Through the Service, it is possible to make subscriptions only in shares of unlisted companies.

Transcription

1 PRIVANET AROUND SERVICE: INFORMATION ABOUT FINANCIAL INSTRUMENTS AND RELATED RISKS Through the AROUND service (Service), investors can make subscriptions in shares and bonds of unlisted companies. An investment into the shares or bonds of an unlisted company through the Service is a high-risk investment in which investors may lose the funds they invest in part or in full. This notice provides a general description of the characteristics of and risks related to financial instruments (unlisted shares and bonds) subject to the Service. The general description provided in this notice is not exhaustive, nor does it include all of the characteristics and risks that may be inherent in financial instruments subject to the Service. Prior to making an investment decision, the investor must always review the terms and characteristics of the financial instrument as well as the obligations resulting from them in order for the investor to understand the risks related to financial instruments and potential effects on the investor's financial position. The investor must carefully consider the suitability of the financial instrument for the intended purpose of use also in changing circumstances. SHARES IN GENERAL In limited liability companies, the funds that the owners have invested in the company constitute the share capital, divided into parts of equal value, i.e. shares. The shareholders are the owners of the company, meaning that they hold the power of decision at the general meeting and, possibly, a right to receive dividends or to subscribe for new shares in a share issue (unless these rights are restricted to some extent, e.g. in the articles of association or shareholders agreement). The profits from shares are constituted of dividends and the possible increase in the value of the shares. However, a limited liability company can distribute dividends only if it has the financial prerequisites to do so. The increase or decrease in the value of the shares is realised when the investor sells the shares. In comparison to other asset categories, substantial changes in value is characteristic to shares. The risk connected to shares is higher than with many other investment targets but, on the other hand, there is high potential for profit as well. The profit development of shares is, in the long term, dependent on the operating results of the company. In the short term, the general development of the stock market has an impact on the value of an individual share. When investing in shares, it is possible that the profit that is pursued may not be obtained and it is possible to lose the invested assets, in whole or in part. A share can be listed or unlisted. A listed share means a share that is admitted to trading on a regulated market (e.g. on the stock exchange list maintained by Nasdaq Helsinki Ltd) or on some other trading venue as referred to in the Act on Trading in Financial Instruments. An unlisted share means a share that is not admitted to trading on a trading venue. Through the Service, it is possible to make subscriptions only in shares of unlisted companies. SPECIAL CHARACTERISTICS AND RISKS RELATED TO UNLISTED SHARES Unlisted shares involve special features and risks that may differ significantly from listed shares. Depending on such elements as the investment target and its issuer, it is possible that the risk/reward ratio, the duration of the investment, the marketability of the investment on a secondary market and the issuer s duty of disclosure and any other regulations applied to the issuer may be considerably different from shares that are admitted to trading on a regulated market or on some other trading venue. Prior to making an investment decision, the investor must carefully review the target company and the terms of the share issue as well as the special characteristics and risks of unlisted shares

2 in order for the investor to understand the risks related to unlisted shares and the potential effects on the investor's financial position. Risk/reward ratio Issuers of financial instruments sold and purchased through the Service are generally start-up companies. The business volume and equity of these companies is often low. Therefore, their operational preconditions might be very vulnerable to changes in, e.g. key personnel, financing, sales, competition, product development and the technology they use. Due to these factors, determining the value of such companies is harder than determining the value of listed companies. Changes in the company s operational preconditions may have a substantially negative impact on the company s future outlook and even lead to bankruptcy. In bankruptcy, investors usually lose all of the capital they have invested in securities issued by the company. According to finance theory, the expected return increases with the risk of the investment. This, however, is only true on average, meaning that a single investment target may lose its value for good. The higher the risk, the more important it is to diversify the risk. Privanet recommends that clients invest only part of their investment assets in unlisted financial instruments available through the Service and spread their investments between as many issuers as possible. Privanet requires that, before making an investment decision, clients carefully consider how much of their assets they can invest in investment targets offered through the Service without endangering their own financial position. When making an investment decision, clients must bear in mind that it is more likely that all or a significant portion of the capital invested in unlisted companies will be lost than it would be when making ordinary stock exchange investments. Investment period Investments in financial instruments issued by unlisted companies are typically made for a long period of time. The founders of the company and other key shareholders are usually involved in the company s business. Investments from outside of this group are private equity investments by nature. Private equity investors are committed to the long-term development of the company s business and do not expect return on their investment until several years after making the investment. In some cases, the maker of a private equity investment is committed to the long-term development of the company by concluding a shareholders agreement with the key shareholders. The shareholders agreement may involve long-term restrictions to the selling of the investment. Trading unlisted investment targets Investments made in unlisted financial instruments are typically long term in nature, the number of issued financial instruments is usually low, and the group of investors investing in these financial instruments is small. Therefore, the spread for an investment issued by even a financially successful company may be substantial or there may not be any buyers or sellers in the market at all times. Privanet requires that, before making an investment decision, clients carefully consider how much of their assets they can invest in financial instruments offered through the Service without endangering their own financial position, as it is possible they may have to redeem them for a significantly lower price than the fair price if they want to redeem them after a short time. Restricted duty of disclosure The investor must acknowledge that the investor has less information on an unlisted company compared to, for example, companies listed on a stock exchange, as the disclosure obligations 2 (5)

