Australia: Corporate focus: Useful exemptions for private company fundraising

Last Updated: 29 June 2018
Article by Esteban Gomez and Trent Taylor

Most Read Contributor in Australia, September 2018

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.

Relevance

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.

Background

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:

  1. 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
  2. it appears from a certificate given by a qualified accountant no more than two years before the offer is made that the person:
    1. has net assets of at least AU$2.5 million; or
    2. 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:

  • a financial services licensee
  • an Australian Prudential Regulatory Authority (APRA) body, such as a bank or insurance company
  • stock-exchange listed entities; and
  • pension funds with net assets of at least AU$10 million.

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.

Related considerations

The above exemptions cannot be looked at in isolation. The following are a number of related considerations:

  • The Corporations Act regulates offers of securities received in Australia, regardless of where any resulting issue, sale or transfer occurs. Therefore, it is possible for overseas companies not otherwise captured by the Corporations Act to be captured by the disclosure and exemption requirements where making offers into this jurisdiction (although regulatory relief may be available). Conversely, offers received outside of Australia may not be captured, although they may be captured by overseas laws.
  • The Corporations Act regulates both offers for issue of new shares and offers for sale of existing shares. Accordingly, both must be considered including as recipients of issued shares may not be able to subsequently sell them without disclosure unless an exemption applies or regulatory relief is available. Notably, offers for sale within 12 months of issue are restricted, as are offers by controllers in certain circumstances. These 'on-sale' provisions are principally anti-avoidance measures where the shares were not originally issued with disclosure. Note that certain exemptions from disclosure (such as the small scale offerings exemption) only apply to an offer for issue of shares and so another available exemption or relief applying to on-sale must be considered and, if appropriate, relied upon.
  • Several exemptions may be combined over a number of proposed recipients of offers to ensure that all recipients are adequately covered. For example, certain offer recipients may be covered by the small scale offerings exemption, while others may separately qualify as sophisticated investors.
  • While an exemption from disclosure may apply, a proposed offeror must still comply with applicable advertising and securities hawking restrictions.

Conclusions

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.

What's next?

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.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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