Early stage and emerging private companies are often hungry for capital. It is important they are aware the Corporations Act 2001 (Cth) (Corporations Act) strictly regulates how equity fundraising takes place. A number of useful exemptions from the disclosure requirements of the Corporations Act may be used by private companies raising equity capital to avoid the need for expensive and time consuming disclosure requirements, including preparing a prospectus.
Directors and executives of early stage and emerging companies seeking to raise new or further equity capital should be aware of the exemptions available at law which exist to facilitate fundraising in many circumstances.
In general terms, an Australian proprietary (or ‘private’) company must not engage in activity that would require disclosure to investors - for example, by the preparation and issue of a prospectus. The requirement to give disclosure is a key protection to ensure that retail investors are given sufficient information to make a decision on whether to invest in a company.
This rule is subject to a number of important exemptions available to private companies including as contained in section 708 of the Corporations Act. A number of the key exemptions are described below and these form the backbone of the exceptions for disclosure in connection with private company equity fundraising in Australia.
The ‘20/12/AU$2 million’ or small scale offerings exemption
This exemption allows small scale offers to occur over rolling 12-month periods, as long as they do not result in more than 20 investors being issued shares and more than AU$2 million being raised. Offers must be personal, which means there must be some connection with a person who is likely to be interested in the offer.
The sophisticated investor exemption
This exemption encompasses the making of offers:
(a) where the minimum amount payable by the person is at least AU$500,000 (note that this can be expanded to include amounts previously paid by the person for shares in the same class); or
(b) it appears from a certificate given by a qualified accountant no more than two years before the offer is made that the person:
(i) has net assets of at least AU$2.5 million; or
(ii) has a gross income for each of the last 2 financial years of at least AU$250,000,
(note that paragraph (b) can be expanded to include where the offer is made to a company or trust controlled by the person).
Any offer made to such a person is deemed to be made to a ‘sophisticated investor’ and does not require disclosure. However, note that the Australian Securities and Investments Commission (ASIC) has recently expressed concern over use of qualified accountant certificates to circumvent the disclosure protections afforded to retail investors, including by the use of trust or company structures. Care must be taken to ensure that certificates are provided within the law.
The professional investor exemption
This exemption covers offers made to a person who has or controls gross assets of at least AU$10 million, or who are otherwise ‘professional investors’ at law. A professional investor includes:
The senior manager exemption
This exemption covers offers to senior managers or their spouse, parent, child, brother or sister, or a body corporate controlled by any such person.
Central to the exemption is the definition of ‘senior manager’. This definition is amended by legislative instrument so that it includes any person who is concerned in, or takes part in, the management of the company (regardless of designation and whether or not the person is a director or secretary of the company).
Certain offers to present holders
This exemption covers offers of shares for issue under a dividend reinvestment plan or bonus share plan.
Offers for no consideration
This exemption covers offers of shares where no consideration is to be provided for the issue or transfer of the shares.
Employee incentive schemes
By legislative instrument ASIC has provided conditional relief from disclosure and other requirements for offers made under certain employee incentive schemes. Among other requirements, offers cannot exceed AU$5,000 in value per participant in any 12-month period and 20 per cent of the issued capital on the company.
The above exemptions cannot be looked at in isolation. The following are a number of related considerations:
Early stage and emerging private companies hungry for capital need to be aware of how the Corporations Act strictly regulates the manner in which fundraising can occur. The exemptions outlined above may facilitate the raising of equity capital more efficiently and effectively as they provide a number of circumstances where the substantial financial and time cost requirement of preparing a disclosure document (such as a prospectus) does not need to be undertaken.
However, while a number of exemptions are available, compliance with specific exemption requirements must be taken seriously as significant penalties can apply to offers made without disclosure in circumstances where an exemption or regulatory relief is not available.
Transaction documents involving an issue or sale of shares should also take into account any available exemptions and ensure that appropriate warranties and confirmations are given.
Recent Australian legislation regarding crowd sourced equity funding has been proposed to extend from public to private companies. If this occurs it will provide a further avenue for private companies to access funds from non-traditional sources.
Please note the above is a summary only and is premised on an offer of shares only. It does not cover all of the exemptions or avenues available at law for fundraising by companies. As always, specific advice should be sought regarding particular factual circumstances.
Authors: Trent Taylor
Trent Taylor, Partner
T: +61 7 3135 0668
William Khong, Partner
T: +61 3 9321 9883
Darren Pereira, Partner
T: +61 2 8083 0487
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this publication is accurate at the date it is received or that it will continue to be accurate in the future. We are not responsible for the information of any source to which a link is provided or reference is made and exclude all liability in connection with use of these sources.
Published by Trent Taylor