Do convertible notes need to be registered?

No, issuers generally are not required to file resale registration statements with respect to convertible notes issued in a Rule 144A offering, or the underlying shares.

How does a convertible note work for an investor?

A convertible note is a way for seed investors to invest in a startup that isn’t ready for valuation. They start as short-term debt and are converted into equity in the issuing company. Investors loan money to the startup and are repaid with equity in the company rather than principal and interest.

Do you need a PPM for a convertible note?

For issuers considering selling convertible notes, to investors a well-tailored and written PPM is mandatory, particularly for those seeking serious investors. A PPM offering document can add value to your offering by showing investors you are serious about raising money.

Can convertible notes be issued to domestic investors?

Convertible notes may be issued to: a Non-Resident Indian (NRI), an Overseas Citizen of India (OCI), Company, a trust and a partnership firm incorporated outside India and owned and controlled by NRIs or OCIs. However, the investment will be deemed to be domestic investment at par with the investment made by residents.

Are convertible notes equity securities?

In the startup finance context, convertible notes are debt securities issued by startup companies to raise capital from investors. These investors generally expect their notes to convert into the companies’ equity securities in the future instead of receiving the return of their principal plus interest.

Are convertible notes secured?

In almost all cases, your bank debt will be secured (see the Q&A above regarding security interests) and your convertible notes will be unsecured.

Are convertible notes a good investment?

Convertible notes are good for quickly closing a Seed round. They’re great for getting buy in from your first investors, especially when you have a tough time pricing your company.

Does a fund need a PPM?

PPM Required. A PPM is required if the issuer is using Rule 506(b) to onboard non-accredited investors (however, as noted above, Rule 506(b) is not generally advised for non-accredited investors).

Can convertible notes be issued to residents?

A convertible note can be issued to a person resident outside India (other than an individual who is citizen of Pakistan or Bangladesh or an entity which is registered or incorporated in Pakistan or Bangladesh).

What is FDI RBI?

Foreign Direct Investment (FDI) is the investment through capital instruments by a person resident outside India (a) in an unlisted Indian company; or (b) in 10 percent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company.

Do convertible notes dilute shares?

In the absence of protections, convertible bonds almost always dilute the ownership percentage of current shareholders. The result is that stockholders own a smaller piece of the pie after bondholders convert their holdings.