Premium Issue: Benefits, Calculation, Example

The issuance premium: a marker of an increase in the price of company shares

During a capital increase, a company issues new shares or units. These can be subscribed to by existing partners or new investors. However, it is not possible to modify the nominal value of the securities, and in many cases, the company has gained value between its creation and its capital increase. The value of the securities has therefore mechanically increased, and it would be unfair to bring in new investors at the same price as the old ones. The premium issue solves this problem: it is a financial compensation, paid by new investors when they acquire shares or units of companies as part of a capital increase. It can, for example, be encountered during a private equity investment (FCPI, FCPR...), but also in real estate investment companies (REITs) or any company raising funds (LLCs, SAS, public companies...).

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Premium Issue: Definition by example

Let's consider the case of a SME comprising an industrial SAS (French LLC) with a capital of 100,000 euros. At the time of its establishment, the ownership of the company was divided into 100 shares of 1,000 euros each. The two founders each invested 50,000 euros, corresponding to 50 shares. Ten years later, the company has developed well and needs to raise money to maintain its momentum.

The decision is made to bring in new investors via a capital increase: the company is thus going to issue new shares. Yet, it is now worth far more than the initial 100,000 euros investment: it owns assets (machinery, treasury, etc.), has developed a customer base, and a brand, an order book... Therefore, the value of each share has increased. New investors would thus be significantly advantaged if they were to pay the same price for new shares as those set at the company's creation.

To guard against this discrepancy, the SAS will issue new shares at a higher price than their original worth. To do this, these new shares will be issued at a price corresponding to their original nominal value, plus a "premium," i.e., the difference between the actual value of the company per share and its original value. In our example, the value of the company is estimated at 500,000 euros at the time of the capital increase. Each original share would theoretically be worth 5 times more than at its creation, i.e., 5,000 euros. The new shares will therefore be issued at the price of 5,000 euros, composed of the nominal value of 1,000 euros + a premium of 4,000 euros. The premium thus equates to the difference between the current share price and the nominal value it had at the time of its creation. In other words, it is a component that enhances company value beyond its nominal value. The premium plays a crucial role in fundraising operations. It helps to bolster the financial resources of the issuing company.

Advantages of the issuance premium for entrepreneurs and investors

For entrepreneurs and existing investors, issuing premiums offer numerous benefits.

- They strengthen the financial resources of the company: by attracting new investors who are ready to pay a premium to acquire securities, the company increases its equity. This can be used to finance growth projects, acquire new assets, develop new products or services, or even repay existing debts;

- It provides a real valuation of the company: by setting a price higher than the nominal value of the securities, the company reflects its past performances, its future growth potential, and its perceived value in the market. This also helps to strengthen its credibility among investors or partners;

- It attracts more qualified and experienced investors: these are often willing to pay a premium to access promising investment opportunities. By benefiting from their expertise, network, and resources, entrepreneurs can leverage these investors to boost their company's growth;

- It reduces the dilution of the existing partners: although the shares are paid more expensive by the incoming investors, they do not provide more rights than the old shares. By allowing to get more funds without necessarily issuing more shares, the issuance premium allows entrepreneurs to maintain a larger share of ownership. This can sometimes allow them to retain control of their company and fully benefit from its future growth;

- It strengthens the confidence of partners and lenders: when a company succeeds in attracting more qualified new investors, this can boost the confidence of business partners and potential lenders.

- The issuance premium is not necessarily accounted for in the company's share capital, but it strengthens its own funds.

- The issuance premium can cover certain costs related to the capital increase, without reducing the share capital: collection fees, advice... It is indeed considered as "an extra contribution left at the company's disposal" according to jurisprudence.

- It is not taxed for the company and therefore does not represent an additional charge.

- It can also be incorporated into the capital or even distributed to shareholders at a later point. This choice, however, must be decided ahead of the operation and formalized at a general assembly. Its fate can also be inscribed in the company's bylaws.

Set the amount of the issuance premium

The issue premium is a financial tool that applies not only to stocks, but also to shares in limited liability companies (LLCs), bonds, shares in real estate investment trusts (REITs), etc. Its amount must be set in a general meeting based on the company's valuation. If there is no exact formula to determine it on the company's or issuing investment fund's side, its amount must remain consistent with the actual value to be justified and attract new investors.

The case of the repayment of the issue premium

In some cases, the company will repay the issuance premium to its shareholders. From a tax perspective, this transaction may not be subject to income tax if:
- the repayment does not result from the company's own repurchase of the shares,
- all profits and reserves (excluding legal reserve) have been distributed.