What startups and major investors in Thailand should know about alternative debt financing

With the improvement in digital technology and the pandemic recovery already underway, Thailand’s business community is witnessing a new wave of ambitious startups. To thrive in this highly competitive environment, startups need adequate funding from key investors, venture capitalists, and angel investors. However, in such a crowded environment, raising money is not an easy task. It can be difficult to attract the attention of international investors, while raising funds via the IPO takes a long time and requires a number of legal hurdles to be overcome. Fortunately, there are easier options — and that’s where alternative debt financing comes in.

One method that is gaining renewed attention is called convertible debt financing. This type of arrangement begins in the usual way: the startup borrows money from a lender. The innovative element of this financing model comes from the process of the lender repaying for their services. This repayment can take one of two forms:

1. If the startup reaches certain agreed upon milestones over time, the loan is automatically converted into equity — typically company shares. The net result of this conversion is that the lender acquires an ownership interest in the lending company at a lower price than would be traditionally possible once the startup achieves its early growth goals

2. If the startup is unable to achieve these goals by the time the loan matures, the loan must be repaid in full to the lender.

Seen in this way, the attractiveness of the convertible bonds is immediately apparent. Lenders can attract significant equity for their investment, but if the company fails to meet its growth goals, its money is treated and repaid like a traditional loan.

Startups also benefit from being able to offer such a low-risk, high-reward option, as such an arrangement can help them stand out even in a crowded field. A lot depends on how successful startups are at attracting the attention of investors, and tools like convertible bonds can be of great help. Additionally, the convertible debt financing approach allows startups to receive funding even before they receive an appraisal.

However, as we shall see, this type of alternative debt financing also has its disadvantages – both legal and practical. Startups can only determine whether such financing methods are the right path for them by taking an overall view.

Convertible Debt Financing and Thai Law

Previously in Thailand, under the Thai Civil and Commercial Code, private companies were not permitted to issue convertible bonds to investors. However, the Securities and Exchange Commission, Thailand (“SEC‘) recognized the need to make Thailand more competitive within the region, which meant boosting investment. Startups and SMEs are now allowed to offer convertible bonds via private placements under certain conditions. Even though these conditions are strictthe door is now open for alternative debt financing.

To qualify, SMBs must fit one of the following boxes:

It’s also important to note that only certain types of key investors have been approved by the SEC to participate in convertible debentures. In addition, in some cases there are limits to how many investors can do this and how much total investment is allowed with this financing model. See the infographic below for details:

Participating companies must also complete the paperwork associated with convertible debt financing in Thailand. This process involves registering for the Capital Market Fundraising Promotion Project for SME (PP-SME) with the Office of Small and Medium Enterprises Promotion (OSMEP). This includes preparing an SME fact sheet and filing investment information with the SEC of Thailand within 15 days of the closing of the convertible bond financing offering.

Other regulatory requirements also apply – such as the need for startups to restrict funding offers to pre-selected investors rather than making them known to the broader investment market – and startups must exercise diligence to ensure compliance.

Pros and cons of alternative debt financing

Although “alternative” by some standards, convertible bonds are widely used and accepted by investors around the world. Benefits include lower transaction costs than other forms of investment, while providing lenders with a significant discount (typically 20%) on the company’s equity. An interest rate also remains in place, making this solution relatively easy to sell for investors.

Convertible bonds also have their pitfalls, but this type of loan typically matures in a year or two, allowing the SME to lose little time in reaching the proposed milestones. In addition, this method of financing sometimes leads to organizational complications as it can be difficult to keep an accurate record of each convertible bond with a large number of investors. Finally, it should of course be emphasized that if the financing round is successful, the lender holds a stake in the company. Depending on the SME’s prospects for future growth, this outcome may or may not be ideal.

The above challenges, as well as the legal requirements associated with this form of financing, mean that SMEs should think carefully (and prepare) before choosing convertible bond financing as a financing approach.

Overall, convertible debt financing represents an important complement to Thai business law. This tool facilitates investment opportunities on favorable terms, which in turn helps SMEs gain more attention from key investors. Qualified companies anticipating growth in the near future will find this method of financing very much worth considering.

Legal and practical know-how for the future

With the availability of other fundraising options such as crowdfunding, IPOs and equity financing, convertible debt funding has long been neglected in the Thai startup world. However, the liberalization of alternative debt financing laws offers a new and promising avenue for qualified companies – if they comply with the regulations and implement the right strategy.

As start-ups and investors in Thailand are beginning to take notice of convertible bond financing opportunities, now is the time to use this investment vehicle for the greatest competitive advantage.

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