The Corporations Act 2001 (Cth) (Corporations Act) regulates capital raising in Australia. It’s important directors familiarise themselves with the different regulatory obligations for public and private companies raising capital. Although this article briefly touches upon public company regulation, it will focus on private companies (startup and SMEs).
But first, a distinction. We summarised some broad differences between a public and private company below.
|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:
|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 3 directors (2 Australian residents)||Must have at least 1 director (1 Australian resident)|
|Company Secretary||Must have at least 1 Company Secretary (1 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 public at certain times||Does not need to be open to public|
|Auditor||Must have an auditor||Does not need to have an auditor|
Chapter 6D of the Corporations Act sets out the disclosure requirements to investors that public companies must adhere to when fundraising. The formal document for a capital raise is typically a prospectus or an offer information statement. There are strict obligations on companies preparing, lodging and then ultimately offering securities under these documents. 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.
There are exemptions to these disclosure requirements which will allow private companies to raise funds from people other than existing shareholders or employees. An offer is exempt if it satisfies the following:
- The offer 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), and
- The offer was made to less than 20 people in a 12 month period; and
- The offer will not result in the company raising more than $2 million in a 12 month period.
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 specified requirements); or
- Offers to 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).
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. 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. It should include key information about yourself and your team so your potential investor can see how their skill sets will allow you to succeed. It will include information about the market you are operating in, including your customers and even your competitors. Finally, it should also include your current financials (revenue, cost to acquire customers, profit forecast, etc.).
As the Corporations Act doesn’t impose disclosure obligations 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.
While you can only use an Information Memorandum (IM) for exempt offerings, it contains a similar level of detail and disclosure to a prospectus. For this reason, 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 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). The IM should include the following:
- 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,
- proposed spending, and
- investment risks.
Your IM should not contain information about the investment opportunity which is, or could be considered to be, misleading and deceptive. Due diligence should be done on the IM to ensure that it contains accurate information. If you cannot verify a statement, it is best to leave it out. Also, your IM should contain a clear disclaimer which outlines that:
- It is not a formal (or regulated) disclosure document/prospectus, or it is offered to someone who would need one;
- It is a brief summary and not a complete statement;
- The company makes no warranty as to its accuracy, reliability or completeness;
- It’s general information and should not be taken as investment advice; and
- No guarantees are made as to future performance of the company.
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. 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. If you aren’t sure, check in with your startup networks to see what was required of them. You can also contact a capital raising lawyer who will not only be able to explain your legal obligations and what is general market practice, but who will also be able to assist with preparing the necessary documentation.