Certain capital raising transactions can trigger company disclosure obligations under the Corporations Act 2001 (Cth) ('Corporations Act'). Consequently, directors should familiarise themselves with the disclosure obligations before raising capital to ensure they do not inadvertently breach them. This article explains company disclosure requirements and exemptions under the Corporations Act, particularly for private companies raising capital.
What is a Disclosure Document, and Why Do They Exist?
A company provides a disclosure document to set out critical information concerning the company to prospective investors. In this sense, a disclosure document helps investors and their advisers when assessing the risks involved in investing in a particular company.
The most commonly used disclosure documents are:
- prospectuses; and
- information statements.
A prospectus is the most common disclosure document. It may be used for any offer of securities by a company, with no restriction on the amount raised or the circumstances in which it may be used.
This disclosure document has the broadest information requirements and must include, among other things:
- an overview of the investment highlighting the critical information of the company in a balanced way;
- content regarding the company's business model and how it proposes to generate income or capital growth for investors and achieve its objectives;
- specific content and guidance regarding the risks associated with the company's business model, the securities being offered and the nature of the offer being made;
- a clear explanation of the company's financial position, performance and prospects;
- the background and experience of the directors and key personnel of the company and any interests or benefits they obtain in the company; and
- the terms of the offer being made to the investor and the proposed use of funds.
Offer Information Statements
An Offer Information Statement is a shorter disclosure document that you may use instead of a Prospectus for certain offers to raise $10m or less. Notably, preparing an Offer Information Statement is less demanding than preparing a Prospectus.
An Offer Information Statement must include, among other things:
- a description of the nature of the company's business;
- the risks involved in investing in the company;
- a statement setting out the proposed use of the investment funds; and
- an audited financial report prepared per accounting standards for a 12-month period with a balance date within the 6 months before the securities are first offered under the Offer Information Statement.
There are strict obligations on companies preparing, lodging, and eventually offering securities under these documents. Therefore, you should seek legal advice when preparing these documents, as you must lodge them with the Australian Securities and Investment Commission (ASIC) before issuing them to prospective investors.
Chapter 6D of the Corporations Act sets out the disclosure requirements applicable to private and public unlisted companies when fundraising.
As a general rule, private and public unlisted companies must not offer new securities for the issue or sale of existing securities without making the necessary disclosures under a disclosure document. This rule applies unless an offer of securities is exempt from the disclosure obligations.
An offer of new or existing securities includes an offer to purchase or invitation to apply to purchase a legal or equitable right or interest in a share or debenture.
Accordingly, if you are a director of a private or public unlisted company intending to raise capital, you should consider whether an exemption to the disclosure requirements applies.
Exemptions to the Disclosure Requirements
The Corporations Act sets out a variety of offers of shares and other securities that do not require disclosure. The most common exemptions include, but are not limited to, the following.
Small Scale Offerings (or the '20/12/2 Rule')
Small scale offerings include an offer to purchase securities that are 'personal' in nature. That is to say, you make the offer:
- to an interested person as a result of previous contact or a professional relationship and is intended only for that person to accept (this means that you cannot advertise or promote the offer publicly); and
- to 20 people or less in 12 months.
Additionally, the offer should not result in the company raising more than $2 million in 12 months.
Offers to Sophisticated or Professional Investors
A sophisticated investor includes an investor who:
- pays a minimum of $500,000 upon the acceptance of an offer; or
- no more than 6 months before you make the offer, has net assets of at least $2,500,000 or has had a gross income for each of the last two financial years of at least $250,000 according to the certificate given by a qualified accountant.
On the other hand, a professional Investor is an investor who:
- has an Australian Financial Services Licence;
- is a publicly listed entity;
- is a trustee of a super fund which has net assets of at least $10 million; or
- any other persons who control at least $10 million in gross assets.
Offers to Certain People Associated With the Company
There are disclosure exemptions for offers you make to certain people associated with the company. This includes:
- senior managers of the company; and
- existing holders of securities in the company under a dividend reinvestment or bonus share plan.
If you are a director of a private company, you should familiarise yourself with the disclosure requirements under the Corporations Act. Furthermore, you should determine whether an exemption to the disclosure obligations applies before inviting prospective investors to purchase shares in the company.