Taking in an investor – how a share issue works in practice

A share issue is something quite different from an existing owner selling some of their own shares. In an issue the company creates new shares, the investor pays the company, and the company gains new equity. In return the number of shares rises and existing owners are diluted.

Share sale or share issue – where does the money go?

In a share sale the investor buys existing shares from a shareholder. The money goes to the seller, and the company receives no new capital. In a share issue the company creates new shares. The investor pays the subscription amount to the company, which gains new equity for growth, staff or investment. In return the number of shares rises and existing owners' percentage holdings fall – that is dilution. The two can also be combined, so that the investor both subscribes for new shares and buys some existing ones.

How much of the company does the investor get?

In an ordinary priced issue the parties often start with a pre-money value – the agreed value of the company before the new money comes in. Assume a pre-money value of NOK 10,000,000 and an investment of 2,500,000. The post-money value is then 12,500,000, and the investor owns 2.5 of 12.5 million – 20%. The existing owners go from 100% to 80% between them. That does not mean they have lost 20% of the agreed value. In the simple model their 80% is still valued at 10 million – while the company has gained 2.5 million of new capital. The value is of course only the valuation the parties agreed, and does not guarantee the company could later be sold for that amount. For more on how a pre-money value can be assessed, see what a business is worth.

How to work out the number of new shares

Assume the company has 100,000 shares with a nominal value of NOK 1 before the issue, and a pre-money value of NOK 10,000,000. The price is then NOK 100 per share. If the investor is to invest NOK 2,500,000, that is 25,000 new shares. After the issue there are 125,000 shares and the investor owns 25,000 of them – 20%. The existing shareholders own the remaining 80%. Where the company has options, subscription rights or convertible loans, the parties should define whether the valuation and the holdings are calculated on a fully diluted basis.

Only a small part becomes share capital

In the example the investor pays NOK 100 per new share, but the share has a nominal value of only NOK 1. Of the NOK 2.5 million investment, NOK 25,000 therefore becomes share capital and, before any issue costs, NOK 2,475,000 becomes share premium. Under the Companies Act a share contribution is recognised as share capital and any share premium. An important difference from many older articles is that share premium is no longer a restricted premium fund. That restriction was removed in 2013. Share premium is still contributed equity, but in company law terms it forms part of the free equity, subject to the ordinary limits on distributions and the requirement for adequate equity and liquidity.

Existing owners normally have pre-emption rights

In a cash issue the general rule is that existing shareholders have a pre-emption right to the new shares in proportion to their existing holdings. Where the company wants only one new investor to subscribe, that is usually done as a directed issue, and the pre-emption right has to be set aside. The general meeting can do that by the same majority as for amending the articles: at least two thirds of the votes cast and at least two thirds of the share capital represented. The price should also be defensible. The Companies Act prohibits the general meeting and the board from using their positions to give particular shareholders or others an unreasonable advantage at the expense of other shareholders or of the company. A heavily underpriced issue that dilutes particular owners can therefore create far larger problems than a disagreement about valuation.

How an ordinary cash issue is carried out

Unless the board already has a registered authority to increase the share capital, the process starts with the board putting a proposal to the general meeting, which resolves the increase and any amendments to the articles. The resolution has to state how much the share capital is to be increased by, the nominal value of the shares, the subscription price, who may subscribe, the subscription deadline, how the contribution is to be paid, and from when the new shares carry dividend rights. For an AS the subscription deadline cannot be set later than three months after the resolution. Before the increase can be registered, the contribution has to be paid in full. In a pure cash issue, receipt of the contribution can be confirmed by an auditor, a financial undertaking in Norway or another EEA state, a lawyer or a state-authorised accountant. The increase is then notified to the Register of Business Enterprises.

Watch the three-month deadline

This is an expensive deadline to forget. The capital increase has to be notified to the Register of Business Enterprises within three months of the subscription deadline expiring. If that deadline is missed, the increase cannot be registered and the subscriptions are no longer binding. The share capital is only treated as increased once the increase is registered.

Does the money have to sit in a blocked account?

The general rule is that a cash contribution is paid into a separate account at a credit institution in Norway or another EEA state, and the company cannot use the account until the increase is registered. But that is no longer absolute. Following an amendment in force from 1 January 2024, the general meeting can expressly decide that the contribution is paid directly to the company and that the company can use the money before registration. This is one of the details where older guidance may be out of date.

What if the investor does not pay in money?

In a contribution in kind the company receives property, machinery, shares or other capitalisable assets instead of money. Stricter documentation requirements then apply: the board has to prepare a specific statement confirmed by an auditor, and the valuation date can be no earlier than four weeks before the general meeting's resolution. Work or future services cannot be used as a share contribution. Where an investor has already lent money to the company, the claim can on certain conditions be used to settle the share contribution by set-off. Debt then leaves the balance sheet and is replaced by equity, but no new money comes in. Here too a specific statement and auditor confirmation are required. An important tax point: converting a claim into shares is treated for tax purposes as a realisation of the claim. The tax base of the new shares is as a starting point the value of the claim or the share consideration at the date of conversion – not necessarily the nominal amount of the claim.

Do you need a shareholders' agreement?

The Companies Act does not require a shareholders' agreement simply because an investor comes in. It is often wise even so. When an outside investor becomes a co-owner, the parties should discuss how the board is composed, what information the investor receives, which larger decisions need particular approval, and what happens if someone later wants to sell. Typical topics are also tag-along rights, drag-along rights, future capital needs and exit. Two investor terms should be kept apart. A pro-rata right means the investor can take part in later issues to maintain their percentage holding. Anti-dilution is normally used for a different protection, where the investor is compensated if the company later issues shares at a lower price than the investor originally paid. They are not the same thing.

The issue can change who the beneficial owners are

After the issue the ownership structure has to be checked again. A natural person is a beneficial owner where, among other things, they directly own or control more than 25% of the business or the voting rights. But the percentage is not the only criterion. A right to appoint or remove more than half the board, or control by other means, can also make someone a beneficial owner. Where the issue produces changes, the Register of Beneficial Owners has to be updated within 14 days. The share register has to be updated with the new distribution, and the issue reported in the shareholder register statement, due 31 January in the year after the income year. For the investor, the amount paid in an ordinary cash issue normally becomes the tax base of the new shares, including the share premium paid. For the company, the equity contribution itself is not taxable income.

Get the arithmetic right before you fix the percentage

The legal side of an issue can be documented. The hardest question usually comes before the papers are drawn up: what is the company worth before the investment? If the investor puts in NOK 2.5 million at a pre-money value of 10 million, they get 20%. If the pre-money value is 5 million instead, the same investment gives 33.3%. One valuation discussion can therefore be the difference between giving away a fifth and a third of the company. Before the issue is resolved, get control of the valuation, the capital need, today's ownership split and what the ownership looks like afterwards. Where new owners come in, the relationship between them should also be regulated – see The shareholders' agreement For start-ups with investors, options, convertible loans and the investor deduction come on top – see Accounting for start-ups with investors

This is general guidance, not advice on your specific case. Deadlines, rates and amounts change – always check the current rules, or get in touch with us.

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