3 applied to unlisted companies are not as extensive as those applied to listed companies. For example, unlisted companies are not obligated to comply with the ongoing disclosure obligation as referred to in the Securities Markets Act. Clients should consider the special characteristics above as factors that increase the risk related to the investment, and they should carefully consider how much of their assets they can invest in the unlisted investment objects offered in the Service without endangering their own financial position, keeping in mind that the information affecting the value of these investment objects may be limited or incomplete. OTHER RISKS RELATED TO UNLISTED SHARES In addition to the special characteristics and risks above, examples of the risks related to investments in unlisted shares include the following: Market risk and liquidity risk Market risk refers to a risk of the price fluctuation of shares. The price fluctuation of shares is affected by the general development of the market and the information on the factors affecting or concerning the target company. A liquidity risk indicates that the acquisition or disposal of shares can be difficult at certain times, i.e. realisability can be poor. The profit is uncertain The profit of an unlisted share is difficult to predict and is uncertain. No dividends are necessarily paid for the share at all. The dividend payments are dependent on, e.g. the financial situation of the company. The company can also, e.g. go bankrupt, in which case the investor may lose the invested capital altogether. Possible restrictions to shareholders rights included in the articles of the association and the Shareholders Agreement Joining the shareholders agreement may be a prerequisite for the subscription of the shares. The shareholders agreement or the articles of the association may limit the voting rights of shares or share series in the general meeting. In addition, the articles of the association or the shareholders agreement may contain restrictions concerning the free transferability of the shares and include redemption clauses for the company or other shareholders relating to the redemption of the shares. The investor must always review carefully both the shareholder s agreement and the articles of the association as they may contain rights and obligations directed at the investor. Influence in the company and centralised ownership Owning shares entitles the holder to attend the company s general meeting. The share ownership in unlisted companies is often centralised and the largest shareholder/shareholders together might have considerable control over the company. In practice, the largest shareholders control can include decisions on, e.g. the company s business and strategy, the composition of the board of directors, approval of the financial statements and the dividend policy. The actions, purposes and interests of the largest shareholders may contradict with the objectives and interests of the other shareholders. Dilution Dilution refers to the decrease of an investor s relative ownership in a company, for example as a result of receiving further funding. Many target companies in the Service may arrange a new financing round, in which case dilution occurs unless the investor subscribes for more shares of said company at least in proportion to the existing stake. 3 (5)

4 Foreign exchange risk Foreign exchange risk refers to the effect that movements in exchange rates can have on the value of your investment. When you invest in an offering organised in a currency other than euro, you are subject to foreign exchange risk. BONDS IN GENERAL Bond investing differs from equity investing. The investor will not become a shareholder in the target company and thus they usually will not be able to profit from a possible increase in the valuation of the company. Instead, the company will make interest payments throughout the bond period in accordance with the terms and conditions of the bond and at the end of the period pays back the principal in full. Despite the risk rate of bonds being lower in comparison to investment in shares, a risk related to the issuer s ability to make repayments is always involved. Privanet or any other party will not in any situation be held responsible for the target company s solvency, and the investor might lose the capital invested. As with unlisted shares, unlisted bonds, too, are high-risk investment products and it is possible to lose the invested assets, in whole or in part. Through the Service, it is possible to make subscriptions only in unlisted bonds. RISKS RELATING TO BONDS Investment in bonds entails several risks. When investing in a bond, the investor should always review the target company and the terms and conditions of the bond carefully. The terms and conditions define how the yield and nominal capital will be repaid in different market situations. Furthermore, the issuer s capacity to fulfil its obligations must be assessed in bond investments. Examples of the risks related to investing in bonds are the following: Risk related to the issuer s ability to make repayments Bonds involve a risk related to the issuer s ability to make repayments, which means the risk that the issuer is unable to pay the interest or repay the capital in accordance with the issue terms and conditions. The investor is responsible for their investment decisions and no one will compensate the possible losses caused by poorly performing investments. Restricted duty of disclosure The investor has less information on issuers of unlisted bonds compared to issuers of listed bonds, as the disclosure obligations applied to issuers of unlisted bonds are not as extensive as those applied to issuers of listed bonds. For example, issuers of unlisted bonds are not obligated to comply with the ongoing disclosure obligation as referred to in the Securities Markets Act. Interest rate risk Interest rate risk means a risk of fluctuating interest rates. A rise in the interest rate level decreases the sales value of bonds on the secondary market, whereas a fall in the interest level increases the value. Liquidity risk It is possible that no continuous secondary market will develop for the bond. A liquidity risk indicates that the acquisition or disposal of bonds can be difficult at certain times, i.e. realisability can be poor. Prepayment risk and risk of amendments to the terms and conditions 4 (5)

5 The investor or the issuer may have the right to claim the prepayment of the bond in the manner referred to in bond-specific terms and conditions. In that case, the investor may not able to get back the entire invested capital or any kind of profit. An issuer may also amend the terms and conditions of a bond in certain situations specified in the terms and conditions of the bond. Amendments to the terms and conditions of a bond may be unfavourable to the investor. Unsecured bonds Bonds available in the Service are typically unsecured. This means that if the target company loses its solvency, no security is guarding the invested capital or the unpaid interest payments, and the investor might lose their investment. In case of insolvency, secured debts and other preferential claims are served before the unsecured ones and unsecured bond holders are in a weak positon in the creditor s order of preference. Foreign exchange risk Foreign exchange risk refers to the effect that movements in exchange rates can have on the value of your investment. TAXATION The investor must pay attention to the fact that acquisitions, holdings and disposals of financial instruments (such as shares and bonds) involve tax consequences. The client is, at all times, responsible for the tax implications of the investment activities, meaning that the client must always acquire in-depth information about the taxation of the financial instruments before making the investment decision. If necessary, the client must consult a tax advisor. More information about taxation is available from tax offices and on the Finnish Tax Administration website at 5 (5)