Company directors, promoters and supporters of a business may be of the view that they can raise capital from their associates, friends and relatives without any legal restrictions.
However, under a general rule embedded in the Corporations Act 2001 (Cth) (Corporations Act), to raise capital in Australia by offering securities to investors a company has to issue a disclosure document for the offer and lodge it with the Australian Securities and Investments Commission (ASIC).[1] Too often promoters who seek to raise Capital believe incorrectly they either need to provide a Prospectus for an IPO or a no disclosure document.
The fundraising provisions are set out in Chapter 6D of the Corporations Act and cannot be contracted out.[2] They govern how to raise capital disclosure available exceptions and what relevant disclosure document is needed. An offer of securities for issue needs disclosure to investors under Chapter 6D unless Section 708 or Section 708AA says otherwise.
What follows is an overview of the exceptions to the requirement to issue a Prospectus and issues you should consider when raising capital without a disclosure document.
Key Terms
Chapter 6D, including the exceptions, is based on the following defined key terms.
“Securities”
Securities mean:[3]
- a share in a body; or
- a debenture of a body; or
- a legal or equitable right or interest in a security covered by (a) or (b) above; or
- an option to acquire, by way of issue, a security covered by (a), (b) or (c) above; or
- a simple corporate bonds depository interest; but does not include:
- an excluded security;
- a simple corporate bonds depository interest in simple corporate bonds, where the simple corporate bonds were issued under a 2-part simple corporate bonds Prospectus.
To be within the scope of the prohibition against offering Securities without a current disclosure document, they must fall into one of the above noted categories in (a) to (e).
“Disclosure Document”
Disclosure documents mean:[4]
- Prospectus;
- Short Form Prospectus;
- 2-part Simple Corporate Bonds Prospectus;
- Profile Statement; or
- Offer Information Statement.
Each of the Disclosure documents has different requirements to its content and applicable thresholds.
“Offer”
The Offer of Securities mean:[5]
- an offer to issue unissued Securities including inviting applications for the issue of the Securities; and
- an offer for sale of Securities including inviting offers to purchase the Securities.
“Personal Offer”
A Personal Offer is one that:[6]
- may only be accepted by the person to whom it is made; and
- is made to a person who is likely to be interested in the Offer having regard to:
- previous contact between the person making the Offer and that person; or
- some professional or other connection between the person making the Offer and that person; or
- statements or actions by that person that indicate that they are interested in Offers of that kind.
Small Scale Offerings Exception
Under the small scale offerings exception, a Disclosure document is not required if a person makes a Personal Offer of Securities that results in Securities being issued or transferred to 20 or fewer people with no more than AU$2,000,000 being raised (20/12 Rule).[7]
Under the 20/12 Rule, an Offer to issue or transfer Securities will breach the 20 investor ceiling if it results in the number of people to whom Securities of the body have been issued or transferred exceeding 20 in any 12 month period. An Offer to issue or transfer Securities will breach the AU$2,000,000 ceiling if it results in the amount raised exceeding AU$2,000,000 in any 12 month period.
When counting the number of issues and sales of Securities, the following issues and sales that result from Offers should be disregarded:
- Offers that do not need a Disclosure document because of another applicable exception;
- Offers that are made under a Disclosure document; and
- Offers that are not received in Australia.
The 20/12 Rule can be breached by raising the capital exceeding the AU$2,000,000 ceiling. Therefore, you should take care when working out the amount of money raised by the body by issuing Securities and need to include the following:
- The amount payable for the Securities at the time when they are issued;
- If the Securities are shares issued partly-paid – any amount payable at a future time if a call is made;
- If the Security is an option – any amount payable on the exercise of the option;
- If the Securities carry a right to convert the Securities into other Securities – any amount payable on the exercise of that right.
Other Exceptions
The Corporations Act also provides for the other exceptions to the requirement to issue a Disclosure document.[8] In particular, they include the following:
- Offer to sophisticated investors – Section 708(8);
- Offer through a financial services licensee – Section 708(10);
- Offer to professional investors – Section 708(11);
- Offer to senior managers, their close relatives and bodies corporate controlled by them – Section 708(12);
- Offer to certain present holders of Securities – Section 708(13);
- Offer of a disclosing entity’s debentures to existing debenture holders – Section 708(14);
- Offer that includes issues or sales of Securities for no consideration – Section 708(15) and (16);
- Offer under a compromise or arrangement under Part 5.1 of the Corporations Act – Section 708(17);
- Offer to the company’s creditors under a deed of company arrangement – Section 708(17A);
- Offer made as part of a takeover bid – Section 708(18);
- Offer of debentures of certain bodies – Section 708(19).
Rights Issues
Offer of Securities does not need disclosure to investors under Chapter 6D if the Securities are being offered under a rights issue where the class of the Securities are quoted Securities and other requirements of Section 708AA are satisfied.
Restrictions on Advertising
Restrictions on advertising and publicity of Offers are contained in Section 734 of the Corporations Act. In particular, you must not:
- advertise; or
- publish a statement that directly or indirectly refers to,
an Offer, or intended Offer, of Securities that would need a Disclosure document but for the 20/12 Rule exception.
Furthermore, if an Offer of Securities needs a Disclosure document, you must not:
- advertise the Offer or intended Offer; or
- publish a statement that:
- directly or indirectly refers to the Offer or intended Offer; or
- is reasonably likely to induce people to apply for the Securities.
Offers of Australian Companies to Overseas Investors
In accordance with Section 700(4) of the Corporations Act, Chapter 6D applies to Offers of Securities that are ‘received in this jurisdiction, regardless of where any resulting issue, sale or transfer occurs’. However, you should consider that the securities laws in the jurisdiction where the Offer is made may impose similar or different obligations in respect of disclosure to investors. If this is the case, you need to ensure that your Offer complies with the applicable requirements of the jurisdiction where it is being made.
Anti-avoidance Provisions
Section 740 of the Corporations Act includes the ASIC’s anti-avoidance determinations powers applicable to the 20/12 Rule. The objective is to ensure that different closely related bodies are not established by the same person controlling them[9] to raise more than AU$2,000,000 or make more than 20 issues in 12 months. ASIC may determine in writing that the transactions of a body and of a person who controls the body should be aggregated for the purposes of the fundraising provisions in Chapter 6D.
Our Services
Commercial Lawyers Sydney at Pavuk Legal can assist you with a full range of legal services with the above and many other legal aspects of capital raising requirements with and without a prospectus for both Australian and foreign entities.
To purchase your own copy of Nobody Else’s Business please follow the link http://www.nobodyelsesbusiness.com.au/
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[1] Section 727 of the Corporations Act.
[2] Section 703 of the Corporations Act.
[3] Section 700 of the Corporations Act.
[4] Section 705 of the Corporations Act.
[5] Section 700(2) of the Corporations Act.
[6] Section 708(2) of the Corporations Act.
[7] Section 708(1) of the Corporations Act.
[8] Sections 708(8) to 708(21) of the Corporations Act.
[9] Section 50AA of the Corporations Act defines ‘control’ in the case of an entity.
