trustee will also ensure that each tranche of Bonds,
before they are issued, has some degree of capital backing. The total value of the
outstanding Bonds, after issue of the proposed tranche, will not exceed 16 times
Exmount’s net asset value i.e. its shareholders’ funds.


I have been provided with a copy of (or access to) the following documents from
which I have gleaned the above information:
(a) A draft 18-page Bond Instrument, to be executed as a deed by Exmount, which
includes in its Schedules a form of Bond Certificate and a Subscription Form;
(b) A draft Security Trust Deed between Exmount and the security trustee (Jade State
Wealth Ltd);
(c) A draft Debenture;
(d) A 31-page brochure/investment memorandum for the Bond issue.
(e) The Exmount web site, www.exmountcommercial.com, which describes the
company as a going concern and contains much of the information about the
company which is in the brochure.


I am asked to consider in my Opinion the following issues:
(a) whether the proposed investment arrangements constitute a collective
investment scheme under s. 235 of FSMA;
(b) whether, or in what circumstances, the arrangements will comply with
the Companies Act 2006, especially ss. 755-756, and the European Prospectus
(c) whether, or in what circumstances, the arrangements will be in compliance with
the Financial Promotion Order, SI 2005/1529, promulgated under FSMA.



As to the first, the investment arrangements do not constitute a collective investment
scheme under the FSMA s. 235. That is because they fall within exemption 21 under
the schedule to Statutory Instrument 2001/1062. The capital is being raised by a “body
corporate”, and will constitute an investment in that body corporate, namely

10. The Financial Conduct Authority (“the FCA”) has introduced another restricted
category of non-mainstream pooled investments (“NMPI”), which covers not only
unregulated collective investment schemes but also other schemes considered as
close substitutes. The only way in which the Bonds could be considered a potential
NMPI is if Exmount itself were to fall within the FCA’s definition of a Special Purpose
Vehicle (“SPV”) because it is “securitising assets”. But it is not. At most it can be said
to be raising capital through the issue of securities for the construction or
development of real estate assets. That does not bring it within the tight definition of
an SPV.

11. Exmount, as a private limited company, should be careful to ensure that its
promotional and selling methods do not infringe s. 755(1)(a) of the Companies Act
2006. Specifically, in accordance with the definition set out in s. 756(3)(a), the bonds
should be offered either by Exmount directly or through its agents only to known and
named potential investors. The offer must not be advertised or indirectly
disseminated to the public at large. It should not be communicated even to an
exclusive subset of the public, for example, high net worth individuals living in, say,
Leeds through an advertisement in a glossy controlled circulation magazine. The
recipients of any communications from Exmount designed to market the bonds must
be individually identified and targeted.
12. The bond offering is intended to raise well in excess of the £5m threshold which would
in principle bring it within the provisions of the European Union Prospectus Directive.
The Prospectus Directive, as incorporated in Part 6 (especially s. 85) of the FSMA,
however applies only if the bonds are deemed to be "transferable securities".


13. The Bond Instrument allows for the Bonds to be "transferable", although the
certificates are not and cannot be traded on an investment exchange. This distinction
reflects the fact that "transferable securities", as the term appears in the various EU
financial instrument directives, covers only financial instruments that are “negotiable
on the capital market”. That has been taken to mean only those that are listed on an
investment exchange. The Bonds however are not to be so listed.

14. Some issuers of bonds and shares, in order to be sure that they will not be caught by
the Prospectus Directive, have imposed very tight restrictions on their transferability
or even disallowed transfers altogether. However, the risk to Exmount, in declining
either to follow their example or to adhere to the stringent requirements of the
Prospectus Directive, is, in my view, very small.

15. The sale of the Bonds direct to retail investors will be subject to restrictions under s.
21 of the FSMA and the Financial Promotion Order, SI 2005/1529. In particular, any
marketing literature directed at those investors must be approved by an independent
financial adviser or other entity authorized either by the FCA or by a designated
professional body (“an Authorized Entity”). The latter alternative would cover some
accountancy and solicitors’ firms.

16. I believe there is a good chance that an Authorized Entity would approve the
brochure/investment memorandum in, largely, its current form, no doubt with
suggestions of amendments. If and to the extent strictly necessary, the content of the
Web site is also likely to be approved.
17. The restrictions imposed by SI 2005/1529 also prevent the Bonds being sold to those
retail investors over the telephone, in a face-to-face meeting or in any other “real
time” communication. Although a salesman may answer questions from potential
investors and provide purely neutral descriptions of the terms of the bond issue, he or
she should not invite or induce an investment.


18. There is however an important exemption from this restriction. It does not apply to a
certified or self-certified sophisticated investor or high net worth individual. To them,
the Bonds may be promoted freely.

19. Indeed I note that the Web site has an on-line declaration section for the selfcertification of sophisticated investors or high net worth individuals. Such declarations
would be sufficient to allow Exmount to send the brochure/investment memorandum
to them, even if the document has not been approved by an Authorized Entity. This
conclusion and advice are subject to the proviso that the prescribed cautionary
wording (as set out in SI 2005/1529) must accompany the document.


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