Switzerland Update: Stay on the Safe Side When Looking for Investors for your Startup: 8 Questions and Answers

Developing a product or service and scaling a startup’s business model requires large amounts of money. Therefore, most startups look for capital from investors at some point. There are some legal hurdles to overcome. The following questions and answers will help you navigate safe waters and point out areas where you should not venture without an experienced pilot.

1. What is a prospectus?

A prospectus is neither a pitch deck nor a glossy brochure about a startup, but a disclosure document issued prior to the public offering of shares. The prospectus must contain very detailed information. These are regulated in Articles 40 to 49 of the Federal Act on Financial Services (FinSA) and in Articles 50 to 57 and Annex 1 of the Financial Services Ordinance (FinSO). In addition, it must be audited by a testing body (currently BX Swiss AG or SIX Exchange Regulation AG). Preparing a prospectus is a demanding and time-consuming process that requires a great deal of commitment from the management as well as the support of external legal and financial advisors.

2. My startup is still in its infancy. Why should I take care of the prospectus requirement now?

In accordance with the Federal Act on Financial Services (FinSA), anyone who makes a public offer to acquire securities in Switzerland must first publish a prospectus. Shares in a startup are considered securities. Failure to comply with the prospectus requirement may result in criminal penalties and additional liability to those who subscribe for or acquire shares. Therefore, a startup should know exactly what a public offering is and what exceptions to the prospectus requirement apply.

3. Does my pitch deck constitute an offer?

An offer is an invitation to acquire a financial instrument that contains sufficient information about the terms of the offer and the financial instrument itself (Art. 3 lit. g FinSA). Offer terms are the approximate amount to be raised, the valuation or price range, and the type of securities (loans, shares or convertible loans, common or preferred shares). There is no offer if you send out a pitch deck that simply states that you are conducting a seed funding round, but without specifying the volume and valuation. This allows you to draw attention to the upcoming financing without having to publish a prospectus right away.

4. How can I use my personal network to raise capital for my startup?

Art. 36 para. 1 lit. b FinSA provides for an exception for offers aimed at fewer than 500 investors. Note that the threshold for the same exemption in the European Union is only 150. Anyone wishing to invoke this exemption must, on the one hand, keep a detailed list of all persons who have received the tender and, on the other hand, take technical measures to prevent third parties from accessing the tender. For example, personalized links could be sent so that only the people on your list can see the offer. A mere indication that the offer is intended only for the intended recipients will hardly be sufficient to benefit from this exception.

5. What about the search for capital on platforms such as LinkedIn, Instagram, etc.?

Social media and the internet don’t stop at national borders, but are available in many countries around the world. If an offer is aimed at persons abroad, foreign legislation applies. For example, in the European Union, there is generally a threshold of EUR 1 million, below which no prospectus is required. EU member states have the option of raising this limit to up to EUR 8 million. Germany, France and Italy, among others, have raised their threshold, but at the same time introduced further requirements such as additional information obligations. Searching for capital on open platforms such as LinkedIn or Instagram is therefore not recommended, as it is almost impossible to keep track of all the applicable legal requirements.

6. What applies if I approach professional investors exclusively?

The hurdle for classification as a professional client under Article 4 (3) FinSA is quite high. In particular, high-net-worth individuals are not considered professional clients as long as they do not use investment structures with professional treasury (e.g. Family Office). However, venture capital funds with total assets of CHF 20 million or more are considered professional clients. They can be offered securities without the publication of a prospectus.

A much more convenient way to be exempt from the prospectus requirement is to set a minimum amount per investor of CHF 100,000. In this way, you circumvent the prospectus requirement in Switzerland and the EU and at the same time leave the door open to address wealthy individuals.

7. Is there a legal way to look for investors by means of a newspaper advertisement?

The search for investors via an advertisement in a Swiss newspaper is undoubtedly considered a public offer. A newspaper advertisement is probably not the right communication channel if you are looking for investors with a minimum commitment of CHF 100,000. However, there is another exemption from the prospectus requirement that is helpful in this case: If you offer shares with a total value of less than CHF 8 million in a period of 12 months, you do not have to publish a prospectus. Limiting the volume of offers is therefore an efficient and safe means of avoiding the preparation and publication of a prospectus. However, keep in mind that this threshold may be significantly lower in other countries. So make sure you choose a Swiss newspaper.

8. What should I do if I do not meet the above conditions?

If none of the exceptions apply to you, you are required to prepare a prospectus for your offer. This must contain comprehensive information about the securities offered and the issuer and must be approved by the review body. This applies both in Switzerland and in the EU member states. If a prospectus is approved in an EU member state, an EU passport can be applied for. This means that the prospectus is valid for the entire EU area. Failure to comply with the prospectus requirement can be punished in Switzerland with a fine of up to 500,000 francs. There is also a threat of severe penalties in the EU.

By Vischer, Switzerland, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact switzerland@transatlanticlaw.com

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