The Startup Series | Capital raising exemptions

This article is the fourth article in The Startup Series – a collection of short articles covering key concepts that early-stage companies in Australia establishing a business or raising capital.

Australian capital raising exemptions

If a company is seeking to raise capital in Australia through an offer of securities, it is critical to consider whether:

• a disclosure document is required under Chapter 6D of the Corporations Act 2001 (Cth) (the Corporations Act)
• an exemption is available.

As a general rule, an offer of securities in Australia requires a disclosure document such as a prospectus. This reflects the principle that prospective investors must be provided sufficient information to assess the securities being offered before deciding to invest.

In the context of Chapter 6D, ‘securities’ are defined broadly and include shares, options, debentures and convertible notes. Offerings of interests in trusts are governed by a similar disclosure regime in Chapter 7 of the Corporations Act.

What are the key exemptions?

Notwithstanding the general rule that an offer of securities in Australia requires the preparation of a disclosure document, there are several key exemptions to this requirement.

In broad terms, these exemptions are limited to investors who, by reason of their financial position, expertise or relationship with the issuer, are better placed to assess the risks associated with the investment.

Set out below is a summary of some of the most commonly relied upon exemptions.

1. Small scale offerings

The small scale offering exemption, often referred to as the ‘20/12 rule’, allows a company to raise up to $2m from no more than 20 investors in any rolling 12-month period without issuing a disclosure document.

To rely on this exemption, the offers must be personal in nature. This means that they may only be accepted by the person to whom they are made and must be directed to persons who are likely to be interested in the offer, having regard to matters such as prior contact, professional or other connections with the company, or actions demonstrating an interest in such investments.

Importantly, the Corporations Act also permits a company to rely on multiple exemptions concurrently. Accordingly, offers made under other exemptions (including the ones discussed below) can be disregarded when assessing whether the 20-person or $2m threshold has been reached.

2. Sophisticated investors

Disclosure is not required to the extent that an offer is made to ‘sophisticated investors’.

A person will be defined as a sophisticated investor if:

• they have net assets of at least $2.5m (including their primary residence) or a gross income of at least $250,000 per annum for the previous two financial years
• they subscribe for at least $500,000 worth of securities under the offer.

With respect to the first point above, an individual’s assets or income must be evidenced by a certificate issued by a qualified accountant within six months before the offer is made.

3. Senior managers

The Corporations Act recognises that certain persons within a business will have sufficient familiarity with its operations, financial position and risk profile to assess an investment without the need for formal disclosure.

Accordingly, offers made to senior managers do not require a disclosure document. A senior manager is defined broadly as a person who is concerned in, or takes part in, the management of the body, regardless of their formal title or whether they are a director or company secretary.

This exemption also extends to the senior manager’s spouse, certain relatives and any body corporate controlled by them.

4. Professional investors

Disclosure is not required for offers made to professional investors.

This exemption captures several categories of investors including:

• investors who control at least $10m of gross assets
• Australian financial services licensees (i.e., AFSL holders)
• trustees of superannuation funds that have net assets of at least $10m
• listed entities and any related body corporate of a listed entity
• bodies regulated by APRA.

5. Issues for no consideration

An offer of securities for no consideration is also exempt from the prospectus and disclosure requirements under Chapter 6D of the Corporations Act.

Key takeaways

The exemptions outlined above are among the most commonly used in private capital raisings but are not exhaustive. In practice, capital raisings are often structured using a combination of exemptions, and careful consideration must be given to how offers are made and to whom.

Failure to properly rely on an exemption may result in a breach of the disclosure provisions of the Corporations Act.

For more information in relation to these exemptions or capital raising strategies more generally, please contact Vaughan Petherbridge.

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Authored by: 

Vaughan Petherbridge, Partner