When considering raising funds to grow your business it is important to ensure you do not fall foul of the disclosure requirements set out under the Corporations Act 2001 (Cth).
The general position is you must not offer shares in a company to an investor without first lodging the required disclosure documents (e.g. a prospectus) with the Australian Securities Investment Commission. As at the date of this article, failure to do so can expose you to penalties of up to $42,000 (or up to $210,000 if a company is at fault) and/or 5 years imprisonment.
However there are a number of exemptions which allow private companies to raise funds without the burdensome and expensive process of issuing disclosure documents. Set out below are a few exemptions which are of particular relevance for small to medium sized businesses.
Small scale offerings
The issuing of disclosure documents to investors is typically not required where the personal offers of shares may result in:
- less than 20 people being issued shares; and
- less than $2 million dollars being raised,
in any 12 month period.
If you are raising funds by way of a small scale offering you must not advertise or publish a statement that refers to the offer of shares.
An offer of shares to sophisticated investor also does not require disclosure.
Sophisticated investors are generally either investors:
- who will have or have subscribed for at least $500,000 worth of shares; or
- whose net assets are at least $2.5 million, as certified by a qualified accountant at least 6 months before the offer; or
- who have a gross income of at least $250,000 for each of the last 2 financial years, as certified by a qualified accountant at least 6 months before the offer.
Offers to associates
Offers of shares to a senior manager (or their spouse, parent, child, brother or sister) or a related company or a body corporate controlled by these entities does not require disclosure.
A senior manager is essentially someone who makes or participates in decision making that affects the whole or a substantial part of the business of the entity or someone who has the capacity to significantly affect the entity’s financial standing (other than a director or secretary, partner or trustee).
Offers to present holders
Offers of shares to existing holders of shares in the company also do not require disclosure if the offer is for fully-paid shares under a dividend reinvestment plan or bonus share plan.
Prohibitions on advertising and cold calling
If disclosure documents are required, generally you must not advertise or publish a statement that refers to an offer or is likely to induce people to apply for it.
Further to this you generally cannot offer shares by way of an unsolicited meeting or telephone call with another person.
If you are looking to raise funds to expand your business by way of capital raising we recommend you contact us to ensure you do not infringe the disclosure regime and unwittingly expose yourself to penalties.