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What is treatment for new sale of equity?

Business has raised new equity funding through capital reduction and new shares issue.

I'm working with an early stage start up that has raised equity investment from a new investor. I am not certain that this has been structured correctly in terms of the share issue and as a result I am unsure of the accounting treatment for the change in equity. I will set out below what has happened and what I think should have happened and would be very grateful if anyone can offer some advice. Apologies for the longevity of the post, I wanted to be clear on the details. Many thanks in advance.

Original shareholding 100 Ordinary £1 shares:

Shareholder A: 48% (48 Ordinary £1 shares) - £48

Shareholder B: 48% (48 Ordinary £1 shares) - £48

Shareholder C: 4% (4 Ordinary £1 shares) - £4

In the year, 2 new shareholders/investors have joined the business. Shareholder D paid £28,000 for 10% equity. Shareholder E paid nil cash (providing other benefits) for 20% equity. The agreed new ownership structure between all parties was as set out below (42%, 25%, 3%, 10%, 20%). This was completed by the advising solicitors by way of capital reduction so that total share capital was reduced to 70 ordinary £1 shares, divided as follows:

Shareholder A: 42% (29.4 Ordinary £1 shares) - £29.40

Shareholder B: 25% (17.5 Ordinary £1 shares) - £17.50

Shareholder C: 3% (2.1 Ordinary £1 shares) - £2.10

Shareholder D: 10% (7 Ordinary £1 shares) - £7.00

Shareholder E: 20% (14 Ordinary £1 shares) - £14.00

The key issue here is that I don't understand if this has been done correctly. Shareholder D has paid £28,000 for £7 of shares, therefore does this mean that £27,993 must be allocated to share premium? If that is the case, my understanding is that the share premium account can only be used for very limited expenditure under section 610 of the CA? Whereas this £28k funding is for general expenditure and business growth and therefore may not be eligible to be accounted for under share premium rules?

In my head a more logicial capital structure (I have very limited previous experience of this) would have been to change the existing Ordinary shares to 1p shares and issue a new class of shares to each new shareholder. The overall aim of this is to get a total of 10,000 shares and share capital of £28,090, as per below:

Shareholder A: 42% (4,200 Ordinary £0.01 shares) - £42.00

Shareholder B: 25% (2,500 Ordinary £0.01 shares) - £25.00

Shareholder C: 3% (300 Ordinary £0.01 shares) - £3.00

Shareholder D: 10% (1,000 Ordinary A £28.00 shares) - £28,000

Shareholder E: 20% (2,000 Ordinary B £0.01 shares) - £20.00

The accounting treatment would therefore be Credit Share Capital £27,990 Debit Bank £27,990 (not £28,000 due to taking into account original share capital was £100 and it is now £28,090).

If anyone has seen this before and is able to give some advice on what they correct structure and treatment is it would be really appreciated.

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By Matrix
20th Oct 2018 09:49

In the title you say that the existing shareholders transferred shares to the new shareholders and then you say there was a capital reduction. I think you need to find out the facts. I don't know who you are acting for, whether you also provide tax advice to the company and shareholders but, since there are tax implications, you may need to make sure these have been addressed too unless already addressed by the solicitors.

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20th Oct 2018 12:33

You can't have fractions of a share so this can't be right.

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