Legal snapshot: Australian capital raising exemptions

27 May 2019
Michael Kenny, Partner, Melbourne

Companies seeking to raise capital in Australia through an offer of securities should familiarise themselves with the prospectus requirements and exemptions to those requirements in Chapter 6D of the Corporations Act 2001 (Cth) (the Corporations Act) before undertaking any fundraising activities.

Generally, an offer of “securities” in Australia will require the preparation of a disclosure document, commonly a prospectus. “Securities” in the context of Chapter 6D includes shares, debentures, convertible notes and options. Offerings of units in a trust are covered by a similar regime in Chapter 7 of the Corporations Act.

The key exemptions to the requirements to prepare a disclosure document for a private securities offering are outlined below. These exemptions are commonly relied upon to facilitate early stage capital raising and institutional investment.


What are the key exemptions?

Issuing a full form prospectus (or other disclosure document) is a costly and time consuming process. The Corporations Act recognises that while robust disclosure requirements are necessary to ensure retail investors have sufficient information to make an informed assessment about the securities being offered, there are limited circumstances where the economic benefits derived from allowing certain types of people to invest in securities outweigh the policy objectives that underpin the disclosure requirements for securities.

As a general rule, the Corporations Act manages these risks by limiting the exemptions available to those types of investors who by virtue of their qualifications, financial position or involvement in the business are well placed to assess the potential risks associated with the securities.

We summarise some of the key exemptions below.


Small scale offerings

A small scale offering – colloquially referred to as the “20/12 Rule” – permits companies to raise up to $2 million worth of capital from up to 20 persons in any rolling 12 month period without issuing a disclosure document.

To fall within this exemption, the offers need to personal in nature, being an offer that can only be accepted by the person to whom it is made and that is made to a person who is likely to be interested in the offer having regard to:

  • previous contact between the company and that person; or
  • professional or other connections between the company and that person; or
  • actions by that person indicating that they are interested in such offers.

Helpfully, the Corporations Act permits a combination of exemptions to be relied upon. This means that a company may disregard offers made in reliance on other exemptions when assessing whether the 20 persons or $2 million ceiling has been reached.


Sophisticated investors

Disclosure under the Corporations Act is not required to the extent that an offer is made to “sophisticated investors”. A “sophisticated investor” is defined as a person who:

  • has net assets of at least $2.5 million or has a gross income of at least $250,000 per annum for the last two financial years; or
  • who pays a minimum of $500,000 for the offered securities.

An individual’s assets or income must be evidenced by a certificate given by a qualified accountant no earlier than 6 months before the offer is made.


Professional investors

Disclosure is similarly not required to the extent that an offer is made to “professional investors”.

While there are a number of categories of professional investors, this exemption is often relied on when issuing securities to professional trustees or Australian financial services licensees.


Senior manager

The Corporations Act recognises that certain persons known as “senior managers”, who by virtue of their position within the business, will possess a degree of familiarity with the business, its financial position and risk-profile which is sufficient to enable them to make an informed assessment about whether to subscribe for the securities being offered without the need for further disclosure by the entity.

For the purposes of this exemption, a senior manager is defined broadly to mean “a person who is concerned in, or takes part in, the management of the body (regardless of the person’s designation and whether or not the person is a director or secretary of the body)”.

This exemption extends to the senior manager’s spouses and certain relatives and any body corporates they control.


What next?

In addition to the exemptions listed in this article there are a number of other specific exemptions to the prospectus requirements under the Corporations Act.

For more information if in relation to the exemptions outlined above or fundraising generally, please contact:
Michael Kenny, Partner +61 402 486 959
Steven Wambeek, Associate +613 9252 2599

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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