The Corporations Act 2001 (Cth) (Corporations Act) regulates capital raising in Australia. It’s important that directors familiarise themselves with the different regulatory obligations for public and private companies raising capital. This article will explain the disclosure obligations for companies raising capital, with a focus on private companies (startups and SMEs).

Public vs Private Company

Firstly, there are some important differences between a public and a private company:

Public Company Private Company
Non-employee Shareholders No limits on non-employee shareholders No more than 50 non-employee shareholders
Raising Capital Fundraises from the public by issuing securities (e.g. shares) Cannot engage in any activity that involves selling shares in itself to the public (except for an offer of its shares to either:

  • existing shareholders,
  • employees or subsidiaries).
Disclosure Obligations Must provide a disclosure document to potential investors (e.g. prospectus or an offer information statement) Only in certain circumstances if exemptions do not apply
Directors Must have at least three directors (two Australian residents) Must have at least one director (one Australian resident)
Company Secretary Must have at least one Company Secretary (one Australian resident) Does not need a Company Secretary (but if it does, at least one must be Australian resident)
Registered Office Must be open to the public at certain times Does not need to be open to public
Auditor Must have an auditor Does not need to have an auditor

Disclosure

Chapter 6D of the Corporations Act sets out the disclosure requirements to investors that public companies must adhere to when fundraising. The disclosure document needed for a capital raise is typically either a:

  • prospectus; or
  • offer information statement.

A prospectus is the most common type of disclosure document for large capital raises by public companies and has the broadest information requirements. An offer information statement has lower information requirements but can only be used for fundraising up to $10 million in aggregate. However, there are strict obligations on companies preparing, lodging and then ultimately offering securities under these documents. Therefore, you should seek legal advice when preparing these documents as you will need to lodge them with the Australian Securities and Investment Commission (ASIC) before use.

A private company can only raise capital from the general public if the fundraising is exempt from the disclosure requirements.

Exemptions

Exemptions to the disclosure requirements allow private companies to raise funds from people other than existing shareholders or employees. Furthermore, they allow public companies to raise funds without a disclosure document. An offer of securities (most commonly shares) is exempt if the offer:

  • firstly, is a personal offer (i.e. an offer made to a likely interested person as a result of previous contact or a professional connection and intended only for that person to accept);
  • secondly, was made to less than 20 people in a 12 month period; and
  • finally, will not result in the company raising more than $2 million in a 12 month period.

Importantly, you must not advertise or promote this offer to the public for these exemptions to apply.

Also exempt from the disclosure requirements are offers to:

  • sophisticated investors (i.e. offers over $500,000 or made to someone who has a certificate from an accountant confirming that their net assets or gross income meet certain requirements); or
  • professional investors (i.e. a person who has an Australian Financial Services Licence or manages gross assets of at least $10 million).

If Exempt, What Next?

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

  • pitch deck; or
  • Information Memorandum (IM).

Pitch Deck

In short, a pitch deck consists of 15-20 slides which clearly and succinctly set 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 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 doesn’t 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.

In short, the goal of your IM should be to 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 to be 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 offering to. As a general rule, 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 and/or IM should be sufficient (provided you fit within 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. Therefore, if you aren’t sure, check in with your startup networks to see what was required of them. If you have any issues or questions about capital raising, you can contact LegalVision’s capital raising lawyers on 1300 544 755 or fill out the form on this page.

Madeleine Hunt
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