What Are My Disclosure Requirements as a Company Raising Capital?

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Table of Contents

• Public vs Private Company
• Disclosure
• Exemptions
• If Exempt, What Next?
• Accuracy of Information
• Key Takeaways

The Corporations Act 2001 (Cth) (Corporations Act) regulates capital raising in Australia. Directors must familiarise themselves with the different regulatory obligations for public and private companies that raise capital. This article will explain the disclosure requirements for companies raising capital, with a specific focus on private companies such as startups and SMEs.

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Public vs Private Company

First, let us highlight some significant differences between a public and a private company:

Disclosure

The Corporations Act sets out the disclosure requirements that public companies must follow when they raise funds from investors.

If a company wants to offer securities, apart from a Crowd Sourced Funding offer, it must provide investors with certain information unless an exception applies.

Essentially, if a company intends to issue securities to an investor to raise capital, it must first provide the investor with certain pieces of information relating to the company. These disclosure requirements exist to protect the investor and ensure they have all the information required to assist them in making an informed decision about their investment. 

Typically, a capital raise requires a disclosure document, such as a:

• prospectus; or
• offer information statement.

A prospectus is the most common type of disclosure document for significant capital raises by public companies and has the broadest information requirements. An offer information statement has fewer information requirements but can only be used for fundraising up to $10 million in total. However, companies have to follow strict obligations when preparing, lodging and offering securities under these documents. Therefore, when preparing these documents, you must lodge them with the Australian Securities and Investment Commission (ASIC) before use.

The general rule for a private company is that it has disclosure requirements on each issue of securities it intends to undertake unless an exemption applies.

Exemptions

The law has some exceptions to the general disclosure rule. If a company offers securities, usually shares, it does not need to disclose anything if they are:

• small scale offerings: do not bring the number of offers made and accepted in the 12 months above 20 offers and does not bring the total investments received in the immediately preceding 12 months over $2,000,000.00;
• sophisticated investors: an issue of securities where the investment sum is at least $500,000.00, or the amount payable for the securities on acceptance by the investor and including the amounts previously paid by the same investor for securities in the same company and of the same class add up to at least $500,000, or it appears from a certificate given by a qualified accountant no more than 6 months before the offer is made that the investor:
  • has net assets of at least $2,500,000.00 (as of 27 February 2024); or
  • has a gross income for each of the last 2 financial years of at least $250,000.00;
• professional investors: is made to a person who meets the definition of “professional investor” (under the law or a person who has or controls gross assets of least $10,000,000.00; and
• senior manager: is made to a senior manager of the company (meaning, at a broad level, the person influences the decision-making and financial affairs of the company).

A startup looking to get the business off the ground and raise a small or large amount of capital or bring friends and family on board will usually seek to rely on one of the above exemptions.

If Exempt, What Next?

Even if you are exempt from the formal disclosure requirements, you may still need to disclose information about your company to your proposed investor through a:

• pitch deck; or
• information memorandum (IM).

If you are exempt, you may also choose to provide the investor with certain information about your company. Typically, when bringing on a more significant investor, such as a venture capitalist or institutional investor, they will seek to do due diligence into your company and will likely request specific information, such as the financial performance of the company, key personnel, or business plans.

Pitch Deck

A pitch deck consists of 15-20 slides that clearly and succinctly sets out all the key points an investor should know about your business and their potential investment. Therefore, you should view the deck as a marketing document structured in a way that will ‘sell’ your offering without tricking or misleading your investor.

Generally, your pitch deck will introduce your business and identify what gap in the market you are filling or the problem you are solving. Consequently, it should include information about:

• you and your team so your potential investor can see how your skill sets will allow you to succeed;
• the market you are operating in, including your customers and your competitors; and
• current financials (including revenue, cost to acquire customers and profit forecast).

As the Corporations Act does not specify what you need to disclose for these exempt offerings, the market determines what documents you should provide a potential investor when raising capital. You will likely use a pitch deck on its own for smaller, early investment rounds such as your family and friends, seed, or series A round.

Information Memorandum

While you can only use an information memorandum (IM) for exempt offerings, it contains a similar level of detail and disclosure to a prospectus. As a result, it is typically reserved for a later stage or higher stakes raise. There are no specific regulations regarding the type of information that an IM should include, and there is no need to notify ASIC. The Corporations Act, however, does indirectly impose restrictions on IM content.

The goal of your IM should give your investor enough information on which to base their investment decision. Just like your pitch deck, it is a marketing document for your business, however considerably more comprehensive (about 50 pages or so). As a result, the IM should include:

• details of the investment opportunity;
• overview of the business;
• its product or service offering;
• its performance and performance goals;
• the target market and proportion of market share;
• details of the directors and management team;
• IP ownership;
• financials;
• funding;
• proposed spending; and
• investment risks.

Accuracy of Information

In addition, both a pitch deck and IM should not contain information about the investment opportunity, which is or could be considered misleading and deceptive. Therefore, you should exercise due diligence to ensure that they contain accurate information. If you cannot verify a statement, it is best to leave it out. Additionally, the pitch deck and IM should include a clear disclaimer outlining that:

• it is not a formal (or regulated) disclosure document/prospectus or offered to someone who would need one;
• it is a summary and not a complete statement;
• the company makes no warranty as to its accuracy, reliability or completeness;
• it contains general information and is not investment advice; and
• it makes no guarantees regarding the future performance of the company.

Key Takeaways

Capital raising disclosure requirements will differ depending on whether you are a public or private company and who you are targeting. Generally, if you are offering to the public at large, you should be a public company, and you will need the appropriate disclosure documentation. However, if you are a smaller private company offering to friends and family, angel investors, or venture capitalists directly, a pitch deck or IM should be sufficient (provided you fit within the exemptions). There also may be certain situations where you are fully exempt from the disclosure requirements if the offer of securities meets one of the exemptions.

Whether you should prepare an IM will almost always depend on what the investor requires and the stage and scale of your raise. Further, if you qualify for a disclosure exemption it may lessen the burden when you wish to raise capital and will speed up the process for you to get the capital on board to use to grow the business. 

If you need guidance on navigating these disclosure requirements or ensuring compliance with relevant regulations, our experienced capital raising lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.